Special Drawing Rights (SDR): Key Points to Remember

Introduction

Special Drawing Rights (SDR) was created in 1969 by IMF as a fixed exchange rate system to support the Bretton Woods agreement.

SDR Calculation

SDR is calculated based on the basket of five international currencies
The five currencies include

• US Dollar
• Euro
• Yen
• Pound and
• Yuan 

Role of SDR

• SDR had a dominant role in the world economy and trade during the fixed rate regime
• SDR role diminished after the collapse of fixed rate regime
• The floating rate regime saw huge accumulations of international currency reserves
• In 2009, SDR regained popularity by allocating 182.6 billion SDR to global economy amidst the global economic crisis
• IMF helped world nations to get out of the financial crisis through SDR allocation
• Now, SDR has become a dominant force in international economic scenario  

Value of SDR

• SDR is an international reserve asset
• SDR is not a currency
• It is also not a claim on the IMF
• SDR exchanged for freely usable currencies
• Allocated to members of IMF from time to time
• SDR is a potential claim on the IMF member countries
• 204 billion SDRs is equivalent to $285 billion in value
• Valuation and weight of the IMF currencies basket done once in 5 years
• Next valuation to be done on September 30, 2021

SDR Weightage

Following is the weight assigned to the basket of five currencies

• US Dollar – 41.73 %
• Euro – 30.93 %
• Yuan – 10.92 %
• Yen – 8.33 %
• Pound Sterling – 8.09 %

Criteria to get added to SDR 

• SDR basket of currencies determined by the IMF Executive board
• Export criteria – The exports of the country must have the largest value in five years
• Freely usable criteria – Widely transacted in the international exchange markets
• Earlier in 1999, Euro was included in the SDR basket replacing Franc
• In 2016, Chinese Yuan was included in the SDR basket

SDR Interest Rate

• Interest rate is determined weekly by IMF
• Interest rate charged on IMF loans and SDR allocations
• Interest rate is given to members of IMF based on their SDR holdings
• Interest rate determined on short-term debt instrument basis prevailing in the money market of SDR currency basket

Conclusion

• SDR of IMF is going to play a crucial role in the global economy
• SDR allocations to member countries of IMF is focused on recovering from an economic turmoil
• SDR basket of currencies are considered as a global standard of currency exchange
• The currencies included in the IMF SDR currency basket will play a dominant role in the world economy
• The five nations in SDR are considered to be politically important and dominant in the international affairs 
• The recent inclusion of Chinese Yuan is considered a political victory for China over the USA
• World trade is to be dominated by the SDR basket of currencies with a great boost in international relations

Join 40,000+ readers and get free notes in your email

Let's block ads! (Why?)

- http://www.bankexamstoday.com/2016/12/special-drawing-rights-sdr-key-points.html