What Are Special Drawing Rights?
Special drawing rights (SDRs) are a world reserve asset with a value based on a basket of five major international currencies. SDRs are used by the International Monetary Fund (IMF) to make emergency loans and are used by developing nations to shore up their currency reserves without the need to borrow at high interest rates or run current account surpluses at the detriment of economic growth.
SDRs are not currencies and can only be accessed by members of the IMF. They play a crucial role in maintaining macroeconomic stability and global growth by providing emergency liquidity and credit when traditional methods fall short.
Key Takeaways
- Special drawing rights (SDRs) are a world reserve asset whose value is based on a basket of five major international currencies.
- SDRs were created by the International Monetary Fund (IMF) in 1969. They are used by the IMF to make emergency loans and are used by developing nations to shore up their currency reserves without the need to borrow at high interest rates or run current account surpluses at the detriment of economic growth.
- SDRs are neither a currency nor a claim on the IMF itself; they are a potential claim against the currencies of IMF members.
- The SDR is valued as a basket of five world reserve currencies: the U.S. dollar, Japanese yen, euro, British pound, and Chinese yuan.
How SDRs Came to Be
The IMF was founded in 1945 as part of the Bretton Woods system agreement a year earlier. The goal of the IMF is to foster macroeconomic stability and global growth and to reduce poverty around the world.
Interestingly, economist John Maynard Keynes first proposed a supranational currency known as “Bancor” at the Bretton Woods conference, but his proposal was rejected. Instead, the IMF adopted a system of pegged exchange rates tied to the value of gold bullion. At the time, the world reserve assets were the U.S. dollar and gold. However, there was not enough supply of these internationally to keep sufficient reserves for the IMF to function properly. In order to fulfill its mandate, in 1969, the IMF created special drawing rights, or SDRs, as a supplement to help fund its stabilization efforts.
By 1973, the original Bretton Woods system had been almost completely abandoned. Then-President Richard Nixon restricted gold outflows from the United States, and major currencies shifted from a pegged system to a floating exchange rate regime. Still, the SDR system has been largely successful, with the IMF allocating approximately SDR 660 billion as of November 2024, providing needed liquidity and credit to the global financial system.
Why SDRs Are Needed
According to the IMF, SDRs (or XDR) are an international reserve asset to supplement its member countries’ official money reserves. Technically, the SDR is neither a currency nor a claim on the IMF itself. Instead, it is a potential claim against the currencies of IMF members.
An SDR allocation is a low-cost method of adding to member nations’ international reserves, allowing members to reduce their reliance on more expensive domestic or external debt. Developing nations can use SDRs as a cost-free alternative to accumulating foreign currency reserves through more expensive means, such as borrowing or running current account surpluses.
The SDR is also used by some international organizations as a unit of account where exchange rate volatility would be too extreme. Such organizations include the African Development Bank, Arab Monetary Fund, Bank for International Settlements, and Islamic Development Bank. By using SDRs, local currency fluctuations do not have as large of an impact. SDRs can only be held by IMF member countries and not by individuals, investment companies, or corporations.
As of 2000, at least four countries peg their currency to the value of an SDR, even though the IMF discourages such action.
The Value of the SDR
The value of an SDR was initially the equivalent of one U.S. dollar at the time, or 0.88671 grams of gold. When the gold standard changed over to a floating currency system, the SDR instead became valued as a basket of world reserve currencies. This basket includes the U.S. dollar, Japanese yen, euro, British pound, and Chinese yuan.
Every five years, the IMF reviews the components of the currency basket to make sure that its holdings represent the most widely used global currencies. In 2016, the IMF added the Chinese yuan (CNY), making it the first emerging currency to be added to the IMF’s reserves.
The SDR’s interest rate is used for calculating interest due from members of IMF loans paid from SDR holdings. SDRs are allocated by the IMF to its member countries and are backed by the full faith and credit of the member countries’ governments.
In 2024, 1 SDR = 1.3288 U.S. dollars, up 0.0335 over the past 12 months vs. the dollar.
What Is the International Monetary Fund (IMF)?
The International Monetary Fund (IMF) is an international organization that promotes global economic growth and financial stability, encourages international trade, and reduces poverty.
How Do SDRs Factor Into IMF Member Countries’ Voting Power?
Quotas of IMF member countries are a key determinant of the voting power in IMF decisions. Votes comprise one vote per 100,000 special drawing rights (SDRs) of quota plus basic votes.
Are SDRs a Currency?
No, the SDR is neither a currency nor a claim on the IMF itself. Instead, it is a potential claim against the currencies of IMF members. According to the IMF, SDRs (or XDR) are an international reserve asset to supplement its member countries’ official money reserves.
The Bottom Line
Special drawing rights are a world reserve asset whose value is based on a basket of five major international currencies. SDRs are used by the IMF to make emergency loans and are used by developing nations to shore up their currency reserves without the need to borrow at high interest rates or run current account surpluses at the detriment of economic growth.
While SDRs themselves are not currencies, and can only be accessed by members of the IMF, they play a crucial role in maintaining macroeconomic stability and global growth by providing emergency liquidity and credit when traditional methods fall short.