What is the SDR? - YouTube

Special Drawing Rights, or SDRs,

play an important role in providing

liquidity to the global economic system.

SDRs were created by the IMF

in 1969 to supplement

the official reserves of its member countries.

SDRs aren't a currency

and they're not claims on the IMF.

But they are an international reserve asset

that can be converted into reserve

currencies with the help of other

member countries.

This way, IMF members have

access to unconditional liquidity.

SDRs are normally distributed

among members through a process

called a 'general allocation' -

a decision that requires approval by

the IMF Board of Governors

with at least 85 percent of

the total voting power.

There have been four so far in the

history of the IMF.

In a general allocation, the

IMF distributes SDRs

to member countries in proportion

to their quota shares at the IMF,

reflecting their relative economic

standing in the world economy.

Only certain parties can hold SDRs:

the IMF, its member countries,

and certain prescribed holders -

such as regional central banks,

intergovernmental monetary institutions,

and some development banks.

The value of the SDR is updated

daily and defined by a basket

of major currencies used in the

world's most important trading and financial systems:

the U.S. dollar,

the euro,

the Chinese renminbi,

the Japanese yen,

and the UK pound sterling.

The SDRs' interest rate is adjusted

weekly based on the short-term

interest rate of government

securities of the currencies in the SDR basket.

How do SDRs help provide liquidity to

the global economic system?

Members can exchange SDRs

for freely usable currencies

held by other members.

This brings down their SDR holdings

but provides them with the currency

to either help meet balance of

payment needs or add to their

own reserves.

Members can also use their SDRs

to pay for IMF loans or quota increases.

Members with strong external

positions sometimes use their

SDR holdings to contribute to the

financing of low income countries

by lending to the Poverty Reduction

and Growth Trust.

Members can hold on to their

allocated SDRs to increase

their international reserve buffer.

They earn interest

on their holdings of SDRs

and pay interest on their cumulative

allocations at the same SDR interest rate.

This means that the interest earned

and charged cancel out

so long as SDR holdings are

equal to their allocated SDRs.

So, holding on to the allocation

itself has no cost for the members.

If a member exchanges its SDRs

for freely usable currencies,

it's SDR holdings and the

interest earned on those holdings

will fall.

If the holding falls below the

cumulative allocation, the

member has to pay interest on

the shortfall.

Likewise, if a member provides

freely usable currencies in exchange

for extra SDRs

it gets paid interest on the

surplus of SDR holdings.

Most exchanges of SDRs for currency

take place through voluntary trading

arrangements, or VTAs.

Under these arrangements facilitated by

the IMF, members volunteer to

buy or sell SDRs.

In the rare and unlikely event

that a transaction doesn't go

through a VTA, the IMF

can call on members with strong

external positions to buy

SDRs from members with a balance

of payment need.

The IMF helps members make the best

use of their SDRs, by providing

advice on macroeconomic policy,

as well as transparency and accountability measures.

The IMF's guiding principle is that

any use of SDRs should

be consistent with macroeconomic

sustainability - but it also

provides space for response for crises

such as the pandemic.

The use of SDRs should not delay changes to

macroeconomic policies, reforms, or debt

restructurings, where needed.

In August 2021,

the IMF's Board of Governors adopted

the largest ever general allocation

of SDRs equivalent to $650 billion.

This allocation among 190

member countries was adopted to

help meet the long-term global need

to supplement reserve assets.

Another important objective was to

help build confidence and send

a powerful signal of a cooperative

multilateral response to the the Covid-19 crisis,

including providing more scope for spending

on crisis response in liquidity

constrained emerging market

and developing economies.

Learn more about SDRs at

IMF.org/SDR.