- Appearance and appointment
- Interest on Special Drawing Rights
- Financial asset allocation
- Buying and selling SDR
- Perspectives and the Role of China
SDR is an abbreviation for the English name, which in Russian sounds like “special drawing rights” (SDR). SDRs are considered synthetic currency and an international reserve asset, which is issued by the IMF and is used to secure financial relations between its members. Reserves are established in this currency and loans are issued by it. According to statistics, in March 2016 there are about 204.1 billion SDRs.
Appearance and appointment
Special Drawing Rights (SDR, SDR, SDR) appeared in 1969 in the context of the Bretton Woods monetary system. To maintain a stable exchange rate of their monetary units, the countries needed reserves. However, the volume of international supply of gold and dollars was not enough. The credibility of the American currency could be undermined if you begin to print new banknotes. Therefore, it was decided to create a new reserve asset.
The SDR is the missing link in the Bretton Woods system. However, the latter soon fell apart. Most countries switched to floating exchange rates. Under the new Jamaican system, the CRA is not a vital mechanism. The development of money and capital markets has allowed many countries to accumulate significant reserves in foreign currency.
However, the SDR is not a relic of the past. They continued to exist and had a significant impact on alleviating the effects of the global financial crisis. In 2009, to increase the liquidity of the world economic system, SDRs were issued in the amount of 182.6 billion. They supplemented the official reserves of members of the International Monetary Fund affected by the financial crisis.
This is not to say that SDR is a currency or a requirement of the IMF. Their holders can receive freely used monetary units in exchange for them using two mechanisms:
- Exchange between members of the IMF, which occurs on a voluntary basis.
- Purchase of SDRs by countries with strong external positions from countries in need of lending.
Since the SDR is a synthetic currency, it cannot be used by individuals in their daily lives. However, it serves for settlements not only in the framework of the IMF, but also in a number of international organizations (BIS, EBTs and other regional development banks).
Initially, the value of special drawing rights was enshrined in gold. One SDR was equivalent to a price of 0.88871 grams of this metal. The course of the SDR to US dollars was determined as 1: 1. After the collapse of the Bretton Woods system in 1973 and the replacement of its Jamaican cost, the SDR began to be calculated on the basis of a basket of currencies. It originally consisted of the US dollar, euro, yen and pound sterling. Most recently, they added the yuan. Changes occurred on October 1, 2016. The SDR rate is now determined based on the following weight fractions:
- American dollar - 41.73%.
- euro - 30.93%.
- yuan - 10.92%.
- Japanese yen - 8.33%.
- British Pound - 8.09%.
The cost of the CRA is published every day on the official IMF website. Its calculation is carried out on the basis of the weight fractions of the basket on the basis of the courses, which are fixed at noon on the London Stock Exchange.
The list of currencies determining the value of special borrowing rights is necessarily re-evaluated every five years by the IMF Executive Board or earlier, if this is required by a change in the conditions of the world system. The latest innovation was the inclusion in the basket of Chinese yuan. The next review of its composition is scheduled for 2021.
Interest on Special Drawing Rights
The rate on SDRs is the basis for calculating the amount of payments on IMF loans. It also determines the interest that Member States pay on their holdings in special drawing rights and is charged on distributed reserves.
The rate is calculated weekly based on weighted average representative interest on debt instruments with a short term repayment term in the money markets of the currencies that make up the basket.
Financial asset allocation
The amount of SDR on the accounts of IMF members is proportional to their quota in the organization. Thus, each country receives an international reserve asset at its disposal, which is not associated with additional costs.
The mechanism of allocation of borrowing rights is self-financing. The interest that is charged to states with excess holdings is actually charged to the members of the IMF who use them. However, SDR holders are not only members of the International Monetary Fund, but also some other organizations of the appropriate type. Among them, for example, the European Central Bank. Designated holders can use SDRs in transactions between themselves or with IMF member countries.
Buying and selling SDR
For the history of its existence the IMF has made three distributions of SDR The total amount of the first was 9.3 billion. This distribution was made from 1970 to 1972. The next time the decision to replenish reserve assets was made in 1979. The total amount of the second distribution was 12.1 billion. It was produced from 1979 to 1981. Then for many years the reserves of SDR remained at the same level.
For almost 30 years after that, a decision was taken in due time on the absence of the need for this step. However, on August 28, 2009, against the backdrop of the global financial crisis, the third distribution was made. Then an unprecedented number of SDRs were issued. The total amount was 161.2 billion. In addition, two weeks before this was provided for an additional one-time replenishment of reserves in the amount of 21.5 billion. It should be noted that, until 2009, more than one-fifth of the members of the IMF (those who joined the organization after 1981) never received distributions of SDRs.
Perspectives and the Role of China
In 2016, the World Bank developed a bond program for the domestic market of the PRC. Papers are nominated in SDRs and are intended for institutional investors. The World Bank organized this program in conjunction with major Chinese banks. The total volume of the program is 2 billion SDR. Earlier this year (October 1), the yuan was included in the basket of synthetic currency produced by the IMF. Now SDR is not only pound sterling, Japanese yen, euro and American dollar.