What is the SDR?
The Special Drawing Right (SDR) is an international reserve asset, created by the International Monetary Fund (IMF) in 1969. It’s crucial to understand that the SDR is not a currency itself. Instead, its value is derived from a basket of five major world currencies: the US dollar, the euro, the Chinese renminbi (RMB), the Japanese yen, and the British pound sterling. This basket composition is reviewed periodically to reflect the evolving importance of currencies in the global financial system.
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The Purpose of the SDR in Global Finance
Initially, the SDR was established as a supplementary international reserve asset when the global monetary system was based on fixed exchange rates and gold. At that time, the US dollar was the primary international reserve currency, and the SDR was defined as equivalent to a specific amount of gold, which also equaled one US dollar.
When the fixed exchange rate system ended in 1973, the SDR’s definition evolved. It was then redefined to represent the value of a basket of key global currencies, including the euro and Chinese RMB today. While not a currency, the SDR acts as an asset that countries holding it can exchange for actual currency when needed. Furthermore, the SDR serves as the unit of account for the IMF itself and various other international organizations, playing a vital role in international financial operations.
Who is Eligible to Hold SDRs?
It’s important to note that SDRs are not accessible to individuals or private entities. Instead, SDRs are held by IMF member countries and the IMF itself. The IMF also has the authority to approve other entities, known as “prescribed holders,” to hold SDRs. These typically include central banks and multilateral development banks. As of February 2023, there were 20 organizations with this prescribed holder status.
Participating member countries and prescribed holders are authorized to buy and sell SDRs among themselves. However, a key distinction is that prescribed holders do not receive SDR allocations, and they cannot request SDR exchanges through the designation process that is available to member countries. This framework ensures that SDRs are primarily utilized by and for the benefit of member states in the international monetary system.
Understanding SDR Value: Euro, Chinese RMB, and Daily Fluctuations
The value of the SDR in terms of the US dollar is calculated daily. This calculation is based on the spot exchange rates of the currencies within the SDR basket, observed around noon in London. The IMF publishes this daily valuation on its website, ensuring transparency and accessibility of this crucial information. You can find the SDR value on the IMF website.
The composition of the SDR basket, including the euro and Chinese RMB, is reviewed by the IMF every five years, or sooner if deemed necessary. This review process is essential to ensure that the basket accurately reflects the relative importance of different currencies in the world’s trading and financial landscapes. A significant milestone was the 2015 review, where the IMF Executive Board determined that the Chinese renminbi (RMB) fulfilled the criteria for inclusion in the SDR basket. In October 2016, the Chinese RMB was officially added to the SDR basket, marking its integration into this key international reserve asset. Furthermore, the three-month yield for China Treasury bonds was incorporated into the basket used to calculate interest rates on SDRs.
During these quinquennial reviews, the IMF not only assesses the currency composition but also the criteria for selecting SDR basket currencies and the initial weights assigned to each currency. While the currency amounts within the SDR basket remain fixed for each five-year valuation period, the actual weights of these currencies, including the euro and Chinese RMB, fluctuate based on exchange rate movements in the foreign exchange markets. This dynamic valuation ensures the SDR’s value remains aligned with global currency market conditions. The daily determination of the SDR value reflects these market fluctuations.
To be included in the SDR basket, a currency must meet specific criteria established by the IMF, reflecting its international usage and importance.
Quinquennial SDR Valuation Review and the Euro & Chinese RMB
In March 2021, due to the pressing need to focus on the COVID-19 pandemic response, the IMF Executive Board made the decision to extend the existing SDR valuation basket until July 31, 2022. This effectively adjusted the five-year cycle for SDR valuation reviews. The subsequent review, completed in May 2022, upheld the existing composition of currencies in the SDR basket, which includes the euro and Chinese RMB. However, the review did update the weights assigned to each currency within the basket (historical weights available here). The revised SDR basket, with these updated weights, became effective on August 1, 2022, guiding the SDR’s valuation for the following period.
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General Allocations of SDRs and Global Liquidity
The IMF’s Articles of Agreement provide the legal framework for the IMF to allocate SDRs to its member countries (but not to prescribed holders) under specific circumstances. Historically, there have been four general allocations of SDRs. The most recent and largest allocation occurred in 2021, when the IMF Board of Governors approved a general allocation of approximately SDR 456 billion, equivalent to US$650 billion. This significant allocation was aimed at bolstering global liquidity in the face of economic challenges. Notably, this was the largest SDR allocation in the IMF’s history and was instrumental in assisting countries in their responses to the COVID-19 pandemic. Prior to this, a general allocation of around SDR 161 billion (US$250 billion equivalent) in 2009 had also been deployed to enhance liquidity during the global financial crisis.
General SDR allocations require broad consensus and support from the IMF’s membership. When a general allocation is approved, the IMF distributes SDRs to member countries in proportion to their existing quota shares within the IMF, ensuring equitable distribution based on their relative economic size in the global economy.
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Special SDR Allocation for Enhanced Equity
In addition to general allocations, the IMF has also undertaken special, one-time SDR allocations. In 2009, a special one-time allocation of SDR 21.5 billion (approximately US$33 billion) was made. The primary purpose of this special allocation was to enhance the equity of SDR distribution, particularly for countries that had joined the IMF after 1981. At that time, these newer member countries, representing over one-fifth of the IMF’s total membership, had never received an initial SDR allocation. This special allocation aimed to rectify this historical inequity and ensure broader participation in the SDR system.
SDR Interest Rate and its Determination
The SDR interest rate, often referred to as SDRi, is a crucial element of the SDR system. It serves as the foundation for calculating interest charges and payments between IMF member countries. This includes interest on regular borrowing from the IMF and on SDR holdings themselves.
The SDR interest rate is determined on a weekly basis using a weighted average of interest rates on three-month debt instruments in the money markets of the currencies included in the SDR basket. This basket, of course, includes the euro and Chinese RMB, among others. This methodology ensures that the SDR interest rate reflects prevailing conditions in major global money markets.
SDR Allocations and Holdings Information
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This page was last updated in January 2023.
