Special Drawing Rights (SDR) is an international reserve asset, created by the International Monetary Fund (IMF) in 1969 to supplement its member countries’ official reserves.
However, it is a basket of currencies, but is not treated as a currency.
Why was it created?
When countries were to do imports and exports, they had to face restrictions in world trade and financial development. The two main assets that were used internationally were gold and US Dollar. But they were found to be inadequate when the world started expanding and international trade grew. Then IMF decided to create a new international reserve asset.
When SDRs are used?
- They are used by the member countries of IMF for their balance of payments settlements.
- Any country holding SDRs can use them to buy any other global currency like for their balance of payments settlements or for keeping foreign exchange reserves, etc.
- When a country takes credit or loan from IMF, it is given in SDR and not in any particular currency.
- SDRs make taking loan from IMF easy than taking loan from any other country. For example: India takes loan from US, it will get loan in US Dollars and also it have to return loan amount in US Dollars. But if India takes loan from IMF; it can get loan in US Dollars and return the equivalent amount in any other currency present in SDRs bucket.
Some facts about SDR:
- Currently the SDR bucket contains four major currencies – U.S. Dollar, Euro, Pound and Japanese Yen. A fifth currency, Chinese Renminbi (RMB) is also going to be included in the SDR bucket which will be effective from October 1, 2016.
- The value of an SDR is determined by a weighted basket of major currencies.
- The composition of this basket of currencies is reviewed every five years wherein the weightage of currencies sometimes get altered.
- SDRs can be exchanged for freely usable currencies i.e. the currencies which are widely used in the international transactions.
- SDR is neither a currency, nor any precious metal.
- The SDR interest rate is determined weekly on each Friday.
- According to the last SDR review in 2010, the use of the Chinese renminbi (RMB) in international payments has risen substantially, and also China continues to meet the export criterion for SDR inclusion, so Chinese renminbi (RMB) is also going to be added in SDRs basket.