Special Drawing Rights (Sdrs) Are an Internationally Recognized Unit Of

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special drawing rights Special drawing rights (SDRs) are an internationally recognized unit of account and reserve assets issued by the International Monetary Fund (IMF) and allocated to IMF member countries in proportion to their quotas at the IMF. According to the IMF (2006a), the SDR is ‘‘a potential claim on the freely usable currencies of IMF members.’’ SDRs can be exchanged for other currencies in two ways: ﬁrst, through voluntary exchanges between members; and second, by an IMF directive, designating members with strong external positions to purchase these SDRs. SDRs were initially created in 1969 to increase the availability of easily convertible reserve assets. Before 1969, reserve assets—those assets held by central banks to clear international transactions—were held mostly in U.S. dollars and gold. The economists PeterClarkandJacquesPolak(2004)notethat,atthe time, issuing SDRs was seen as a way of preventing

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pca rwn rights drawing special official dollar holdings from undermining the sta- quidity (i.e., the worldwide lack of sufficient gold bility of the system. Reserve accumulation was per- reserves) that led to the establishment of the SDR no ceived as destabilizing since many central banks longer apply. converted their dollar reserves into gold, thereby Although the original rationale for the creation of drawing down the limited U.S. gold stocks. SDRs is no longer relevant to the post–Bretton SDRs are also used as units of account by the Woods system of flexible exchange rates, other rea- IMF in all of its transactions. The IMF conditional sons for their existence as reserve assets remain. Since loans are denominated in SDRs, while the interest capital accounts are now much more open than ever rate on these loans is calculated on the basis of before (with the possible exception of 1880–1914), the SDR interest rate (in addition to an interest reserves are seen as a means to prevent fluctuations in surcharge that varies with the different lending fa- the trade balance and domestic consumption that cilities). would be required in the face of fluctuations in Amended every five years, the value of an SDR capital flows. SDRs enable countries to diversify their unit is the sum of the values of the following as of reserve holdings, and more important for developing January 2006: 0.632 U.S. dollars, 0.410 euros, 18.4 countries, the SDR can be held at a much lower cost Japanese yen, and 0.0903 British pounds. As of than major currencies such as the U.S. dollar, the February 1, 2007, 1.496137 U.S. dollars were worth Japanese yen, the euro, or the British pound. This is one SDR unit. The SDR interest rate is calculated as especially true for the lowest-income countries, the weighted average of interest rates on short-term which are virtually cut off from the international fi- instruments in the financial markets of the four nancial markets and for whom the only means of currencies included in the SDR valuation basket; it is obtaining reserves is running trade surpluses through posted on the IMF Web site once a week. On the reductions in imports. week of February 1, 2007, for example, the SDR Another possible future use for the SDR is as an interest rate was 4.20—the weighted average of the alternative reserve asset that can be issued broadly in interest rates of a three-month U.S. Treasury bill, a case of a dramatic U.S. dollar crash (Lissakers 2006). three-month Europe rate, the Japanese government’s A dollar crash, a plausible event in light of the per- 13-week financing bill, and a three-month UK sistent U.S. balance of payment deficits, and the Treasury bill. central role of the dollar as a reserve currency Role of SDRs From their onset, SDRs could be (roughly 70 percent of all foreign reserves are held in held only by governments, central banks, and official U.S. dollar–denominated assets), might create the bodies such as the IMF. The original SDR allocation conditions for a general flight from the dollar; this of 9.3 billion SDRs was disbursed among the IMF means that the question of constraints on interna- members according to predetermined quotas over a tional liquidity might reemerge. two-year period (1970–72). An additional amount See also balance of payments; Bretton Woods system; of 12.1 billion SDRs was allocated and distributed dollar standard; dominant currency; global imbalances; between 1979 and 1981. SDRs have not been allo- gold standard, international; hot money and sudden cated since. As a result of the reluctance among the stops; international liquidity; International Monetary Fund IMF stakeholders to allocate new SDR issues, SDRs (IMF); international reserves; reserve currency; Triffin di- now amount to only about 1 percent of the inter- lemma; twin deficits; vehicle currency national reserves held worldwide. SDRs clearly did not end up as the primary reserve asset in the global FURTHER READING monetary system as envisioned in the IMF Article of Clark, Peter B., and Jacques J. Polak. 2004. ‘‘International Agreements (XXII). In addition, Clark and Polak Liquidity and the Role of the SDR in the International (2004) suggest that the concerns of international li- Monetary System.’’ IMF Staff Papers 51 (1): 49–71. A

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discussion of the 1969–70 introduction of SDR, written by senior IMF staffers at the time who argue for a re- invigoration of the SDR allocation program. Goldstein, Henry N. 1969. ‘‘Gresham’s Law and the De- mand for NRUs and SDRs.’’ The Quarterly Journal of Economics 83 (1): 163–66. A contemporary argument supporting the introduction of SDRs. International Monetary Fund. 2006a. ‘‘A Factsheet— Special Drawing Rights (SDRs).’’ Downloadable from http://www.imf.org/external/np/exr/facts/sdr.htm (accessed August 15, 2006). Contains updated information about the current status and history of SDRs. International Monetary Fund. 2006b. ‘‘SDR Valuation.’’ Downloadable from http://www.imf.org/external/np/ ﬁn/rates/rms_sdrv.cfm (accessed August 17, 2006). Contains daily updates on the value of SDRs. International Monetary Fund. 2006c. SDR Interest Rate Calculation. Downloadable from http://www.imf.org/ external/np/ﬁn/rates/sdr_ir.cfm (accessed August 17, 2006). Contains details on the current SDR interest rate. Lissakers, Karin. 2006. ‘‘Is the SDR a Monetary Dodo? This Bird May Still Fly.’’ In Reforming the IMF for the 21st Century, edited by Edwin M. Truman. Washington, DC: Institute for International Economics, Special Re- port #19. Written by a former U.S. executive director at the IMF, the paper advocates the allocation of SDRs in the case of a U.S. dollar crash. The book includes other useful discussions on various aspects of IMF reform proposals.

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