Special Drawing Rights (SDR): Key Points to Remember


Introduction

Special Drawing Rights (SDR) was created in 1969 by IMF as a fixed exchange rate system to support the Bretton Woods agreement.


SDR Calculation

SDR is calculated based on the basket of five international currencies
The five currencies include

  • US Dollar
  • Euro
  • Yen
  • Pound and
  • Yuan 

Role of SDR


  • SDR had a dominant role in the world economy and trade during the fixed rate regime
  • SDR role diminished after the collapse of fixed rate regime
  • The floating rate regime saw huge accumulations of international currency reserves
  • In 2009, SDR regained popularity by allocating 182.6 billion SDR to global economy amidst the global economic crisis
  • IMF helped world nations to get out of the financial crisis through SDR allocation
  • Now, SDR has become a dominant force in international economic scenario  

Value of SDR


  • SDR is an international reserve asset
  • SDR is not a currency
  • It is also not a claim on the IMF
  • SDR exchanged for freely usable currencies
  • Allocated to members of IMF from time to time
  • SDR is a potential claim on the IMF member countries
  • 204 billion SDRs is equivalent to $285 billion in value
  • Valuation and weight of the IMF currencies basket done once in 5 years
  • Next valuation to be done on September 30, 2021

SDR Weightage

Following is the weight assigned to the basket of five currencies

  • US Dollar – 41.73 %
  • Euro – 30.93 %
  • Yuan – 10.92 %
  • Yen – 8.33 %
  • Pound Sterling – 8.09 %

Criteria to get added to SDR 


  • SDR basket of currencies determined by the IMF Executive board
  • Export criteria – The exports of the country must have the largest value in five years
  • Freely usable criteria – Widely transacted in the international exchange markets
  • Earlier in 1999, Euro was included in the SDR basket replacing Franc
  • In 2016, Chinese Yuan was included in the SDR basket

SDR Interest Rate



  • Interest rate is determined weekly by IMF
  • Interest rate charged on IMF loans and SDR allocations
  • Interest rate is given to members of IMF based on their SDR holdings
  • Interest rate determined on short-term debt instrument basis prevailing in the money market of SDR currency basket

Conclusion


  • SDR of IMF is going to play a crucial role in the global economy
  • SDR allocations to member countries of IMF is focused on recovering from an economic turmoil
  • SDR basket of currencies are considered as a global standard of currency exchange
  • The currencies included in the IMF SDR currency basket will play a dominant role in the world economy
  • The five nations in SDR are considered to be politically important and dominant in the international affairs 
  • The recent inclusion of Chinese Yuan is considered a political victory for China over the USA
  • World trade is to be dominated by the SDR basket of currencies with a great boost in international relations


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