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    Special Drawing Rights

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    gautam_hariharan
    The SDR was created by the IMF in 1969 to supplement its member countries' official reserves. It can be exchanged for freely usable currencies. The SDR's value is based on a basket of international currencies, and it benefits international trade by providing liquidity and serving as a "paper gold" alternative reserve asset. However, the SDR faces limitations in its acceptance as a global currency due to its composition only including four major currencies and the inequitable distribution of SDR allocations based on IMF quotas.

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    Special Drawing Rights

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    gautam_hariharan
    144 views4 pages
    The SDR was created by the IMF in 1969 to supplement its member countries' official reserves. It can be exchanged for freely usable currencies. The SDR's value is based on a basket of international currencies, and it benefits international trade by providing liquidity and serving as a "paper gold" alternative reserve asset. However, the SDR faces limitations in its acceptance as a global currency due to its composition only including four major currencies and the inequitable distribution of SDR allocations based on IMF quotas.

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    Special Drawing Rights

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    The SDR was created by the IMF in 1969 to supplement its member countries' official reserves. It can be exchanged for freely usable currencies. The SDR's value is based on a basket of international currencies, and it benefits international trade by providing liquidity and serving as a "paper gold" alternative reserve asset. However, the SDR faces limitations in its acceptance as a global currency due to its composition only including four major currencies and the inequitable distribution of SDR allocations based on IMF quotas.

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    144 views4 pages

    Special Drawing Rights

    Uploaded by

    gautam_hariharan
    The SDR was created by the IMF in 1969 to supplement its member countries' official reserves. It can be exchanged for freely usable currencies. The SDR's value is based on a basket of international currencies, and it benefits international trade by providing liquidity and serving as a "paper gold" alternative reserve asset. However, the SDR faces limitations in its acceptance as a global currency due to its composition only including four major currencies and the inequitable distribution of SDR allocations based on IMF quotas.

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    Monetrix The Finance and Economics Club of MDI

    Gyaan@ Finstreet
    SDR as a Global Currency The Benefits and The Pitfalls

    Monetrix The Finance and Economics Club of MDI

    The Special Drawing Rights or SDR is an international reserve asset created by the International Monetary Fund (IMF) in 1969. The SDR comprises of a basket of international currencies including the US Dollar, Euro, Japanese Yen and the British Pound Sterling. Prior to the introduction of Euro in 1999, the German Mark and the French Franc were also a part of the basket of currencies. The weights of the individual currencies making one SDR are determined by the IMF every five years on the basis of the importance of the individual currencies. Due to the fluctuations in the international currency exchange rates, the relative value of each currency also varies. The SDR is neither a currency, nor a claim on the IMF. Rather, it is a potential claim on the freely usable currencies of IMF members. Holders of SDRs can obtain these currencies in exchange for their SDRs in two ways: first, through the arrangement of voluntary exchanges between members; and second, by the IMF designating members with strong external positions to purchase SDRs from members with weak external positions. In addition to its role as a supplementary reserve asset, the SDR, serves as the unit of account of the IMF and some other international organizations.

    Period

    USD

    DEM

    FRF

    JPY

    GBP

    19811985

    0.540 (ca. 42%)

    0.460 (ca. 19%)

    0.740 (ca. 13%)

    34.0 (ca. 13%)

    0.0710 (ca. 13%)

    19861990

    0.452 (ca. 42%)

    0.527 (ca. 19%)

    1.020 (ca. 12%)

    33.4 (ca. 15%)

    0.0893 (ca. 12%)

    19911995

    0.572 (ca. 40%)

    0.453 (ca. 21%)

    0.800 (ca. 11%)

    31.8 (ca. 17%)

    0.0812 (ca. 11%)

    19961998

    0.582 (ca. 39%)

    0.446 (ca. 21%)

    0.813 (ca. 11%)

    27.2 (ca. 18%)

    0.1050 (ca. 11%)

    Period

    USD

    EUR

    JPY

    GBP

    0.2280 (ca. 21%) 19992000 0.5820 (ca. 39%)

    0.1239 (ca. 11%) 27.2 (ca. 18%)

    0.1050 (ca. 11%)

    = 0.3519 (ca. 32%)

    20012005

    0.5770 (ca. 45%)

    0.4260 (ca. 29%)

    21.0 (ca. 15%)

    0.0984 (ca. 11%)

    20062010

    0.6320 (ca. 44%)

    0.4100 (ca. 34%)

    18.4 (ca. 11%)

    0.0903 (ca. 11%)

    Monetrix The Finance and Economics Club of MDI The SDR is calculated as the sum of specific amounts of the four currencies valued in U.S. dollars, on the basis of exchange rates quoted at noon each day in the London market.

    History of the SDR


    The SDR was created to support the Bretton Woods fixed exchange rate system. A fixed exchange rate is a type of exchange rate regime wherein a currency's value is matched to the value of another single currency or to a basket of other currencies, or to another measure of value, such as gold. According to this system, the participating countries need to have reserves government or central bank holdings of gold and widely accepted foreign currenciesthat could be used to purchase the domestic currency in foreign exchange markets. The countries purchase the currency in the global markets in order to maintain their exchange rates with respect to the benchmark currency. With the expansion in the global trade, the supplies of the two key reserve assets proved to be inadequate. Hence the SDR was created as a new international reserve asset under the guidelines of the IMF.

    Allocation of SDR to countries


    Under the Articles of Agreement, IMF allocates SDRs to its members in proportion to their IMF quotas. The IMF members receive a costless asset from the IMF through this allocation. If the SDR holdings of a member country rise above the allocation, it receives an interest on the excess amount above the allocated amount. Similarly, if there is a shortfall in the SDR holding of the country below the allocated level, it has to pay an interest on the deficit.

    Rationale behind the creation of SDR


    The SDR was created by IMF to supplement the reserves of its member countries. The SDRs can be exchanged for the freely usable currencies. With a general SDR allocation taking effect on August 28 and a special allocation on September 9, 2009, the amount of SDRs will increase from SDR 21.4 billion to SDR 204.1 billion (currently equivalent to about $317 billion).

    Benefits of SDR
    SDRs facilitate international trade by providing liquidity. In case there is a shortage of internationally liquid assets like gold and dollars in the reserves of a country, the country might be forced to reduce its demand. This would result in reduced output and sub optimum economic performance for the country. If many countries faced this shortage, the international trade would suffer. SDRs provide the extra liquidity so that the world economy produces at full potential. SDR is used as a mode of payment in international transactions. SDR is as an alternative reserve asset other than gold and silver in large international transactions. Since the gold reserves are finite and the economies of all the participant countries are growing, a need for alternative was identified. SDRs are used as an alternative for gold, known as Paper Gold. This eliminates the logistics and security issues involved with the transport of gold to settle international trade accounts. SDRs are costless as compared to the production of gold as an international asset.

    Monetrix The Finance and Economics Club of MDI SDR is used for the international fees of the Universal Postal Union, responsible for the world-wide postal system

    Potential Problems with SDR


    Despite its benefits, SDR faces some potential problems which have hindered its acceptance as a global currency, replacing other currencies like the US Dollar and the Euro. These could be outlined as follows: The current composition of the SDR only includes four currencies. The SDR does not contain the Chinese Yuan, Indian Rupee, Australian Dollar or Canadian Dollar, which are important benchmark or secondary global reserve currencies. The currencies contained in the SDR (US Dollar, Euro, Pound Sterling and the Yen) have been losing value against the secondary global reserve currencies since the recession of 2007. This undermines the acceptance of the SDR as a global currency. The distribution of SDRs is inequitable as it is linked to the quota of the respective countries with the IMF.

    References:
    http://www.lowyinterpreter.org/post/2009/04/Special-Drawing-Rights-An-idea-whose-time-hascome.aspx http://en.wikipedia.org/wiki/Fixed_exchange_rate http://en.wikipedia.org/wiki/Special_Drawing_Rights http://www.imf.org/external/np/exr/facts/sdr.htm http://books.google.co.in/books?id=tB53gJqaIm8C&pg=PA309&lpg=PA309&dq=demerits+of+SDR&s ource=bl&ots=79_RCoGbHD&sig=Q-rqJmthagXWY2gWzCebO6ctmpI&hl=en&ei=6A_SStTOYOUkAWj7tH4Aw&sa=X&oi=book_result&ct=result&resnum=3&ved=0CBEQ6AEwAg#v=onepage& q=demerits%20of%20SDR&f=false

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