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SDR1

The document provides an overview of Special Drawing Rights (SDR), including their definition, history, valuation, interest rate calculation, and allocations by the IMF. SDRs serve as a unit of account for the IMF and can be used by member countries for various financial transactions. The future of SDRs is discussed, highlighting challenges and potential changes in their use and attractiveness as an asset.

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14 views

SDR1

The document provides an overview of Special Drawing Rights (SDR), including their definition, history, valuation, interest rate calculation, and allocations by the IMF. SDRs serve as a unit of account for the IMF and can be used by member countries for various financial transactions. The future of SDRs is discussed, highlighting challenges and potential changes in their use and attractiveness as an asset.

Uploaded by

LuckyAwmi
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
You are on page 1/ 18

Financial Market: Forex Management

SPECIAL DRAWING
RIGHTS (SDR)

1
Contents
• Introduction to SDR
• History of SDR
• Valuation of SDR
• SDR Interest Rate Calculation
• SDR allocations
• Use of SDR
• Qualitative analysis: What is the future of SDR?

2
Definition of SDR
• SDRs are used as a unit of account by the IMF and several other international
organizations. A few countries peg their currencies against SDRs, and it is also
used to denominate some private international financial instruments (e.g., the
Warsaw convention, which regulates liability for international carriage of
persons, luggage or goods by air, uses SDRs to value the maximum liability of
the carrier).

3
History of SDR Creation
• World War II, elimination of gold standard
• Meeting of the representatives of 44 countries at Bretton Woods in 1944
• Formation of the IMF and World Bank
• Two scenarios for the USA:
 trade deficit policy - overflow the market with reserve currency

 zero deficit strategy - a shortage of USD in the market

• Solution was SDR, no willing to give IMF the right to print money
• In 1969 IMF created an international monetary reserve currency (SDR)
• SDR
 neither a currency, nor a claim on the IMF

 step towards solving the problems of limited resources of gold and dollars

 support the Bretton Woods fixed exchange rate system 4


Valuation of SDR
Five main principles for making decisions while SDR valuation:
• The SDR’s value should be stable in terms of the major currencies.
• The currencies included in the basket should be representative of those
used in international transactions.
• The relative weights of currencies included in the basket should reflect
their relative importance in the world’s trading and financial system.
• The composition of the SDR currency basket should be stable and change
only as a result of significant developments from one review to the next.
• There should be continuity in the method of SDR valuation such that
revisions in the method of valuation occur only as a result of major
changes in the roles of currencies in the world economy.

Source: IMF Articles of Agreement—Article XIX Designation of Participants to Provide Currency 5


Valuation of SDR

SDR basket comprises of the four currencies that are issued by IMF member
countries, or by monetary unions that include IMF members, with the largest
value of exports of goods and services during the 5-year period ending 12
months before the effective date of the revision.

SDR Valuation formula

, where X= exports and R= reserve holdings, in levels in SDRs

• SDR basket is revalued once in 5 years


• As of date of 8 May 2015, 1 SDR= $1.40633, and $1=0.711069 SDR.

6
Valuation of SDR
Actual Currency Weights in the SDR basket (in percentages)

Currency Weights in the SDR basket (in percentages)

SDR structure, (%), 2011-14

11.3%
9.4%
41.9% USD
EUR

37.4% JPY
GBP

Source: Finance Department, International Monetary Fund


SDR Interest Rate Calculation
• SDR interest rate is calculated based on weighted average of the interest rate
on short-term money market debt of the currencies of SDR basket.

• The current benchmark rates for the four currencies are as follows:

 U.S. dollar: 3-month U.S. Treasury bills

 Euro: 3-month Eurepo

 Japanese yen: 3-month Japanese Treasury discount bill

 Pound sterling: 3-month U.K. Treasury bill


8
SDR Interest Rate Calculation
Interest Rates on the SDR and its financial instrument components (in percentages), 2005- 2014

Source: Finance Department, International Monetary Fund


SDR allocations
Chart Title
100%
• The basis of SDR allocation by IMF to its members is the proportions of 90%
80%
their IMF quotas, 70%
60%
50%
• This allocation means a costless, unconditional international reserve asset 40%
30%
for the members, and no interest is earned or paid on it, 20%
10%
0%
• Only in case SDR Holdings of a member increase above its allocation, Category 1

Series 1 Series 2 Series 3


interest is earned on the excess,

• If fewer SDR is held than allocated, the members pay interest on this
shortfall. Cancellations of SDRs are allowed.
10
SDR allocations
The two types of allocations :

• General- based on long-term need to increase existing reserve


as a special one-time allocation

• Special- ensure all members of IMF the relative same amount


of SDRs, since countries join the IMF at different times

Decisions on these allocations are made for periods of up to five


years.
11
Use of SDR
• SDRs are used as a unit of account by the IMF and several other international
organizations. A few countries peg their currencies against SDRs, and it is
also used to denominate some private international financial instruments

• SDRs can be used in transactions with the IMF. For example, it can be used
for the repayment of loans or payment of the reserve asset portion of quota
increases

• In the Euro zone, the Euro is displacing the SDR as a basis to set values of
various currencies, including Latvian Lats.

12
Use of SDR
• SDRs were originally created to replace gold and silver in large
international transactions and provide a cost-free alternative to member
states for building reserves.

• SDRs are credits that nations with balance of trade surpluses can draw
upon from nations with deficits.

• It has also been suggested that having holders of US Dollars convert


those dollars into SDRs would allow diversification away from the dollar
without accelerating the decline of the value of the dollar
13
SDR allocation examples
• Bosnia and Herzegovina used a substantial portion of its SDR holdings to
help finance its 2009 budget deficit.
• Malawi, facing a foreign exchange shortage, used the 2009 special allocation
of SDRs in November 2009.
• Mauritania, facing a deteriorating fiscal position, used a significant portion
of its 2009 SDR allocations to help close a fiscal financing gap.
• In Moldova, the authorities used most of their SDR allocation for budget
financing in late 2009, helping to clear accumulated expenditure arrears and
reduce reliance on more expensive short-term domestic financing.
• Ukraine used its 2009 SDR allocations to meet external obligations to natural
gas suppliers
• Zimbabwe used a portion of its SDR holdings for budgetary purposes.
14
Qualitative analysis: What is the future of SDR
• Low interest in SDR by the private sector
• Starting from 1970s attempts to increase the attractiveness of SDR as an asset
 allow the SDR holders to use it in such transactions as swap, forward, etc.

 let central banks involve into SDR transactions without the intermediation of IMF

 issue of SDR-denominated liabilities by commercial banks and private corporations

• Changes in the foreign exchange reserves


• Chances that new currencies can join the basket (e.g. Yuan)
 Issues of timing

 Stability of SDR

 Perceptions

 Convertibility

 Condition of freely-used currency


15
 Provision of updated statistics
Obstacles for SDR
• USA and its 17% voting rights
• Independent monetary policies

SDR Pros SDR Cons


• US government’s high debt • Major transactions in USD

• Domestic economic problems in the USA • High costs of shifting

16
IMF’s vision of SDR
• IMF is discussing the scenario of private use of SDR.
• IMF is considering the expansion of SDR denominated
bonds
• Creating the substitution accounts

17
18

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