What Are Special Drawing Rights (SDR)?

Special Drawing Rights (SDR)

Reviewed By Will Kenton   Updated Apr 7, 2019

What Are Special Drawing Rights (SDR)?

Special drawing rights (SDR) refer to an international type of monetary reserve currency created by the International Monetary Fund (IMF) in 1969 that operates as a supplement to the existing money reserves of member countries.

Created in response to concerns about the limitations of gold and dollars as the sole means of settling international accounts, SDRs augment international liquidity by supplementing the standard reserve currencies.

An SDR is essentially an artificial currency instrument used by the IMF, and is built from a basket of important national currencies.

The IMF uses SDRs for internal accounting purposes. SDRs are allocated by the IMF to its member countries and are backed by the full faith and credit of the member countries' governments. The makeup of the SDR is re-evaluated every five years. The current makeup on the SDR is represented by the following table:

Currency         Weights Determined in the 2015 Review   Fixed Number of Units of Currency  

                                                         5-Year Period Starting Oct 1, 2016                                                                                 

                                                                                    

U.S. Dollar                            41.73                                                       0.58252

Euro                                      30.93                                                       0 .38671

Chinese Yuan                       10.92                                                        1.0174

Japanese Yen                         8.33                                                      11.900

Pound Sterling                       8.09                                                       0.085946

 

Understanding SDR

 The SDR was formed with a vision of becoming a major element of international reserves, with gold and reserve currencies forming a minor incremental component of such reserves.

 To participate in this system, a country was required to have official reserves. This consisted of central bank or government reserves of gold and globally accepted foreign currencies that could be used to buy the local currency in foreign exchange markets to maintain a stable exchange rate.

Key Takeaways

 Special drawing rights, or SDR, are an artificial currency instrument created by the International Monetary Fund, which uses them for internal accounting purposes.

 The value of the SDR is calculated from a weighted basket of major currencies, including the U.S. dollar, the euro, Japanese yen, Chinese yuan, and British pound.

The SDR interest rate (SDRi) provides the basis for calculating the interest rate charged to member countries when they borrow from the IMF and paid to members for their remunerated creditor positions in the IMF.

 

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