Special drawing rights
Template:Short description Template:Infobox currency
Special drawing rights (SDRs, code Template:ISO 4217) are supplementary foreign exchange reserve assets defined and maintained by the International Monetary Fund (IMF).<ref>Template:Cite web</ref> SDRs are units of account for the IMF, and not a currency per se.<ref name="white7"/> They represent a claim to currency held by IMF member countries for which they may be exchanged.<ref name=factsheet /> SDRs were created in 1969 to supplement a shortfall of preferred foreign exchange reserve assets, namely gold and U.S. dollars.<ref name=factsheet /> The ISO 4217 currency code for special drawing rights is Template:ISO 4217 and the numeric code is 960.<ref name="currency-iso.org">Template:Cite web</ref>
SDRs are allocated by the IMF to countries,<ref name=factsheet /> and cannot be held or used by private parties.<ref name=white5/> The number of SDRs in existence was around XDR 21.4 billion in August 2009. During the 2008 financial crisis, an additional XDR 182.6 billion was allocated to "provide liquidity to the global economic system and supplement member countries' official reserves". By October 2014, the number of SDRs in existence was XDR 204 billion.<ref>Template:Cite web</ref> Due to economic stress caused by the COVID-19 pandemic, several finance ministers of poorer countries called for a new allocation to support member economies as they seek ways to recover, and some economists called for the allocation to be as high as $4T.<ref name="economist2020">Staff. (11 April 2020). "Special delivery: Should the IMF dole out more special drawing rights?". The Economist website Retrieved 1 April 2021.</ref> In March 2021 the G24 and others proposed an allocation of $500B for this purpose.<ref>Kevin P. Gallagher, José Antonio Ocampo, and Ulrich Volz. (26 March 2021). "IMF Special Drawing Rights: A key tool for attacking a COVID-19 financial fallout in developing countries". Brookings Institution website Retrieved 1 April 2021.</ref> In response, XDR 456.5 billion (about US$650B) was allocated on August 23, 2021.<ref>Template:Cite web</ref>
The value of a SDR is based on a basket of key international currencies reviewed by IMF every five years.<ref name=factsheet>Template:Cite web</ref> The weights assigned to the currencies in the XDR basket are adjusted to take into account their current prominence in terms of international trade and national foreign exchange reserves.<ref name=factsheet /> Template:As of, the XDR basket consists of the following five currencies: U.S. dollar 43.38%, euro 29.31%, Chinese yuan 12.28%, Japanese yen 7.59%, British pound sterling 7.44%.<ref>Template:Cite web</ref>
Name
[edit]While the ISO 4217 currency code for special drawing rights is XDR,<ref name="currency-iso.org"/> they are often referred to by their acronym SDR. The name was chosen as a compromise between parties who wanted an international currency and those who wanted a credit facility.<ref name=white1/> Member countries receiving XDR allocations were required by the reconstitution provision of the XDR articles to hold a prescribed number of XDRs. If a state used any of its allotment, it was expected to rebuild its XDR holdings. As the reconstitution provisions were abrogated in 1981, the XDR now functions less like credit than previously.<ref name=white3/> Countries are still expected to maintain their XDR holdings at a certain level, but penalties for holding fewer than the allocated amount are now less onerous.<ref name=factsheet/>
The name may actually derive from an early proposal for IMF "reserve drawing rights".<ref name=p92/> The word "reserve" was later replaced with "special" because the idea that the IMF was creating a foreign exchange reserve asset was contentious.<ref>Template:Cite book </ref>
History
[edit]Special drawing rights were created by the IMF in 1969 and were intended to be an asset held in foreign exchange reserves under the Bretton Woods system of fixed exchange rates.<ref name=factsheet/> After the collapse of that system in the early 1970s, the XDR has taken on a less important role.<ref name="less imp">Template:Cite web</ref> Acting as the unit of account for the IMF has been its primary purpose<ref name=white7/> since 1972.<ref name=white2/>
The IMF itself calls the current role of the XDR "insignificant".<ref name=p1/> Developed countries, who hold the greatest number of XDRs, are unlikely to use them for any purpose.<ref name=white1/> The only actual users of XDRs may be those developing countries that see them as "a rather cheap line of credit".<ref>Template:CitationTemplate:Dead link</ref>
One reason XDRs may not see much use as foreign exchange reserve assets is that they must be exchanged into a currency before use.<ref name=white5/> This is due in part to the fact private parties do not hold XDRs:<ref name=white5/> they are only used and held by IMF member countries, the IMF itself, and a select few organizations licensed to do so by the IMF.<ref name=prescribedholders/> Basic functions of foreign exchange reserves, such as market intervention and liquidity provision, as well as some less prosaic ones, such as maintaining export competitiveness via favorable exchange rates, cannot be accomplished directly using XDRs.<ref name=p7/> This fact has led the IMF to label the XDR as an "imperfect reserve asset".<ref name=p4/>
Another reason they may see little use is that the number of XDRs in existence is relatively few compared to the total amount of foreign exchange reserves. To function well a foreign exchange reserve asset must have sufficient liquidity, but XDRs, because of their small number, may be perceived to be an illiquid asset. The IMF says, "expanding the volume of official XDRs is a prerequisite for them to play a more meaningful role as a substitute reserve asset."<ref name=p6/>
Alternative to U.S. dollar
[edit]The XDR comes to prominence when the U.S. dollar is weak or otherwise unsuitable to be a foreign exchange reserve asset. This usually manifests itself as an allocation of XDRs to IMF member countries. Distrust of the U.S. dollar is not the only stated reason allocations have been made, however. One of its first roles was to alleviate an expected shortfall of U.S. dollars Template:Circa.<ref name=white2/> At this time, the United States had a conservative monetary policy<ref name=white2/> and did not want to increase the total amount of U.S. dollars in existence.Template:Citation needed If the United States had continued down this path, the dollar would have become a less attractive foreign exchange reserve asset: it would not have had the necessary liquidity to serve this function. Soon after XDR allocations began, the United States reversed its former policy and provided sufficient liquidity.<ref name=white2/> In the process a potential role for the XDR was removed. During this first round of allocations, 9.3 billion XDRs were distributed to IMF member countries.
The XDR resurfaced in 1978 when many countries were wary of taking on more foreign exchange reserve assets denominated in U.S. dollars. This suspicion of the dollar precipitated an allocation of 12 billion XDRs over a period of four years.<ref name=white3/>
Concomitant with the 2008 financial crisis, the third round of XDR allocations occurred in the years 2009<ref name=factsheet/> and 2011.<ref name=20billion/> The IMF recognized the financial crisis as the cause for distributing the large majority of these third-round allotments, but some allocations were couched as distributing XDRs to countries that had never received any<ref name=factsheet/> and others as a re-balancing of IMF quotas, which determine how many XDRs a country is allotted, to better represent the economic strength of emerging markets.<ref name=20billion/>
During this time China, a country with large holdings of U.S. dollar foreign exchange reserves,<ref>Template:Cite web</ref> voiced its displeasure at the current international monetary system, and promoted measures that would allow the XDR to "fully satisfy the member countries' demand for a reserve currency."<ref>Template:Cite web Alt URL</ref> These comments, made by a chairman of the People's Bank of China, Zhou Xiaochuan, drew media attention,<ref>Template:Cite web
- Template:Cite news</ref> and the IMF showed some support for China's stance. It produced a paper exploring ways the substance and function of the XDR could be increased.<ref name=p1/> China has also suggested the creation of a substitution account to allow exchange of U.S. dollars into XDRs.<ref name=white1/> When substitution was proposed before, in 1978, the United States appeared reluctant to allow such a mechanism to become operational.<ref name="white3" />
Use by developing countries
[edit]In 2001, the UN suggested allocating XDRs to developing countries for use by them as cost-free alternatives to building foreign exchange reserves through borrowing or running current account surpluses.<ref name="un">Template:Cite conference </ref> In 2009, an XDR allocation was made to countries that had joined the IMF after the 1979–1981 round of allocations was complete (and so had never been allocated any).<ref name=factsheet /> First proposed in 1997,<ref>Template:Cite web</ref> many of the beneficiaries of this 2009 allocation were developing countries.Template:Efn
COVID-19 pandemic
[edit]On August 23, 2021, the IMF allocated $650 billion worth of XDRs to all 190 members of the IMF in proportion to member quotas in response to COVID-19 related balance of payments concerns. This allocation of XDRs represents roughly 2/3rds of all XDRs currently in circulation, and was by far the largest ever single allocation of XDRs.<ref>Template:Cite web</ref>
Value definition
[edit]Currency basket
[edit]To determine the composition of the XDR, the IMF takes into account several currencies important to the world's trading and financial systems. A currency's importance is currently measured by two factors: the amount of exports sold in that currency, and whether that currency is considered "freely usable" (determined by its use as a foreign exchange reserve asset and how widely it is used in international transactions).<ref name=factsheet/>
An XDR basket definition remains valid for five years. Approximately one to two months before the end of this time period, the IMF Executive Board will re-evaluate the XDR basket; the currencies included as well as their weights can then change.<ref name="2011-15weights">Template:Cite web</ref> Changing the XDR's value definition requires at least 70% of the votes among the IMF members.<ref name="2022weights">Template:Cite web</ref> The changes take effect at the end of the five-year period (one to two months after the board review). One business day before taking effect, the newly defined weights are converted to currency amounts based on an average of the exchange rate over the past three months, such that the value of the XDR in U.S. dollars remains the same before and after the change. The currency amounts then remain fixed throughout the five-year period.<ref name="2022weights" />
The IMF reserves the right to perform a re-evaluation after less than five years if it decides that the current basket no longer reflects "the relative importance of currencies in the world’s trading and financial systems";<ref name=factsheet /> it also reserves the right to postpone re-evaluations. If either occurs (causing the old definition to be valid for less or more than five years), the new definition will still be valid for a full five years.
Historical valuation
[edit]At the time of the XDR's creation in 1969, the United States dollar was backed by the gold standard and the XDR was fixed at 1/35 troy ounce of gold or exactly 1 US dollar.<ref name="white1" /> After the Nixon Shock of 1971 and during the collapse of the Bretton Woods system between 1971 and 1973, the XDR initially remained fixed relative to the nominal international price of gold, even the value of the United States dollar dropped to $38 per troy ounce in 1972 and to $42 2⁄9 per troy ounce in 1973. On 1 July 1974, the XDR instead became defined by a currency basket of 16 currencies.<ref name="white2" />
On January 1, 1981, the five-year schedule was introduced and the XDR basket was reduced to five currencies: the United States dollar, the Deutsche mark, the French franc, the British pound, and the Japanese yen.<ref>Template:Cite web</ref> When the euro was introduced in January 1999, it replaced the German mark and French franc and the basket consisted of four currencies.<ref name=factsheet />
In November 2010, the IMF determined that China's renminbi met the export requirement but failed to meet the "freely usable" requirement and thus was not included in the XDR basket taking effect on 1 January 2011. In November 2015, the IMF announced that the renminbi now met the "freely usable" requirement and would be included in the next basket definition, changing its size back to five currencies. The effective date of the re-evaluation was postponed to October 1, 2016, in order to "allow users sufficient lead time to adjust".<ref name=2015review>Template:Cite web</ref><ref name=2016weights>Template:Cite web</ref> In 2016, the renminbi was added to the basket with a 10.9% weighting.<ref name=":024">Template:Cite book</ref>Template:Rp
In March 2021, the IMF announced that the next re-evaluation, normally scheduled for 1 October 2021, would be postponed to 1 August 2022, in order to prevent the basket's definition from changing during the COVID-19 pandemic.<ref>Template:Cite web</ref>
| Period | Template:FlagiconUSD | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 1969–1971<ref name="white1" /> | 1.0 (100%) | |||||||||||||||
| XAU | ||||||||||||||||
| 1971–1974<ref name="casheet">Template:Cite web</ref> | 1⁄35 (100%) | |||||||||||||||
| Template:Flagicon USD | Template:Flagicon DEM | Template:Flagicon GBP | Template:Flagicon FRF | Template:Flagicon ITL | Template:Flagicon JPY | Template:Flagicon CAD | Template:Flagicon NLG | Template:Flagicon BEF | Template:Flagicon SAR | Template:Flagicon ESP | Template:Flagicon AUD | Template:Flagicon SEK | Template:Flagicon IRR | Template:Flagicon NOK | Template:Flagicon ATS | |
| 1974–1980<ref name="sixteencurrencies">Template:Cite journal</ref> | 0.4 (32.6%) | 0.32 (10.2%) | 0.05 (9.7%) | 0.42 (7.1%) | 52.0 (6.6%) | 21.0 (6.0%) | 0.07 (5.9%) | 0.14 (4.3%) | 1.6 (3.5%) | 0.13 (3.0%) | 1.5 (2.1%) | 0.017 (2.1%) | 0.11 (2.1%) | 1.7 (2.0%) | 0.1 (1.5%) | 0.28 (1.3%) |
| Template:Flagicon USD | Template:Flagicon DEM | Template:Flagicon FRF | Template:Flagicon JPY | Template:Flagicon GBP | |
|---|---|---|---|---|---|
| 1981–1985<ref name="casheet" /> | 0.54 (42%) | 0.46 (19%) | 0.74 (13%) | 34.0 (13%) | 0.071 (13%) |
| 1986–1990<ref name="casheet" /> | 0.452 (42%) | 0.527 (19%) | 1.02 (12%) | 33.4 (15%) | 0.0893 (12%) |
| 1991–1995<ref name="casheet" /> | 0.572 (40%) | 0.453 (21%) | 0.8 (11%) | 31.8 (17%) | 0.0812 (11%) |
| 1996–1998<ref name="casheet" /> | 0.582 (39%) | 0.446 (21%) | 0.813 (11%) | 27.2 (18%) | 0.105 (11%) |
| Template:Flagicon USD | Template:Flagicon EUR | Template:Flagicon JPY | Template:Flagicon GBP | ||
|---|---|---|---|---|---|
| 1999–2000<ref name="casheet" /> | 0.582 (39%) | 0.3519 (32%)<ref>Template:Cite press release</ref> | 27.2 (18%) | 0.105 (11%) | |
| 2001–2005<ref name="casheet" /> | 0.577 (44%) | 0.426 (31%) | 21.0 (14%) | 0.0984 (11%) | |
| 2006–2010<ref name="2011-15weights" /> | 0.632 (44%) | 0.41 (34%) | 18.4 (11%) | 0.0903 (11%) | |
| 2011–2016<ref>Template:Cite web</ref> | 0.66 (41.9%) | 0.423 (37.4%) | 12.1 (9.4%) | 0.111 (11.3%) | |
| Template:Flagicon USD | Template:Flagicon EUR | Template:Flagicon CNY | Template:Flagicon JPY | Template:Flagicon GBP | |
|---|---|---|---|---|---|
| 2016–2022<ref name="new2016weights">Template:Cite web</ref> | 0.58252 (41.73%) | 0.38671 (30.93%) | 1.0174 (10.92%) | 11.9 (8.33%) | 0.085946 (8.09%) |
| 2022–2027<ref name="2022amounts">Template:Cite web</ref> | 0.57813 (43.38%) | 0.37379 (29.31%) | 1.0993 (12.28%) | 13.452 (7.59%) | 0.080870 (7.44%) |
Daily valuation
[edit]Because of fluctuating exchange rates, the relative value of each currency varies continuously, as does the value of the XDR. The IMF sets the value of the XDR in terms of United States dollars every day. The latest United States dollar valuation of the XDR is published on the IMF website.<ref>Template:Cite web</ref> For example, on 31 January 2021, the value was USD$1.44080, and on June 22, 2021, the value was USD$1.426480.<ref>QUARTERLY REPORT ON IMF FINANCES For the Quarter Ended January 31, 2021. (31 January 2021). IMF website p. 22. Retrieved 22 June 2021.</ref>
Allocations
[edit]Template:Main XDRs are allocated to member countries by the IMF. A country's IMF quota, the maximum amount of financial resources that it is obligated to contribute to the fund, determines its allotment of XDRs.<ref name=factsheet /> Creating a new allocation requires 85% of the votes in the SDR Department of the IMF.<ref name="p4" /> All IMF member countries are represented in the SDR Department,<ref name="prescribedholders">Template:Cite book</ref> but this is not a one country, one vote system; voting power is determined by a member country's IMF quota.<ref>Template:Cite web</ref> For example, the United States has 16.7% of the vote as of March 2, 2011.<ref>Template:Cite conference</ref> This means the United States has a de facto veto on all new XDR allocations, it is currently the only country that does.
Allocations are not made on a regular basis and have only occurred on rare occasions. The first round took place because of a situation that was soon reversed, the possibility of an insufficient amount of U.S. dollars because of U.S. reluctance to run the deficit necessary to supply future demand. Extraordinary circumstances have, likewise, led to the other XDR allocation events. For example, during the 2008 financial crisis, XDR 182.6 billion was allocated to "provide liquidity to the global economic system and supplement member countries’ official reserves". The 2011 allocations were to low-income member countries.<ref name="20billion" />
| Date | Amount |
|---|---|
| 1970–1972<ref name="white2" /> | XDR 9.3 billion<ref name=factsheet /> |
| 1979–1981<ref name=factsheet /> | XDR 12.1 billion<ref name=factsheet/> |
| 28 August 2009<ref name=factsheet /> | XDR 161.2 billion<ref name=factsheet /> |
| 9 September 2009Template:Efn | XDR 21.4 billion<ref name=factsheet /> |
| Sometime after 3 March 2011Template:Efn | XDR 20.8 billion<ref name="20billion">Template:Cite news</ref> |
| 23 August 2021<ref name=factsheet /> | XDR 456.5 billion<ref name=factsheet /> |
After being split among the IMF member countries, the 2021 allocation gave Liberia and South Sudan each an amount equal to 9-10% of their GDP.<ref name="economist2020"/>Template:Efn
Exchange
[edit]An IMF member country that requires actual foreign currency may sell its XDRs to another member country in exchange for the currency. To sell a part or all its XDRs, the country must find a willing party to buy them.<ref name="white3" /> The IMF acts as an intermediary in this voluntary exchange.
The IMF also has the authority under the designation mechanism to ask member countries with strong foreign exchange reserves to purchase XDRs from those with weak reserves.<ref name=factsheet /> The maximum obligation any country has under this mechanism is currently equal to twice the amount of its XDR allocation.<ref name=p7/> As of 2023, XDRs may only be exchanged for euros, Japanese yen, UK pounds, US dollars or Chinese yuan.<ref name=p7/> The IMF says exchanging XDRs can take "several days."<ref name=p10/>
It is not, however, the IMF that pays out foreign currency in exchange for XDRs: the claim to currency that XDRs represent is not a claim on the IMF.<ref name=factsheet/>
The percentage of foreign exchange reserves in XDRs increases sharply after a new allocation, then declines until the next allocation. In the early 1970s, the percentage of non-gold reserves in XDRs reached a peak of 8.4%. In January 2011, this amount was less than 4%.<ref name=p6/> In April 2020 prior to the large allocation regarding the COVID-19 pandemic, this amount was under 3%; by comparison, over half (of non-gold reserves) were in the United States dollar.<ref name="economist2020"/>Template:Update inline
Interest rate
[edit]The IMF calculates a weekly interest rate, which is based on "a weighted average of representative interest rates on short-term debt in the money markets of the XDR basket currencies". No interest is payable on the XDRs allocated to a country by the IMF. However, interest is payable by an IMF member country that has exchanged (sold) some or all of the XDRs it was allocated, and interest is paid to a member country that holds more XDRs than it was allocated (i.e., the country that bought XDRs from another member).<ref name=factsheet/> In April 2020, the interest rate was 0.05%.<ref name="economist2020"/>
Other uses
[edit]The XDR is used in international transactions, including export quotas in the IMF members and the number of official reserve assets which were in their own currencies. It is traded on the main foreign exchange market, including foreign exchange trading volume, whether there are forward exchange markets.<ref name=factsheet />
Unit of account
[edit]Some international organizations use the XDR as a unit of account.<ref name="uoa" /> The IMF says using the XDR in this way "help[s] cope with exchange rate volatility."<ref name="p4" /> As of 2001, organizations that use the XDR as a unit of account, besides the IMF itself, include: Universal Postal Union,<ref name="upu">Template:Cite web</ref> African Development Bank, Arab Monetary Fund, Asian Development Bank, Bank for International Settlements,<ref name="p14" /> Common Fund for Commodities, East African Development Bank, Economic Community of West African States, International Center for Settlement of Investment Disputes, International Fund for Agricultural Development, and Islamic Development Bank.<ref name="p106" /> It is not only international organizations that use the XDR in this way. JETRO uses XDRs to price foreign aid.<ref>Template:Citation</ref> In addition, charges, liabilities, and fees prescribed by some international treaties are denominated in XDRs.<ref>Template:Cite journal</ref> In 2003, the Bank for International Settlements ceased to use the gold franc as their currency, in favour of XDR.
Some bonds are also denominated in XDR, like the IBRD 2016 XDR denominated bonds.<ref name='ibrd_sdr_bond'>Template:Cite web</ref>
Use in international law
[edit]In some international treaties and agreements, XDRs are used to value penalties, charges or prices. For example, the Convention on Limitation of Liability for Maritime Claims caps personal liability for damages to ships at XDR 330,000.<ref>Template:Cite web</ref> The Montreal Convention and other treaties also use XDRs in this way, capping damages at XDR 128,821.<ref>Template:Cite conference</ref>
Use as currency
[edit]According to the IMF, "the SDR may not be any country’s optimal basket",<ref name="p14" /> but a few countries do peg their currencies to the XDR. One possible benefit to nations with XDR pegs is that they may be perceived to be more transparent.<ref name="p14" /> As of 2000, the number of countries that did so was four.<ref>Template:Cite book</ref> This is a substantial decrease from 1983, when 14 countries had XDR pegs.<ref name="uoa">Template:Cite book</ref> Between 1981 and 2002, the Iranian rial was pegged to the XDR.<ref name="sixteencurrencies"/><ref>Template:Cite web</ref>Template:Better source needed As of 2010, Syria pegs its pound to the XDR.<ref>Syria switches currency peg from dollar to XDR Template:Webarchive bi-me.com, Tue June 5, 2007</ref><ref>Template:Cite web</ref>