Special Drawing Rights, or SDRs, are an international reserve asset created by the International Monetary Fund (IMF) in 1969.

The primary purpose of SDRs is to supplement the official reserves of the IMF’s member countries, helping to address global liquidity issues and stabilize the international monetary system.

SDRs are not a currency, but they are a potential claim on the freely usable currencies of IMF members. As such, SDRs can provide a country with liquidity.

What is the SDR?

The creation of SDRs was a response to the limitations of the Bretton Woods system, which tied global currencies to the U.S. dollar, which in turn was backed by gold.

As international trade grew rapidly in the post-World War II era, the demand for international reserves increased, leading to concerns about the availability of gold and U.S. dollars to meet the demand. SDRs were introduced as a supplementary reserve asset to help alleviate these concerns.

SDRs are allocated to IMF members in proportion to their IMF quotas. Quotas are based broadly on the relative economic position of the country in the world economy.The quota is essentially a country’s financial commitment to the IMF and its voting power.

SDRs are held by the IMF’s member countries and can

be used to settle international payments, purchase other currencies, or repay IMF loans.

SDRs can also be used as collateral for loans from the IMF.

What is the purpose of SDR?

The primary function of SDRs is to serve as a reserve asset that central banks can use to supplement their foreign exchange reserves.

SDRs can be exchanged for freely usable currencies among IMF member countries, providing liquidity to the global financial system.

This function becomes particularly important during times of financial stress or crises when countries may face difficulties in obtaining foreign currencies.

SDRs also serve as the unit of account for the IMF and several other international organizations, helping to standardize financial transactions and simplify the process of international cooperation.

Is SDR a currency?

SDRs are not a currency; rather, they are based on a basket of major international currencies.

The value of the SDR is determined by the weighted average of the exchange rates of these currencies, which currently include the U.S.> dollar, euro, Japanese yen, British pound, and Chinese renminbi.

The composition of the SDR basket is reviewed every five years by the IMF to ensure that it reflects the relative importance of the currencies in the global economy.

Why are SDRs important?

The importance of SDRs lies in their ability to provide liquidity and stability to the global financial system.

By serving as a supplementary reserve asset, SDRs help to reduce the reliance on a single currency or a limited number of reserve currencies, thus promoting a more balanced and resilient international monetary system.

Furthermore, SDR allocations can play a crucial role in times of global financial crises, providing additional resources to countries in need of foreign exchange reserves.

Here are some of the advantages of SDRs:

  • They are a reserve asset that is not tied to any particular country or currency.
  • They are a potential claim on the freely usable currencies of IMF members.
  • They are a relatively stable asset.

Here are some of the disadvantages of SDRs:

  • They are not widely used.
  • They are not as liquid as other reserve assets, such as the U.S. dollar.
  • They are not as widely accepted as other reserve assets, such as the U.S. dollar.

Overall, SDRs have the potential to play a more important role in the international monetary system in the future. However, their use is currently limited by their lack of widespread use and acceptance.