General Allocation of Special Drawing Rights -SDR by the IMF

International Monetary Fund (IMF) makes the general SDR allocation to its members in proportion to their existing quotas in the Fund. The Board of Governors of the IMF had approved a general allocation of about SDR 456 billion on August 2, 2021 (effective from August 23, 2021) of which the share of India is SDR 12.57 billion (equivalent to around USD 17.86 billion at the latest exchange rate). According to the RBI circular dated September 1, 2021, the total SDR holdings of India now stand at SDR 13.66 billion (equivalent to around USD 19.41 billion at the latest exchange rate) as of August 23, 2021.

Let us now understand what is SDR?

The Special Drawing Rights (SDR) is an international reserve asset, created by the IMF in 1969 to supplement its member countries’ official reserves. IMF makes the general SDR allocation to its members in proportion to their existing quotas in the Fund. The member country’s SDR holding is one of the components of the Foreign Exchange Reserve (FER).

Why is SDR holding necessary for a country?

The asset was formed to supplement IMF member countries’ official reserves in response to concerns about the limitations of gold and dollars as the sole means of settling international accounts.  SDRs supplement international liquidity by complementing the standard reserve currencies. Adding SDRs to a country’s international reserves makes it a more stable asset financially. In times of crisis, a country can utilize its SDR holdings, for payments of crucial import needs.

Is the allocation of SDR by IMF to a country is a loan or donation?

No. The Special Drawing Right (SDR) allocation is neither a loan nor a donation/aid from the IMF. Most importantly, SDR allocation does not add to any country’s public debt burden. The SDRs are units of account for the IMF that cannot be recognised as a currency per se or a claim on the IMF. The member countries of IMF can use them in a range of authorized operations among themselves such as loans, payment of obligations, pledges, and in operations and transactions involving the IMF, such as the payment of interest on and repayment of loans, or payment for quota increases. However, countries that use SDRs for payment have to pay interest if they use SDR in lieu of hard currencies. They need not pay interest if they don’t use them. Thus, an SDR allocation is ‘cost-free for all members because charges and interest net out to zero if the countries do not use their SDR allocations.

If SDRs are not money, how can countries use them?

Member Countries can exchange their SDRs for hard currencies with other IMF members. They can also use their SDRs in a range of operations with other countries or to settle financial obligations to the Fund. Many member countries that don’t need the support have used SDRs to voluntarily support concessional financing to low-income countries.

How interest is charged for using SDR?

The SDR interest rate is determined weekly on each Friday and is based on a weighted average of representative interest rates on 3-month debt in the money markets of the five SDR basket currencies (i.e., the U.S. dollar, Japanese yen, euro, and pound sterling, and the Chinese Yaun (renminbi).

How is the value of SDRs decided?

SDR was initially determined as equivalent to 0.888671 grams of fine gold—which, at the time, was also equivalent to one U.S. dollar. After the collapse of the Bretton Woods system in 1973, the SDR was redefined as value arrived from a basket of currencies. The value of the SDR is determined in 2015 from a weighted basket of major currencies, including the U.S. dollar, the euro, Chinese Yuan, Japanese yen, and British pound, as below.  

The valuation basket is reviewed and adjusted every five years. However, the currency value of the SDR is determined daily by summing the values in U.S. dollars, based on market exchange rates, of the above major currencies.  For example, the SDR rate as of 01.09.2021 is calculated as under.

The total of column 4 above is 1.423243

SDR1 = US$ 1.423240 or 1US$= SDR 0.702621

The value of the U.S. dollar in terms of the SDR is rounded to six significant digits.     

The exchange rates for the Japanese yen and the Chinese renminbi*are expressed in terms of currency units per U.S. dollar; other rates are expressed as U.S. dollars per currency unit.

* renminbi is the official currency of China where it acts as a medium of exchange. The yuan is the basic unit of the renminbi, but the word is also used to refer to the Chinese currency generally, especially in international contexts

The SDR review due in March 2021, postponed to July 31, 2022, and the new basket will become effective from August 1, 2022

Source: IMF websites