Special drawing rights
IMF-created reserve asset based on a currency basket.
Special drawing rights (SDRs, code XDR) are a supplementary foreign exchange reserve asset defined and maintained by the International Monetary Fund (IMF). Created in 1969, they were originally pegged to gold and later redefined as equivalent to a basket of world currencies. SDRs serve as the IMF's unit of account and are allocated to member countries and central banks, but cannot be held by private entities. Their role has evolved from a potential substitute for the U.S. dollar to a tool for providing liquidity during financial crises, such as the 2008 financial crisis and the COVID-19 pandemic.
Quick Facts
- Date of introduction
- 1969
- Using countries
- IMF
- Pegged with
- U.S. dollar
- euro
- Japanese yen
- pound sterling and Chinese yuan
Facts from the source article.
Lore & Background
Special drawing rights were created by the IMF in 1969 as an asset held in foreign exchange reserves under the Bretton Woods system of fixed exchange rates. Initially each SDR was worth 0.888671 grams of gold, roughly equivalent to one U.S. dollar. After the collapse of the Bretton Woods system in the early 1970s, the SDR took on a less important role, primarily serving as the IMF's unit of account since 1972. The name was a compromise between those wanting an international currency and those wanting a credit facility; it may derive from an early proposal for 'reserve drawing rights,' with 'reserve' replaced by 'special' due to contention over creating a foreign exchange reserve asset.
Reader's Guide
Special drawing rights have played a periodic but significant role in the international monetary system, particularly during times of dollar weakness or global financial stress. They were created to alleviate an expected shortfall of U.S. dollars around 1970, and allocations resumed in 1978 when many countries were wary of dollar-denominated reserves. The largest allocation occurred in response to the COVID-19 pandemic, with XDR 456.5 billion (about US$650B) distributed on 23 August 2021. Despite their potential, the IMF itself calls the current role of the XDR 'insignificant' and an 'imperfect reserve asset,' because they must be exchanged into a currency before use and cannot be held by private entities. Developed countries hold the greatest number of XDRs but are unlikely to use them, while developing countries may see them as a cheap line of credit. The XDR's value is based on a basket of five currencies reviewed every five years, with weights adjusted for international trade and foreign exchange reserves. As of August 2023, the basket comprises the U.S. dollar (43.38%), euro (29.31%), Chinese yuan (12.28%), Japanese yen (7.59%), and British pound sterling (7.44%).
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