What are Special Drawing Rights?

SPECIAL DRAWING RIGHTS (SDR’s): BACKGROUND:
SDRs created by the IMF were allocated to all member countries in the same ratio as the
quotas (subscriptions) paid by them for their membership. The main features of this
instrument are as follows:
1. SDR’s are entitlements granted to member countries enabling them to draw from the
IMF in addition to drawings against their quotas.
2. SDR’s do not have any physical existence (artificial currency unit) and operate only
through book entries with the IMF. A special account is set up for each member and
the allocated SDR’s are credited to it. When a member needs to borrow against
SDR’s they apply to the IMF for drawings. The IMF designates a surplus member
country to fulfill the requirements of the borrowing country.

3. The SDR is not a currency and there is no security to back its existence. The IMF

does not undertake any liability against SDR operations. The SDR therefore is not a
negotiable instrument.
4. The strength of the SDR is derived from the undertaking by member countries to
abide by the articles of the IMF and provide assistance against the security of the
SDR’s.
5. The value of the SDR is established daily on a weighted average basis using a
basket involving USD, GBP, EUR and JPY. The composition and weights for this
basket are reviewed every 5 years. The value is however expressed in terms of USD.
6. The account of the borrowing country is debited with the corresponding credit to the
lending country. Periodic interest ispayable by the borrower at the rate of interest
applicable to SDR’s. This interest rate is calculated on a weighted average basis in
terms of the 3 month inter-bank interest rates applicable to the currencies in the
valuation basket of the SDR and in the same proportion. The interest rate is revised
on a weekly basis.
7. Designated countries providing assistance against the security of the SDR’s are
obliged to accept SDR’s up-to 3 times the SDR’s allocated to them. Drawings against
SDR’s are permitted up-to 70% of the SDR’s allocated to the country.
8. The SDR is the unit of account for all IMF transactions and can be used for the
following:
 Receipts and Payments for BOP management
 IMF charges, interest etc.
 Inter-country bi-lateral settlements and
 Currency swaps.
9. SDR’s were created in 1969 in terms of the 1st amendment to the IMF articles with a
view to provide international liquidity. At the time of their introduction the Bretton
Woods system was in operation and the value of 1 SDR was equated to a specific
quantity of gold [1/ 35oz] which was equal to 1 USD. The IMF provided an absolute
gold guarantee against SDR’s and because of this SDR’s were initially known as
“paper gold”.
10. Subsequently after the breakdown of the gold valuation system, valuation of the SDR
was done through a currency basket whose composition and weights were reviewed
periodically. (The gold valuation system was abandoned by the IMF in 1975.)