Special drawing rights

Special drawing rights (ISO 4217 currency code XDR (numeric: 960),also abbreviated SDR) are supplementary foreign-exchange reserve assets defined and maintained by the International Monetary Fund (IMF). The SDR is the unit of account for the IMF, and is not a currency per se. SDRs instead represent a claim to currency held by IMF member countries for which they may be exchanged. The SDR was created in 1969 to supplement a shortfall of preferred foreign-exchange reserve assets, namely gold and the U.S. dollar. Special drawing rights (ISO 4217 currency code XDR (numeric: 960),also abbreviated SDR) are supplementary foreign-exchange reserve assets defined and maintained by the International Monetary Fund (IMF). The SDR is the unit of account for the IMF, and is not a currency per se. SDRs instead represent a claim to currency held by IMF member countries for which they may be exchanged. The SDR was created in 1969 to supplement a shortfall of preferred foreign-exchange reserve assets, namely gold and the U.S. dollar. SDRs are allocated to countries by the IMF. Private parties do not hold or use them. The amount of XDRs in existence was around XDR 21.4 billion in August 2009. During the global financial crisis of 2009, an additional SDR 182.6 billion were allocated to 'provide liquidity to the global economic system and supplement member countries’ official reserves'. By October 2014, the amount of XDRs in existence was SDR 204 billion. The value of the SDR is based on a basket of key international currencies reviewed by IMF every five years. The weights assigned to each currency in the XDR basket are adjusted to take into account their current prominence in terms of international trade and national foreign exchange reserves. In the review conducted in November 2015, the IMF decided that the Renminbi (Chinese yuan) would be added to the basket effective October 1, 2016. From that date, the XDR basket now consists of the following five currencies: U.S. dollar 41.73%, Euro 30.93%, Renminbi (Chinese yuan) 10.92%, Japanese yen 8.33%, British pound 8.09%. While the ISO 4217 currency code for special drawing rights is XDR, they are often referred to by their acronym SDR. Both refer to the name 'special drawing rights'. Intentionally innocuous and free of connotations because of disagreements over the nature of this new reserve asset during its creation, the name derives from a debate about its primary function—money or credit. While the name would offend neither side, it can be argued that prior to 1981 the XDR was a debt security and so a form of credit. 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. 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. The name may actually derive from an early proposal for IMF 'reserve drawing rights'. The word 'reserve' was later replaced with 'special' because the idea that the IMF was creating a foreign exchange reserve asset was contentious. 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. 1 XDR was initially defined as US$1, equal to 0.888671 g of gold. After the collapse of that system in the early 1970s the SDR has taken on a less important role. Acting as the unit of account for the IMF has been its primary purpose since 1972. The IMF itself calls the current role of the XDR 'insignificant'. Developed countries, who hold the greatest number of XDRs, are unlikely to use them for any purpose. The only actual users of XDRs may be those developing countries that see them as 'a rather cheap line of credit'. One reason XDRs may not see much use as foreign exchange reserve assets is that they must be exchanged into a currency before use. This is due in part to the fact private parties do not hold XDRs: 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. 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. This fact has led the IMF to label the XDR as an 'imperfect reserve asset'.