Special Drawing Rights

The Special Drawing Right (SDR) often is referred to as the “currency” of the International Monetary Fund (IMF), but in fact is not a currency at all. Rather, it is the IMF’s accounting unit created in 1969 to support the Bretton Woods structure of fixed exchange rates that relied either on gold or the U.S. dollar as the two key international reserve assets. Originally the SDR was defined as carrying the equivalent reserve value as 0.888671 grams of gold, which in 1969 was the equivalent of one U.S. dollar.

Composition and Value

The Bretton Woods system collapsed in the early 1970s, leading to redefinition of the SDR according to the value of a “basket” of specific currencies. As of 1981, the SDR consisted of the U.S. dollar, German Deutsche mark, French franc, Japanese yen and British pound. That changed in 1999 when the euro came into existence and replaced both the Deutsche mark and French franc. Composition of the SDR then became 39% dollar, 32% euro, 18% yen and 11% pound. The Executive Board reviews composition every five years; the most recent review was at the end of 2010 when the dollar’s influence diminished and the euro’s greatly increased. As of January 1, 2011, the current composition of the SDR is 41.9% dollar, 37.4% euro, 9.4% yen and 11.3% pound. One of the concerns in financial markets is the continued decline of the dollar. In the 2001–2005 period, the dollar supplied 45% of the value of the SDR; that declined to 44% in the 2006–2010 period in response to the U.S. recession. The recent decline to 41.9% is of concern to all countries regarding the dollar as their leading reserve currency. By the same token, the increase of the influence of the euro from 34% to 37.4% is highly positive for those holding or operating in euros.

The composition of the SDR changes only in five-year intervals, but the value of the SDR changes daily. Each of the four currencies on which the SDR is based fluctuates daily, so the value of the SDR changes daily as well. The IMF reports these daily fluctuations and values, but it does not and cannot control them. The IMF absolutely controls the degree to which each of the four currencies contributes to the value of the SDR in the form of the five-year review and adjustment. The SDR is expressed in terms of the dollar.

Uses

Reference to the SDR as the IMF’s currency arises from some of the uses of the SDR. The IMF allocates SDRs to member nations according to each member nation’s IMF quota, which is the maximum level of financing that each member nation is required to make to the IMF. Allocations result from the official action of the semiannual meeting of the G-20, the shorthand name of the Group of Twenty Finance Ministers and Central Bank Governors. The G-20 is comprised of the central bank governors and finance ministers of 19 countries plus the European Union. Allocations were annual from 1970 to 1972, resulting in 9.3 billion SDRs being distributed to member nations. The dollar’s wrenching stresses during the later years of the 1970s led to the second two-year round of allocations from 1979 to 1981, adding another 12.1 billion SDRs to the world’s total. No new allocations took place between 1981 and 2008, but the allocation authorized by the G-20 in 2009 more than made up for that long period. At that time, the G-20 authorized an allocation of 250 billion SDRs, increasing the world’s supply from 21.4 billion to 271.4 billion in a single action. Following this, the G-20 authorized the issuance of another 21.4 billion SDRs later that same year, bringing the total to 292.8 billion SDRs.

The goal behind the staggering allocations in 2009 was to calm the world economy and to funnel much-needed reserve funds to the developing nations that were so adversely affected by developed nations’ inability to buy their goods during the deep international recession. Member nations with healthy external finances can buy developing nations’ SDRs, providing developing nations with much-needed currency without the need to borrow funds and incur greater indebtedness. Richer countries with larger allocation shares benefit most from the release of new SDRs to the world, but smaller countries also benefit to a significant degree. When the IMF released the $250 billion new SDRs, the allocation immediately increased South Korea’s reserves by $3.4 billion. India’s increased by $4.8 billion, and Russia’s increased by $6.9 billion. The across-the-board action also meant that China’s reserves increased by $9.3 billion, adding to existing reserves of nearly $2 trillion. It is the hope of the IMF and many members of the G-20 that richer countries will lend their SDRs to developing ones, however. The IMF supplies interest credit to these countries, basing the interest paid on the difference between what richer countries have been allocated and what they actually hold.

Billionaire and international financier George Soros has said for years that the SDR should replace the dollar as the world’s reserve currency, a sentiment also voiced by China in the recent past. Such a move would diminish the U.S. and Europe, a long-held Soros goal that he promoted most recently in a kind of Bretton Woods II gathering. Such a move should be several years in the future, if indeed it ever occurs.