Special Drawing Rights (SDR)

These are international reserve currencies created by the International Monetary Fund  (IMF) to overcome the problems of using gold and national currency reserve.  These represent an entirely new form of reserve assets.  The SDR are simply entries in the books of the IMF and do not require expenditure of resources to create them unlike gold.  Also their use does not put any country under strain unlike the use of national reserve currencies.  Initially, the unit of the SDR was pegged to the American dollar, but when the dollar was floated the unit of SDR became a weighted basket of 16 currencies of the world's major trading nations, the weight used in each case being the proportion of World Trade taken up by that country.  Later the unit of SDR was reduced to a weighted basket of the exchange values of five major currencies (the US dollar, the Deutschemark, the French franc the Japanese yen and the Pound sterling).  The value obtained is then expressed in dollars.

SDRs are issued by the IMF to member countries in proportion to their quotas and represent claims or rights which are honoured by other members and by the IMF itself.  By joining the scheme, a member accepts an obligation to provide currency, when designated by the Fund, to other participants in exchange for SDRs.  It cannot, however, be obliged to accept SDRs to a greater total value than three times its own allocation.

Participants whose holdings are less than their allocation pay interest on the difference between their allocation and their actual holdings, and members holding SDRs in excess of their allocation receive interest.

Each member of the IMF is entitled to an allocation of SDR, which it can use to pay for its imports or settle international debts. If both the paying country and the country being paid are members of the IMF, then in the books to IMF, the allocation of the paying country will go down and that of the country being paid will go up.  If the country being paid is not a member of IMF, then the country paying can use its allocation of SDR to purchase gold or convertible currency from the IMF or another member of the IMF, whose allocation of SDR will correspondingly increase.