What is Special Drawing Rights (SDR)

What is SDR?

• The SDR is an international reserve asset.
• It was created by the IMF in 1969 to supplement its member countries’ official reserves. 
• The SDR serves as the unit of account of the IMF and some other international organizations.
• The SDR is neither a currency nor a claim on the IMF. Rather, it is a potential claim on the freely usable currencies of IMF members. SDRs can be exchanged for these currencies.

Determination of SDR

The SDR value is determined on the basis of a basket of five currencies—the U.S. dollar, the euro, the Chinese renminbi, the Japanese yen, and the British pound sterling. The SDR basket is reviewed every five years or earlier, if necessary.

There is a criteria to include Currencies in the SDR basket:

• Export criterion: The country should be a member of IMF and shall be one of the top five world exporters.
• Freely usable criterion: The country's currency has to be widely used to make payments for international transactions and widely traded in the principal exchange markets.

What are the benefits of SDR for Member Countries?

IMF allocates SDRs to participants (countries) in proportion to their quotas in the IMF. Adding SDRs to a country’s international reserves makes it more resilient financially. In times of crisis like Covid-19 pandemic, a country can use these reserves for urgent needs - to pay for importing corona vaccines. The low-income countries and less developed countries benefit from these allocations.

Earlier, during 2009 economic crisis, IMF made allocations worth more than $ 200 billion in SDRs for financial stabilization.

And now with the onset of pandemic, the IMF has already mobilized $15 billion in SDRs voluntarily pledged by some members that can be lent to low-income countries at zero interest rate. The SDRs can be used to buy vaccines.