Special Drawing Rights

Also called: SDR · Topic: Balance of Payments and Exchange Rates · NCERT: Beyond NCERT

Meaning

A Special Drawing Right (SDR) is an international reserve asset that the IMF created in 1969. It is not a currency and not a claim on the IMF. It is a potential claim on the freely usable currencies of IMF members. A country holding SDRs can swap them for these currencies.

It matters because it was the world's first reserve asset created by agreement between countries rather than dug out of the ground (gold) or issued by one nation (the dollar). It is also the IMF's own unit of account: quotas, loans and allocations are all counted in SDRs.

Value rule: SDR value = the combined market value of fixed amounts of five currencies: USD, EUR, CNY, JPY and GBP.

Explanation

Why the SDR was created

• The problem: too little world liquidity. World liquidity means the reserves countries need to pay for trade. Under Bretton Woods (1944–1971/73), reserves meant gold or US dollars.
• Gold supply grew slowly.

• Dollars reached the world only when the US ran BoP deficits (it paid out more to the world than it earned).

• The Triffin dilemma (Robert Triffin, 1960).

• More US deficits → more dollars held abroad.
• The US gold stock could no longer cover all those dollars at $35 per ounce.

• So confidence in the dollar fell.

• The fix: a reserve asset that does not depend on one country's deficits. The IMF created the SDR in 1969 to add to members' reserves.

• What happened next. The gold–dollar link broke with the Nixon shock (15 August 1971). The SDR then became a basket of currencies, and it did not become the main reserve asset. The dollar still leads today.

The basket and its weights

• Five currencies: US dollar, euro, Chinese renminbi (yuan, CNY), Japanese yen and pound sterling. The renminbi joined in 2016 [2].
• 2022 review. On 11 May 2022 the IMF Board kept the same five currencies and reset their weights. The new weights applied from 1 August 2022 for a five-year valuation period [2].

Currency	Weight (from 1 Aug 2022)
US dollar	43.38%
Euro	29.31%
Chinese renminbi	12.28%
Japanese yen	7.59%
Pound sterling	7.44%

• Compared with 2015, the dollar and renminbi weights rose slightly. The euro, yen and pound weights fell. The order of the five stayed the same [2].
• The next valuation review is due by 2027 [2].

Why a basket keeps the SDR stable (worked example)

• The dollar is 43.38% of the basket. The other four together make up 56.62%.
• Case: the dollar rises 10% against all four other currencies.
• The dollar part of the SDR does not change in dollar terms.
• Only the non-dollar part (56.62%) loses value in dollar terms.

• So the SDR falls only about 10% × 56.62% ≈ 5.7% against the dollar, not the full 10%.

• Lesson: a move in one currency is partly balanced by the others, so the SDR swings less than any single currency.

How SDRs are allocated and used

• General allocation. The IMF creates new SDRs and gives them to members in proportion to their quotas. A quota is the subscription a member pays when it joins the IMF, and it is fixed in SDRs.

• Bigger quota → bigger share of any new SDRs.

• Largest allocation ever: about SDR 456 billion (≈ US$650 bn), effective 23 August 2021. Its aim was to help countries deal with the COVID-19 shock [3].

• Use. A member short of foreign exchange can swap its SDRs with other members for freely usable currencies, such as dollars or euros. It then uses that money to pay for imports or repay debt.
• Unit of account. The IMF states quotas and loans in SDRs. For example, India's 1991 IMF loan was counted in SDRs (see below).

In India

• Part of forex reserves. The RBI (Reserve Bank of India) manages India's foreign-exchange reserves. These have four parts: 1. foreign currency assets 2. gold 3. SDRs 4. Reserve Tranche Position (RTP)

• India's 2021 allocation: India received about US$17.9 bn from the 2021 general allocation. This added to its reserves without any borrowing or conditions.

• Why India's share is what it is. SDR allocation follows quota. India's quota share is about 2.75%, and its vote share about 2.63% (verify current figures). So India's SDR share is also about that size.
• 16th General Review of Quotas. Approved on 18 December 2023, it gives a 50% increase in quotas with no realignment, so each member's share stays the same [1]. India's share of future SDR allocations will therefore not grow under this review.
• 1991 crisis (SDR as a unit of account). On 31 October 1991 the IMF approved an upper credit tranche Stand-By Arrangement for India. It was worth SDR 1,656 million (≈ US$2.2 bn) and was to be drawn over 20 months [4].

Don't confuse with

• Reserve Tranche Position (RTP): the RTP is the 25% of a member's IMF quota that it paid in reserve assets. It is money the member put in and can draw at any time. SDRs are created and allocated by the IMF in proportion to quotas. Both are counted separately in India's forex reserves.
• IMF quota: the quota is the subscription a member pays to the IMF, and it decides votes, access to loans and SDR share. The SDR is the asset a member receives, and also the unit in which the quota is measured.
• Reserve currency (e.g. US dollar): a reserve currency is a real national currency, used for trade and held by central banks. The SDR is not a currency. You cannot pay a private firm in SDRs, because only official holders such as IMF members use it.
• Gold under the gold standard: gold was a commodity with its own value. The SDR's value comes only from its currency basket, and gold was demonetised by the Jamaica Accords (1976).

Prelims Hooks

• The SDR was created by the IMF in 1969. It is not a currency and not a claim on the IMF. It is a potential claim on members' freely usable currencies.
• The basket has five currencies: USD, EUR, CNY, JPY and GBP. The renminbi joined in 2016 [2]. The Indian rupee is not in the basket, which is a common trap.
• Weights from 1 August 2022: USD 43.38% > EUR 29.31% > CNY 12.28% > JPY 7.59% > GBP 7.44%. The yen outranks the pound [2].
• SDRs are allocated in proportion to IMF quotas, not by GDP, population or need.
• The 2021 allocation was about SDR 456 bn (≈ US$650 bn), the largest ever, effective 23 August 2021 [3]. India's share was about US$17.9 bn.
• SDRs are one of the four components of India's forex reserves, alongside FCA, gold and RTP.

Mains Points

• SDRs and the fight against dollar dominance:
• The dollar still carries about 43% of the SDR weight [2]. The world depends heavily on one country's currency, just as Triffin warned.
• When the US raises interest rates, money flows out of emerging economies such as India.

• A bigger role for the SDR could lower this risk. That is one reason India pushes rupee trade settlement and builds larger reserve buffers.

• Who gets SDRs is unfair to poorer countries:

• Allocation follows quota, so rich countries with big quotas got most of the 2021 allocation [3], while poorer countries needed it most.
• The 16th Review raised quotas without realignment [1], so emerging economies like India (about 2.75% share) remain under-represented.

• A new quota formula under the 17th Review is a G20 and BRICS demand. It links to the GS-II debate on reforming global institutions.

• SDRs as an unconditional safety net:

• An SDR allocation adds to reserves with no conditionality (policy conditions attached to a loan) and no repayment schedule. This differs from IMF loans such as India's 1991 Stand-By Arrangement [4], which came with reform conditions.
• Allocations are rare and follow quota, so countries like India still need their own large reserves as the first line of defence.

Related concepts

• International monetary system
• Gold standard
• Bretton Woods system
• Triffin dilemma
• Reserve currency
• IMF quota
• Reserve tranche position
• Washington Consensus
• Structural adjustment programme

Read more

• The international monetary system: gold standard, Bretton Woods and the IMF