Special Drawing Rights

Why in news?

• The International Monetary Fund recently said that it has increased the weighting of the dollar and Chinese Yuan in its review of the currencies that make up the valuation of its Special Drawing Rights (SDR), an international reserve asset.

About Special Drawing Rights:

• The SDR is an international reserve asset, 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 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.

Value of SDR:

• The value of the SDR is based on a basket of five currencies:
  • U.S. dollar, Euro, Chinese yuan, Japanese yen, British pound sterling.
• China's yuan first joined the SDR basket of currencies in 2016
• To be considered in the SDR basket, a currency must meet criteria for exports and free use.
  • The export criterion is met if the issuing country is an IMF member and the currency ranks among the top five assets globally.
  • The other criterion is met if the currency is broadly used for payments and traded in principal markets.
• The SDR currency value is calculated daily (except on IMF holidays or whenever the IMF is closed for business) and the valuation basket is reviewed and adjusted every five years.
• After 2022 review:
  • Dollar's weighting rose to 43.38% from 41.7%
  • Yuan's weighting rose to 12.28% from 10.92%.
  • Euro's weighting fell to 29.31% from 30.93%
  • Yen's weighting fell to 7.59% from 8.33%
  • British pound's dropped to 7.44% from 8.09%.

Add ons:

• Quota (the amount contributed to the IMF) of a country is denominated in SDRs.
• Members’ voting power is related directly to their quotas.
• IMF makes the general SDR allocation to its members in proportion to their existing quotas in the IMF.

PRACTICE QUESTION:

Which of the following statements is/are correct regarding Special Drawing Rights?

1. It is an international reserve asset created by the IMF

2. It can be exchanged for any currency recognized in the international market

Select the correct answer using the code given below:

(a) 1 only

(b) 2 only

(c) Both 1 and 2

(d) Neither 1 nor 2

Answer