Sunday, February 9, 2014

What is an SDR?

Part of the process of becoming informed about monetary system change is to understand key terms and concepts of the present monetary system. We hear a lot of terms and acronyms used (like SDR) as if everyone just naturally knows all about them. Today we will offer an article for those who may not be familiar with what an SDR is. This is straight from the IMF web site:

Here are a few of the Q&A items from the article:

Q. What is an SDR?

A. The Special Drawing Right (SDR) is an interest-bearing international reserve asset created by the IMF in 1969 to supplement other reserve assets of member countries.
• The SDR is based on a basket of international currencies comprising the U.S. dollar, Japanese yen, euro and pound sterling. It is not a currency, nor a claim on the IMF, but is potentially a claim on freely usable currencies of IMF members. The value of the SDR is not directly determined by supply and demand in the market, but is set daily by the IMF on the basis of market exchange rates between the currencies included in the SDR basket.
It can be held and used by member countries, the IMF, and certain designated official entities called "prescribed holders"—but it can not be held, for example, by private entities or individuals. Its status as a reserve asset derives from the commitments of members to hold, accept, and honor obligations denominated in SDR. The SDR also serves as the unit of account of the IMF and some other international organizations.

Q. What is a general SDR allocation?

A. An SDR allocation is a low cost way of adding to members' international reserves, allowing members to reduce their reliance on more expensive domestic or external debt for building reserves.
The IMF has the authority under its Articles of Agreement to create unconditional liquidity through "general allocations" of SDRs to participants in its SDR Department (currently, all members of the IMF) in proportion to their quotas in the IMF.
• The IMF's Articles prescribe the conditions under which such allocations can be made, namely that general allocations of SDRs should meet a long-term global need to supplement existing reserve assets in a manner that will promote the attainment of the IMF's purposes and avoid economic stagnation and deflation, as well as excess demand and inflation; and that these allocations should have the broad support of SDR Department participants.

Q. How many SDRs have been allocated?

A. The general SDR allocation of August 28, 2009 is by far the biggest allocation to date:
• SDR 9.3 billion was allocated in yearly installments in 1970–72.
• SDR 12.1 billion was allocated in yearly installments in 1979–81.
• SDR 161.2 billion was allocated on August 28, 2009.
• A special one-time allocation of SDR 21.5 billion took effect on September 9, 2009, bringing total cumulative allocations to about SDR 204 billion (equivalent to about US$318 billion).

Q. How is the general SDR allocation shared among members?

A. The general allocation is based on each country's existing IMF quota. The US$250 billion total equates to around 74.13 percent of eligible participants' quota. Emerging markets and developing countries as a group account for almost US$100 billion of the total, including over US$18 billion for low-income countries.

my added comment: the allocation of the IMF quota between nations is what we have mentioned in earlier posts. There was an agreement in 2010 that would allocate more to the BRIC nations and give them more voice. The US Congress has not approved this yet. Since the US holds what amounts to veto power at the IMF, the changes have not been made at this time.

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