Special Drawing Rights

Summary of Special Drawing Rights

An artificial currency unit created by the international monetary Fund (read this and related legal terms for further details), or IMF, to argument international reserves. The expansion of world trade following World War II necessitated an expansion in reserves; prior to the creation of SDRs, the international reserve function had been performed largely by the U.S. dollar. Concerns over American fiscal policies, largely a persistent balance of payments deficit, plus massive deficit spending resulting from the Vietnam War and the expansion of Federally sponsored social programs, caused dissatisfaction with the dominant role of the dollar. In January 1970, the IMF created 3.4 billion SDRs which were allocated to IMF members in proportion to their quotas in the fund. The SDR was valued at 1 /35th of an ounce of gold, which made the value of one SDR equal to one dollar at that time. Further allocations of SDRs have raised the number of units outstanding as of January 1, 1981, to 4,052,494,000 SDR. As a result of two dollar devaluations against gold (8.5 percent in December 1971 and a further 11.5 percent in February 1973), the dollar and SDR are no longer of equal value.

A nation with a balance of payment deficit can convert its SDRs, which constitute an unconditional international reserve asset, into a convertible currency upon application to the IMF. The IMF will designate another country (one with a balance of payment surplus, or extensive foreign currency reserves) to receive the SDRs in return for cash. Each country is obliged to accept SDRs in exchange for currency upon designation by the fund, up to three times the nation’s allocation. Effective May 1, 1981, SDRs held in excess of allocation earn interest at the full market rate; previously, SDRs earned interest at the rate of 1.5 percent per year. Likewise, when holdings are run below the allocation, interest is payable at the rate of 1.5 percent per year. No nation is permitted to let its holdings slip below 30 percent of its allocation, averaged over a five-year period.

By 1974 dramatic fluctuations in the value of gold disrupted the relationship between the official value of the SDR (in terms of gold) and the market value of the metal. In response to this disturbance, the IMF approved a new “interim”value for the SDR; effective July 1, 1974, the SDR would be valued on the basis of a basket of currencies, weighted proportionally to the exports of goods and services of the issuing countries. By this arrangement, as some currencies appreciated in value, others would depreciate, with the value of the SDR remaining stable. By 1980 it had become evident that a basket of sixteen currencies was cumbersome, particularly since many of the currencies used were not significant in terms of international transactions. Effective January 1, 1981, the number of currencies composing the SDR balance was reduced to five prime trading currencies: the U.S. dollar, French franc,

Deutsche mark, British pound, and Japanese yen, each weighted relative to trading importance.

Inasmuch as the SDR is a basket of currencies in which appreciation in the value of a given component currency is apt to be offset by comparable depreciations in the value of other component currencies, the SDR offers the potential for serving as a more stable standard of value than any single currency. For this reason, international firms and banks have expressed interest in valuing transactions in SDRs so as to minimize overall exchange risks. Since SDRs are international reserve assets, they may be held only by the IMF, national monetary authorities, and a limited number of other holders, all of which are intergovernmental agencies; accordingly, SDRs per se are not available for commercial transactions. In order to secure the benefits of relative rate stability, various commercial entities have duplicated the SDR, creating a so-called Euro-SDR by pooling various national currencies of proportional values in the official SDR basket.

In fixing values in terms of SDRs (official or Euro- SDRs) it is important to understand that the mix of currencies and their respective ratios in the SDR are apt to change over time. The parties to an SDR- denominated transaction must define whether in the event of a change in the makeup of the SDR, the transaction is to be valued in terms of so-called “frozen”SDRs (keeping the SDR makeup at the time the transaction was adopted) or in terms of the new (or flexible) SDRs.

(Main Author: William J. Miller)

Special Drawing Rights (SDRs) and International Trade Economy

In relation to international trade economy, Christopher Mark (1993) provided the following definition of Special Drawing Rights (SDRs): A composite unit of value for international transactions, the value of which is determined daily by the International Monetary Fund on the basis of a weighted “currency basket.” In the derivation of the SDR value, the currencies of the basket are valued at their market exchange rates for the US dollar and are summed to yield the rate of the SDR in terms of the US dollar. Since 1991, the SDR valuation basket has consisted of the US dollar (40 percent), German mark (21 percent), Japanese yen ( 17 percent), French franc ( 11 percent), and British pound ( 11 percent). Some international trade agreements, such as the GATT Government Procurement Code (Sec. I), use SDRs to designate nominal amounts that are less susceptible to distotion via fluctuations in the exchange value of a single currency.

Special Drawing Rights

Embracing mainstream international law, this section on special drawing rights explores the context, history and effect of the area of the law covered here.

Resources

Further Reading

• The entry “special drawing rights” in the Parry and Grant Encyclopaedic Dictionary of International Law (currently, the Encyclopaedic Dictionary of International Law, 2009), Oxford University Press

Hierarchical Display of Special drawing rights

Finance > Monetary relations > International finance > International liquidity

Special drawing rights

Concept of Special drawing rights

See the dictionary definition of Special drawing rights.

Characteristics of Special drawing rights

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Resources

Translation of Special drawing rights

• Spanish: Derechos especiales de giro
• French: Droits de tirage spéciaux
• German: Sonderziehungsrechte
• Italian: Diritti speciali di prelievo
• Portuguese: Direitos Especiais de Saque
• Polish: Specjalne prawa ciągnienia

Thesaurus of Special drawing rights

Finance > Monetary relations > International finance > International liquidity > Special drawing rights

See also

• Hydrology

Rural development

• Drainage
• Irrigated agriculture

• Irrigation
• Water
• Irrigated agriculture

• Agricultural drainage
• Irrigation canal
• Irrigation plan

• SDR