- James Boughton, Peter Isard, and Michael Mussa
- Published Date:
- September 1996
Special drawing right (SDR). The international reserve asset created by the IMF in 1969 and used to supplement existing reserve assets. The SDR serves as the unit of account for the IMF and a number of other international and regional organizations. In addition, a few countries peg the exchange rates of their currencies against the SDR. While the SDR has been used at times to denominate financial instruments and transactions outside the Fund by the private sector and some governments, the market for such “private SDRs” is very limited.
Valuation. The Articles of Agreement authorize the Executive Board of the Fund to determine how to define, or “value,” the SDR. The SDR was valued initially in terms of a fixed quantity of gold (equivalent to one U.S. dollar), and was redefined in June 1974 as a basket of 16 currencies. Since 1981 the SDR basket has consisted of fixed quantities of the currencies of the five Fund members that are the largest exporters of goods and services. The basket is revised every five years, most recently on January 1, 1996. The weights in the basket reflect both the relative shares of countries in exports of goods and services and the relative shares of the five currencies in official reserve holdings. For the current basket, the percentage weights, based on exchange rates for the fourth quarter of 1995, were 39 for the U.S. dollar, 21 for the deutsche mark, 18 for the Japanese yen, and 11 each for the French franc and pound sterling.
Participants and other holders. The Fund’s Articles of Agreement establish three categories of SDR holders, all of which are official institutions: (1) member countries that elect to be “participants” in the SDR Department of the Fund; (2) the Fund itself through its General Resources Account; and (3) other official entities prescribed by the Fund. Since 1980 all member countries of the Fund have been participants. Currently, the Fund has prescribed 15 other official entities as holders. The bulk of SDRs is held by member countries.
Allocations. Since the adoption of the First Amendment of the IMF’s Articles of Agreement in 1969, the Fund has been authorized to allocate SDRs to member countries. Decisions to allocate (or cancel) SDRs require an 85 percent majority vote of the Board of Governors and are made for “basic periods” that, unless otherwise decided, run for five consecutive years. Decisions to allocate have been reached on only two occasions (during the first and third basic periods), each time leading to allocations in three installments (from 1970 to 1972 and from 1979 to 1981), and resulting in cumulative allocations to date of SDR 21.4 billion (Table 1, columns 1 and 2). The sixth basic period will expire at the end of 1996. SDR allocations are distributed, in proportion to IMF quota shares, to members participating in the SDR Department at the time of allocation. Because of considerable expansion in the Fund’s membership since SDRs were last allocated, 38 of the Fund’s 181 member countries have never received SDR allocations. Another 37 members have participated in some, but not all, allocations. The current Articles of Agreement do not authorize the IMF to allocate SDRs selectively among members or to itself.
|Basic Period||Allocation of SDRs|
(in billions of SDRs)
|Share of SDRs in|
Ratio of cumulative SDR allocations to nongold reserves for all countries, end-of-year data.
Share of international reserves. SDRs are counted as a part of a country’s international reserves, along with official holdings of gold, foreign exchange, and reserve positions in the IMF. Because there have been no allocations of SDRs since 1981, the share of SDRs in global holdings of nongold reserves has declined from 8.4 percent at the end of 1972, and 6.5 percent at the end of 1981, to 2.3 percent at the end of 1995 (Table 1, column 3).
Use of SDRs. Recipients of allocations may exchange their SDRs for other currencies with no conditions attached, although there are restrictions on the set of authorized holders with which SDRs may be exchanged. A country may use its SDRs to pay charges or quota subscriptions to the IMF, obtain a currency in an agreement with another member country, engage in swap arrangements or forward transactions, make loans or donations, settle financial obligations with other member countries, or establish security for the performance of financial obligations. In recent years, SDRs have been used in 50–60 percent of all transactions between member countries and the Fund (through its General Resources Account).
Rate of interest. The basis for determining the SDR rate of interest has changed over time. From 1970 through June 1974 it was set at 1.5 percent a year. During the next two years it was set at approximately 50 percent of a “combined market interest rate,” which was defined as a weighted average of market interest rates on short-term assets denominated in the five major currencies contained in the SDR basket. Subsequently it was raised further to 60 percent, then to 80 percent, and in May 1981 to 100 percent of the combined market interest rate. The latter is currently defined, using the weights of currencies in the SDR basket, as a weighted average of interest rates on three-month financial instruments: treasury bill rates for France, the United Kingdom, and the United States; the interbank deposit rate for Germany; and the certificate of deposit rate for Japan. The set of instruments is reviewed periodically.
Rate of charge. Each participant in the SDR system pays the SDR “rate of charge” on the entire amount of its cumulative allocation and receives the SDR rate of interest on its holdings of SDRs. However, while distinguishing in concept between the SDR rate of charge and the SDR rate of interest, the Articles of Agreement require that the two rates be set at the same level. Thus, countries with SDR holdings equal to their cumulative allocations experience no net interest flows on their SDR positions.
Designation. The Articles spell out a “designation mechanism” whereby the Fund can require those countries with strong reserve and balance of payments positions to accept SDRs in exchange for other currencies. Since August 1987, however, no participant in the system has had to resort to the designation mechanism for converting SDRs. Instead, all such requests are accommodated under voluntary arrangements now in place with 12 members, under which the Fund may buy and sell SDRs within prescribed ranges on behalf of these members. Over the past few years, requests by members to acquire SDRs have sometimes gone unsatisfied, while no request by a member to sell SDRs has gone unsatisfied. These and other facts suggest that the SDR is generally competitive with other reserve assets, even though many countries currently have low ratios of SDR holdings to cumulative allocations.
Reconstitution. The Articles allow the Fund to define and impose a “reconstitution requirement” under which members must rebuild their SDR holdings over time following their use. Initially, countries were required to maintain average holdings over any consecutive five-year period of at least 30 percent of their cumulative allocations. The reconstitution requirement was reduced to 15 percent in 1979 and was abrogated when the SDR interest rate was raised to 100 percent of the combined market level in 1981.
Additional information may be found in two pamphlets prepared by the Treasurer’s Department of the IMF: Financial Organization and Operations of the IMF and Users’ Guide to the SDR: A Manual of Transactions and Operations in SDRs. Developments relating to the SDR are also described in the IMF’s Annual Reports.
|February 1942||John Maynard Keynes circulates a draft of his plan for the establishment of an international clearing union (the IMF), which would issue its own currency. Keynes’s suggested name for the asset is the “bancor.”|
|July 1–22, 1944||The Articles of Agreement of the IMF are drafted at Bretton Woods, New Hampshire. Keynes’s proposal to create the “bancor” is omitted; instead, the Fund is authorized to extend credit in national currencies, effectively denominated in gold.|
|1959–60||In a series of publications culminating in Gold and the Dollar Crisis, Robert Triffin sets out the “dilemma” whereby the United States could not continue to increase the supply of its official liabilities to serve as other countries’ reserves and support the growth of world trade without eventually calling into question its ability to support the international monetary system by keeping the dollar fully convertible into gold at the prevailing fixed price.|
|1962||Maxwell Stamp publishes a proposal under which the Fund would meet the growing demand for reserves by issuing its own reserve certificates, to be denominated in dollars or gold. The “Stamp plan” incorporates a link between reserve creation and the provision of development finance; “the link” will later be endorsed and advocated by the Group of Twenty Four developing countries in the context of discussions about the allocation of SDRs.|
|September 1962||At the Annual Meetings, Xenophon Zolotas (Governor of the Fund for Greece) proposes that the Fund establish a multiple currency reserve system.|
|1963||Edward Bernstein, former Director of Research at the IMF, proposes that the Group of Ten industrial countries, plus Switzerland, establish a composite reserve unit (CRU) as a basket of their currencies in fixed proportions.|
|July 1965||U.S. Treasury Secretary Henry Fowler signals his Government’s interest in seeking improvements in international monetary arrangements by calling for an international monetary conference to consider reform proposals.|
|August 1965||After more than a year of study, the Ossola Group—representatives of the Group of Ten countries, chaired by Rinaldo Ossola of the Banca d’Italia—issues its Report on the Creation of Reserve Assets, without agreeing on any of the proposals for new composite or multiple reserve schemes.|
|September 29, 1967||The Board of Governors of the Fund approves the “Outline of a Facility Based on Special Drawing Rights in the Fund” and asks the Executive Board to begin drafting amendments to the Articles of Agreement.|
|April 16, 1968||The Executive Board approves draft amendments to the Articles of Agreement, establishing the SDR as an asset with a value equivalent to the gold value of the U.S. dollar.|
|May 31, 1968||The Board of Governors approves the amendments to the Articles.|
|July 28, 1969||Upon ratification by member countries, the First Amendment comes into force.|
|August 6, 1969||The Special Drawing Account comes into existence. All of the Fund’s transactions in SDRs are to be carried out in this account, which is separate from the Fund’s General Resources Account. Participation in the account by Fund members is to be voluntary. (Under the 1978 amendments to the Articles, the Special Drawing Account will be renamed the SDR Department.)|
|October 3, 1969||The Board of Governors approves a resolution to allocate SDRs over a First Basic Period, 1970–72.|
|January 1, 1970||The first allocation of SDRs is made to countries that have accepted participation in the Special Drawing Account. Additional allocations during the First Basic Period are made on January 1 of 1971 and 1972. The three allocations total SDR 9.3 billion.|
|January 1970-June 1974||The SDR interest rate is fixed at 1.5 percent.|
|June 1–3, 1970||The Fund hosts a conference on “Questions Relating to International Reserve Needs and Availability,” at which the central issue is the determination of the amounts of SDRs that could appropriately be allocated in different situations.|
|December 18, 1971||At the Smithsonian Institution in Washington, the U.S. authorities agree to devalue the dollar in terms of gold. Since the gold value of the SDR does not change, the effect is to break the equivalence in value between the dollar and the SDR.|
|January 1, 1972||With the completion of the allocations under the First Basic Period, the stock of outstanding SDRs is equivalent to 9.5 percent of the world’s non-gold international reserves.|
|March 20, 1972||Pursuant to a resolution approved by the Board of Governors, the Fund begins expressing its accounts in SDRs rather than in U.S. dollars.|
|September 28, 1972||The Committee of Twenty, constituted as a ministerial-level committee of the Board of Governors of the Fund, holds its inaugural meeting in Washington.|
|1973–77||No allocations are made during the Second Basic Period.|
|March 19, 1973||The par value system of exchange rates, established at Bretton Woods in 1944, is essentially abandoned as most major countries adopt floating rate regimes.|
|May 25, 1973||The Deputies of the Committee of Twenty establish a technical group to study the possibility of a link between allocations of SDRs and development finance. That idea, however, is ultimately rejected by the Committee.|
|January 18, 1974||The Committee of Twenty effectively abandons its attempts to define a reformed international monetary system and accepts that the existing multiplicity of exchange arrangements will continue for the time being.|
|January 21, 1974||The Bank for International Settlements becomes the first agency other than a member government of the Fund to be permitted to accept, hold, and use SDRs (“prescribed holder”).|
|June 14, 1974||The Final Report of the Committee of Twenty authorizes the Fund to establish a substitution account, “to permit countries that wish to do so to exchange official currency holdings for SDRs.”|
|July 1, 1974||Based on a recommendation from the Committee of Twenty, the Fund implements a system of valuation of the SDR, based on a basket of 16 currencies. The SDR interest rate is raised from 1.5 percent to 5 percent, consistent with a newly implemented policy of setting the rate semiannually at approximately half the level of a combined market interest rate, which was defined as a weighted average of interest rates on short-term market instruments in the United States, the United Kingdom, Germany, Japan, and France.|
|July 8, 1975||The SDR interest rate is reduced from 5 percent to 3.75 percent for the remainder of 1975.|
|January 1, 1976||The SDR interest rate is reduced from 3.75 percent to 3.5 percent, the last time that the rate will be fixed for a six-month period.|
|January 8, 1976||The Interim Committee (the successor to the Committee of Twenty) agrees in Jamaica to a comprehensive set of reform proposals, including the termination of the connection between the valuation of the SDR and gold, and the notion that the SDR should become the “principal reserve asset in the international monetary system.” These proposals are incorporated in a draft Second Amendment to the Articles of Agreement.|
|July 1, 1976||A more flexible procedure is implemented for setting the SDR interest rate. The rate is now set quarterly at 60 percent of the combined market rate, rounded to the nearest ¼ of 1 percent.|
|April 1, 1978||The Second Amendment enters into force. The Special Drawing Account is renamed the SDR Department.|
|April 30, 1978||The Interim Committee, meeting in Mexico City, asks the Executive Board to review the possibility of allocating SDRs and establishing a substitution account.|
|July 1, 1978||The basket of 16 currencies composing the SDR is revised.|
|September 24, 1978||The Interim Committee agrees to an allocation of SDRs for the Third Basic Period, amounting (for existing participants in the SDR Department) to SDR 4 billion in each of three years, 1979–81.|
|October 25, 1978||The Executive Board reduces the average minimum holding of SDRs under the reconstitution requirement, from 30 percent of net cumulative allocations to 15 percent.|
|January 1, 1979||The first allocation of SDRs in seven years is made to the 137 countries that have accepted membership in the SDR Department of the Fund (which now includes all but one Fund member). Additional allocations during the Third Basic Period are made on January 1 of 1980 and 1981.|
|January 1, 1979||Beginning this quarter, the SDR interest rate is set equal to 80 percent (rather than the previous 60 percent) of the combined market interest rate.|
|March 7, 1979||The Interim Committee asks the Executive Board to draft a plan for a substitution account, administered by the Fund, which would accept voluntary deposits of foreign exchange from member countries in exchange for SDRs.|
|October 1, 1979||The Interim Committee, meeting in Belgrade, asks the Executive Board “to continue to direct priority attention to designing a substitution account.”|
|April 7, 1980||Kuwait accepts membership in the SDR Department. From this date forward, all members of the Fund are also participants in the SDR Department.|
|April 14, 1980||The Executive Board adopts rules prescribing conditions under which official entities other than member countries can hold and use SDRs. Pursuant to this decision, five institutions (in addition to the Bank for International Settlements; see January 21, 1974, above) become “prescribed holders” this month.|
|April 25, 1980||The Interim Committee, meeting in Hamburg, rejects the Managing Director’s proposal for the establishment of a substitution account.|
|January 1, 1981||The SDR basket is reduced from 16 currencies to 5, with the following initial weights: the U.S. dollar, 42 percent; the deutsche mark, 19 percent; and the Japanese yen, the French franc, and the pound sterling, each at 13 percent. The quantities of each currency unit in the basket are to be fixed for a five-year period; the values and thus the weights will vary constantly as exchange rates fluctuate.|
|January 1, 1981||The final allocation of SDRs in the Third Basic Period is made: SDR 4.1 billion, to the 141 member countries of the Fund. As of this date, the SDR 21.4 billion in outstanding SDRs is equivalent to 6.7 percent of the world’s nongold international reserves.|
|April 30, 1981||The reconstitution requirement is abrogated.|
|May 1, 1981||The SDR interest rate is set equal to the combined market interest rate. This step completes the transition from the original system under which the interest rate was fixed periodically at a relatively low level.|
|March 24–25, 1983||The Fund hosts a conference on “International Money, Credit, and the SDR.”|
|August 1, 1983||As an enhancement to the competitiveness of the SDR, the interest rate is calculated weekly, rather than quarterly, and is paid to holders quarterly, rather than annually.|
|January 1, 1986||The weights in the SDR basket are revised. The weights of the dollar and the mark are restored to 42 and 19 percent, respectively; the weight of the yen is raised to 15 percent; and the weights of the franc and the pound are reduced to 12 percent.|
|June 25, 1986||The African Development Bank and the African Development Fund become prescribed holders of SDRs, bringing the total number to a peak level of 16.|
|December 31, 1986||Although most Fund members support a new allocation of SDRs, the Fourth Basic Period concludes without an agreement. Five years later, the Fifth Basic Period will end similarly.|
|January 1, 1991||The weights in the five-currency SDR basket are revised for the second time. As of this date, the weights are 40 percent for the dollar, 21 percent for the mark, 17 percent for the yen, and 11 percent each for the franc and the pound.|
|April 19, 1993||The Managing Director proposes an allocation of SDRs on the grounds that there is a long-term global need to supplement reserves and that the many countries that have joined the Fund since January 1981 have never received an allocation.|
|October 2, 1994||The Interim Committee, meeting in Madrid, rejects several competing proposals to allocate SDRs.|
|April 26, 1995||The Interim Committee asks the Fund to initiate a broad review of the role of the SDR, with the participation of outside experts.|
|October 10, 1995||Brunei Darussalam becomes the 181st member country of the Fund, raising the number of members that have never received an allocation of SDRs to 38.|
|January 1, 1996||The weights in the five-currency SDR basket are revised for the third time. As of this date, the weights are 39 percent for the dollar, 21 percent for the mark, 18 percent for the yen, and 11 percent each for the franc and the pound.|
|March 18–19, 1996||Seminar on “The Future of the SDR in Light of Changes in the World Financial System.”|
|April 22, 1996||The Interim Committee “welcomes the report on the Seminar on the Future of the SDR. It requests the Executive Board to reflect further on proposals on the role of the SDR and to reach a consensus on a way for all members to receive an equitable share of cumulative SDR allocations.”|
The chronology through 1980 is based in large measure on the histories by Horsefield (1969) and de Vries (1976, 1985, and 1986).