Abstract

This book edited by Michael Mussa, James M. Boughton, and Peter Isard, records the proceedings of a seminar held at the IMF in March 1996 on the future of the special drawing right (SDR), given changes in the international monetary system since the inception of the SDR. The seminar focuses on the differences in opinion in the international community on the desirability or feasibility of an additional allocation of SDRs.

Appendix I. Basic Facts About the SDR

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.

Table 1.

SDR Allocations and Share of SDRs in Nongold Reserves

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Source: International Monetary Fund, International Financial Statistics.

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.

Appendix II. The SDR: A Chronology1

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References

  • de Vries, Margaret Garritsen, The International Monetary Fund 1966–71: The System Under Stress (Washington: International Monetary Fund, 1976).

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  • de Vries, Margaret Garritsen, The International Monetary Fund 1972–78: Cooperation on Trial (Washington: International Monetary Fund, 1985).

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  • de Vries, Margaret Garritsen, The IMF in a Changing World 1945–85 (Washington: International Monetary Fund, 1986).

  • Horsefield, Keith, The International Monetary Fund 1945–65: Twenty Years of International Monetary Cooperation (Washington: International Monetary Fund, 1969).

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1

The chronology through 1980 is based in large measure on the histories by Horsefield (1969) and de Vries (1976, 1985, and 1986).

  • de Vries, Margaret Garritsen, The International Monetary Fund 1966–71: The System Under Stress (Washington: International Monetary Fund, 1976).

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    • Export Citation
  • de Vries, Margaret Garritsen, The International Monetary Fund 1972–78: Cooperation on Trial (Washington: International Monetary Fund, 1985).

    • Search Google Scholar
    • Export Citation
  • de Vries, Margaret Garritsen, The IMF in a Changing World 1945–85 (Washington: International Monetary Fund, 1986).

  • Horsefield, Keith, The International Monetary Fund 1945–65: Twenty Years of International Monetary Cooperation (Washington: International Monetary Fund, 1969).

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    • Export Citation