Appendix II: The SDR
- Juanita Roushdy
- Published Date:
- March 1987
Unit of Value
The SDR at present serves as the unit of account for the Fund and is the unit in which all Fund transactions and operations and members’ obligations to and claims on the Fund, are denominated. The currencies of a few Fund members are pegged to the SDR, although the unit does not play a generalized role as a numeraire for the expression of members’ currency values. The SDR has been adopted as the unit of account of a number of other international organizations and conventions, and has played a limited role in denominating transactions and instruments in private financial markets.
The SDR system was created by the Fund in 1969 as a means of supplementing the quantity of official reserves in the international monetary system. The creation of the SDR did not initially introduce a truly new unit, as the value of the SDR was initially set in terms of gold, but instead a new form of reserve asset. The major changes in international monetary arrangements in the early 1970s, in particular the move to a generalized system of floating exchange rates, gave rise to the need for replacing gold as the means of valuing the official SDR.
What became known as the “standard basket” approach to valuing the SDR was adopted in 1974, when the Fund redefined the value of the SDR as fixed amounts of the 16 leading currencies in international trade. As of July 1, 1978, the currency composition of the SDR basket (both currencies and weights) was revised on the basis of export data for the period 1972–76, with the U.S. dollar retaining a weight of 33 percent. Subsequently, because the large number of currencies in the basket was perceived as cumbersome and possibly a handicap for use of the SDR outside the Fund, and to facilitate unification of the interest rate and valuation baskets, the Fund decided, with effect from January 1, 1981, to reduce the number of currencies in the SDR basket to the five most important currencies in world trade and established procedures for subsequent revisions every five years. Pursuant to the latest regular five-yearly revision of the basket, the weights (but not the currencies in the basket) were adjusted again with effect from January 1, 1986. The initial and revised baskets are shown in Table 13.
|July 1, 1974– June 30, 1978||July 1, 1978– December 31, 1980||January 1, 1981– December 31, 1985||From January 1, 1986|
|Currency||Percentage weight at inception||Currency units||Percentage weight at inception||Currency units||Percentage weight at inception||Currency units||Percentage weight at inception||Currency units|
|South African rand||1.0||0.0082||—||—|
|Saudi Arabian riyal||—||—||3.0||0.13|
To assure reasonable continuity in the valuation of the SDR, changes in the principle of valuation, or fundamental changes in the application of the principle in effect, cannot be made unless agreed by a high majority (85 percent) of the Fund’s total voting power. The principles guiding revisions of the SDR’s valuation basket were established in 1980.59 The main criteria to be followed in revisions are summarized below.
(i) The list of currencies that determine the value of the SDR is to be revised every five-year period from January 1, 1981, as necessary to include the currencies of the five member countries of the Fund with the largest exports of goods and services during the five-year period ending 12 months before the effective date of the revision.
(ii) Revisions of the percentage weights for the currencies in the valuation basket are to reflect the values of the exports of goods and services and the balances of a member’s currency held by other members in a manner that would broadly maintain the relative significance assigned to these two factors in determining the percentage weights in the 1981–85 SDR valuation basket. The percentages so calculated are to be rounded to the nearest 1 percent.
(iii) Revisions are to be made in such a manner that the value of the SDR on the last business day preceding the effective date of the new basket will be the same under the method of valuation in effect before and after that date.
The value of the SDR in terms of currencies is established daily on the basis of representative market exchange rates reported to the Fund by its members. The SDR/U.S. dollar rate is calculated on the basis of the dollar values (mid rates) of the basket currencies in the London market at noon as reported to the Fund by the Bank of England. The SDR values of other member currencies are calculated from the SDR/U.S. dollar rate and representative rates of member currencies in terms of the U.S. dollar as reported to the Fund by its members.
Behavior of Value
As with the ECU, the behavior of the SDR’s value over time depends on the currency or currencies in terms of which it is valued and the period involved. Table 14 presents measures of short-run and longerrun stability of the values of the five freely usable currencies, which are also the SDR basket components, in terms of the ECU, the SDR, and the U.S. dollar. By either measure the SDR value of all component currencies except the Japanese yen has been more stable than has their U.S. dollar values. Chart 2 shows the behavior of the component currencies’ SDR values since 1974.
(Monthly averages of observations from 1979 through 1985)
|Coefficient of Variation||Annual Average|
|Japanese yen||0.21||0.08||0.07||−5.64||−1.92||0.37|Chart 2.Indices of Exchange Rates of Five Major Currencies Against the SDR, June 1974–December 1985
Uses by the Fund, Its Members, and Other Entities
Apart from allocations of “official SDRs,” all Fund credits, borrowings, investments, currency holdings, and the resources administered by the Fund as trustee are denominated in SDRs, as are its members’ quotas and reserve positions in the Fund. At the end of 1985 Fund credit to members, which is SDR-denominated debt of Fund members, stood at about SDR 38 billion (including outstanding Trust Fund loans). Fund members held nearly SDR 40 billion in reserve positions (reserve tranche positions and loan claims) in the Fund, and the SDR value of the Fund’s holdings of member currencies was SDR 97 billion. The Fund also held investments totaling SDR 380 million in SDR-denominated deposits with the BIS. Consequently, the Fund’s use of the SDR denomination in its operations has led to significant official balances of SDR-denominated assets and liabilities apart from the allocation of official SDRs.
The SDR is used by some Fund members as the unit against which the value of their currencies is maintained. At the end of 1985, 12 member countries of the Fund pegged the values of their currencies to the SDR. When a country pegs its currency to the SDR, the value of that currency in terms of other currencies is determined by reference to the SDR value of those currencies, as calculated and published daily by the Fund.
International Organizations and Conventions
A number of international organizations use the SDR as their unit of account or as the basis for their unit of account. These include the African Development Bank, the Arab Monetary Fund, the Asian Clearing Union, the International Development Association, the International Fund for Agricultural Development, the Islamic Development Bank, and the Nordic Investment Bank. In addition, various international conventions use the SDR as a standard of value in which to express monetary magnitudes, notably conventions expressing limits of liability for carriers in the international transport of goods and persons. In some cases, the SDR has been adopted in these conventions to replace the Poincare or Germinal franc, both of which are defined by reference to fixed quantities of gold. For example, the unit of account for the Universal Postal Union and the International Telecommunication Union is the gold franc, which has been declared by a legal instrument of these organizations to have a specified relationship to the SDR (SDR 1 equals 3.061 gold francs). Therefore, in practice, international postal and telecommunication accounts are maintained in SDRs.
The official SDR is a supplement to existing reserve assets, allocated by the Fund in proportion to each participating member country’s quota in the Fund. The volume of official SDRs in existence is determined by decisions of the Fund, and the Fund’s membership has undertaken to pursue policies with respect to reserve assets that are consistent with “making the special drawing right the principal reserve asset in the international monetary system.”60
The Fund creates SDRs by means of periodic allocations. The Fund’s Articles of Agreement specify that “in all its decisions with respect to the allocation and cancellation of special drawing rights the Fund shall seek to meet the long-term global need, as and when it arises, to supplement existing reserve assets in such a manner as will promote the attainment of its purposes and will avoid economic stagnation and deflation as well as excess demand and inflation in the world.”61 Decisions to allocate SDRs are made by the Board of Governors, on the basis of a proposal by the Managing Director, concurred in by the Executive Board, and require an 85 percent majority of the Fund’s voting power.62
Decisions to allocate SDRs are made for “basic periods” which last for five years unless another duration is agreed upon.63 The first basic period ran from 1970 to 1972, the second from 1973 to 1977, and the third from 1978 to 1981; the fourth started in 1982 and, unless a decision is taken to the contrary, will run to the end of 1986. When allocations are made, the amount allocated to each participant is a uniform percentage of its quota. Allocations have occurred in the first and third basic periods, and cumulative allocations now amount to SDR 21.4 billion. The amounts and timing of SDR allocations are shown in Table 15.
(In billions of SDRs)
|SDR Allocations||Net Cumulative|
The Fund may also cancel previously allocated SDRs. Decisions on cancellation are governed by the same principles and considerations that apply to allocations and are likewise made for five-year basic periods.64
If a participant in the SDR Department of the Fund either terminates its participation or withdraws from membership in the Fund under Article XXIV, it must surrender an amount of SDRs equal to its net cumulative allocation, and these SDRs are to be cancelled.65 The same procedure would apply for all participants if the SDR Department were liquidated.66
Participants pay charges on their net cumulative allocations of SDRs and, together with prescribed holders and the Fund, earn interest at the same rate, on their SDR holdings. Thus, a participant with holdings of SDRs in excess of (below) its allocation earns (pays) net interest on the difference. Net SDR interest or charges are payable quarterly. Over the years, the SDR interest rate has been raised from very low levels toward market rates. Since 1981 the interest rate on the SDR has been set equal to the average of the interest rates on prime domestic money market instruments in the five countries whose currencies are included in the SDR’s valuation basket, weighted according to their current shares in the basket, as derived from market exchange rates.67 The rate is calculated weekly, on the basis of market rates for the preceding Friday.
Participation in the SDR Department is open to all member countries of the Fund, and all Fund members are now participants in the SDR Department. The Fund itself may accept and use SDRs in transactions and operations specified in the Articles of Agreement. The Fund also has the power to prescribe “other official entities” as holders of SDRs.68 At present, 14 institutions have been prescribed to hold SDRs. They may acquire and use SDRs in transactions and operations by agreement with any participant or other prescribed holder but do not receive allocations or have any obligations to accept SDRs.
Official SDRs may be used only in the various ways provided for in the Fund’s Articles and decisions of the Executive Board. SDRs may be used by participants in spot transactions to acquire other monetary assets in two categories of transactions, transactions with designation and transactions by agreement. The SDR’s liquidity is assured for participants having a balance of payments need to use reserves by the designation mechanism: the Fund designates another participant in a strong balance of payments and gross reserve position to provide currency in exchange for SDRs to the participant wishing to convert its SDRs, provided that the user has a balance of payments need to use them. Each participant is obligated to accept SDRs in designation to the extent its holdings are less than three times its total allocations. Both participants and prescribed holders of SDRs can also use SDRs to obtain foreign exchange from other participants or prescribed holders willing to accept the SDRs voluntarily in transactions by agreement.
To widen the range of possible uses of SDRs, the Fund may prescribe uses of SDRs that are not other-wise explicitly authorized by the Articles. These are called “operations.” Between December 1978 and March 1980 the Fund adopted a series of decisions to permit the use of SDRs in swap arrangements, in forward operations, in loans, in the settlement of financial obligations, as security for the performance of financial obligations, and in donations.
SDRs are also used in a range of transactions and operations between members and the Fund. The Fund accepts SDRs in repurchases of drawings, and charges on the use of the Fund’s resources are paid in SDRs. The reserve asset portion of members’ quota subscriptions is to be paid in SDRs, unless decided otherwise by the Fund. The Fund may use SDRs in various ways, including financing purchases, paying remuneration (i.e., interest payments on members’ creditor positions in the Fund), paying interest and principal on borrowings, and replenishing needed currencies. The Fund may be authorized to buy or sell SDRs against the currency of other members69 though it has done so only for a few specific purposes. Currently, the Fund sells SDRs under this provision to members needing them in order to pay charges to the Fund.
The number and value of transactions in the SDR Department has grown considerably over the years (see Table 16), and the SDR is now used extensively as a medium of exchange and settlement between the Fund and its members. Total SDR transfers increased from an average of SDR 1 billion a year in the period 1970–75 to an average of about SDR 16 billion a year between 1982 and 1985. The last several years have seen an annual average of almost 2,500 transfers (or approximately 10 a business day).
(In millions of SDRs)
|Transfers among participants and prescribed holders||661||1,475||2,151||5,808||5,026|
|Of which: Transactions with designation||261||446||1,458||2,638||1,950|
|Transactions by agreement||377||960||520||2,255||2,593|
|Transfers from participants to General Resources Account||296||1,381||3,406||5,186||4,502|
|Transfers from General Resources Account to participants and prescribed holders||204||1,163||2,135||5,206||6,391|
Voluntary dealings among participants and prescribed holders (transactions by agreement and operations) have increased from about SDR 0.3 billion in 1980 to about SDR 2.8 billion in 1985. Transactions by agreement have exceeded designated transactions in amount since 1983.70 However, the volume of these voluntary dealings among participants and prescribed holders remains relatively small, and the SDR’s liquidity is not assured through this channel. The principal source of the SDR’s liquidity remains the ability of participants having a balance of payments need to use reserves to exchange their SDRs immediately for freely usable currency through the designation mechanism, supplemented by the Fund’s obligation to accept SDRs in repurchases and payment of charges.
The SDR has also been used to denominate some private contracts, agreements, and financial instruments. The value of these “private” SDRs is determined on the basis of the same basket of currencies as the official SDR. Private SDRs are subject to the conventions of the marketplace and are not constrained by the rules governing the uses of official SDRs. As the Fund does not regulate the use of the SDR denomination outside the Fund, private entities are free to adopt the closed as well as the open basket definition.71
The first SDR-denominated bond was issued in June 1975, the same month in which the first commercial bank deposit facility in SDRs was offered. The first and subsequent SDR-denominated bonds are really SDR-indexed currency bonds, in that the basket method of valuation has been used to determine the value of the bonds, but payments have been generally made by transfer of one or all of the SDR’s component currencies, most often the U.S. dollar—that is, an SDR-denominated asset has not generally been used as a means of payment.
The first syndicated loans denominated in SDRs did not appear until after the reduction of the SDR valuation basket to five currencies in January 1981. Current accounts denominated in SDRs were first offered at about the same time. After the last SDR bond issue in December of 1981, development of the private SDR came to a virtual halt, and a relatively small volume of SDR-denominated bank deposits comprise most of the present “market. “After a contraction from 1981 levels, the amount of such deposits stabilized and has recently shown some tendency to increase. Their existence is probably related to the financial activities of those organizations and firms whose operations are denominated in SDRs and whose numbers have grown modestly over the last five years.
SDR-Denominated Financial Instruments72
Deposits. The first deposit facility in SDRs was offered by a bank in London in June 1975. By the end of 1978, some 20 banks were prepared to accept SDR-denominated deposits, although it is not certain how many of them had actually taken deposits at that stage. With the adoption of the five-currency basket in 1981, the volume of SDR-denominated deposits increased substantially. In that year, two commercial banks offered current accounts denominated in SDRs, and participants in the Euroclear and Cedel clearing systems for Eurobonds became able to purchase SDR-denominated bonds by debiting the SDR-denominated current accounts held by these clearing systems. These accounts can be used to make payments in connection with the issue of SDR-denominated loans and bonds (e.g., brokerage fees and interest).
By the end of 1981, it was estimated that between 40 and 50 banks were prepared to accept SDR deposits and that the volume of deposits amounted to about SDR 5–7 billion net of interbank deposits.73 Starting in 1982, the volume of SDR-denominated deposits dwindled; by the end of 1983, SDR-denominated deposits with Belgian, Luxembourg, and U.K. banks and the BIS totaled only about SDR 2.2 billion, about the same amount as was outstanding at the end of September 1985 (see Table 17).
(In millions of SDRs)
|At End of||1985|
Certificates of deposit. The first certificates of deposit denominated in SDRs were issued in June 1980 at a fixed rate of interest. During 1981, there were a number of issues, bringing the total value of such certificates issued to SDR 500-700 million by the end of that year.74 Moreover, in January 1981, a group of seven banks in London announced they would issue and trade SDR-denominated certificates. Although there were some new issues and some secondary market trading in the first half of 1982, interest in SDR-denominated certificates diminished after that time and the market is now believed to be insignificant.
Syndicated bank loans. In 1981 and 1982, there were seven syndicated bank loans totaling approximately SDR 1.2 billion, which compares with a total of SDR 104.3 billion75 for syndicated credits in all denominations in 1981. No SDR-denominated syndicated loans have been arranged since 1982.
Bonds and Notes
Between 1975 and 1981, there were 13 issues of SDR-denominated bonds or notes for a total of SDR 563 million, of which SDR 60 million is currently outstanding. Except for two issues by private corporations, all issuers were official institutions. No SDR-denominated bonds or notes have been issued since late 1981.
Following the simplification of the SDR valuation basket in January 1981, and with the emergence of SDR-denominated syndicated credit, deposit, and certificate-of-deposit markets, a modest forward market in SDRs against other major currencies (mainly U.S. dollars) developed. Forward operations still occur on a modest scale.
Use of the SDR for invoicing or pricing has been rare. Since 1975, transit tolls payable to the Suez Canal Authority by vessels using the waterway have been denominated in SDRs.
Occasional Papers of the International Monetary Fund*
2. Economic Stabilization and Growth in Portugal, by Hans O. Schmitt. 1981.
5. Trade Policy Developments in Industrial Countries, by S.J. Anjaria, Z. Iqbal, L.L. Perez, and W.S. Tseng. 1981.
6. The Multilateral System of Payments: Keynes, Convertibility, and the International Monetary Fund’s Articles of Agreement, by Joseph Gold. 1981.
7. International Capital Markets: Recent Developments and Short-Term Prospects, 1981, by a Staff Team Headed by Richard C. Williams, with G.G. Johnson. 1981.
8. Taxation in Sub-Saharan Africa. Part I: Tax Policy and Administration in Sub-Saharan Africa, by Carlos A. Aguirre, Peter S. Griffith, and M. Zühtü Yücelik. Part II: A Statistical Evaluation of Taxation in Sub-Saharan Africa, by Vito Tanzi. 1981.
9. World Economic Outlook: A Survey by the Staff of the International Monetary Fund. 1982.
10. International Comparisons of Government Expenditure, by Alan A. Tait and Peter S. Heller. 1982.
11. Payments Arrangements and the Expansion of Trade in Eastern and Southern Africa, by Shailendra J. Anjaria, Sena Eken, and John F. Laker. 1982.
12. Effects of Slowdown in Industrial Countries on Growth in Non-Oil Developing Countries, by Morris Goldstein and Mohsin S. Khan. 1982.
13. Currency Convertibility in the Economic Community of West African States, by John B. McLenaghan, Saleh M. Nsouli, and Klaus-Walter Riechel. 1982.
14. International Capital Markets: Developments and Prospects, 1982, by a Staff Team Headed by Richard C. Williams, with G.G. Johnson. 1982.
15. Hungary: An Economic Survey, by a Staff Team Headed by Patrick de Fontenay. 1982.
16. Developments in International Trade Policy, by S.J. Anjaria, Z. Iqbal, N. Kirmani, and L.L. Perez. 1982.
17. Aspects of the International Banking Safety Net, by G.G. Johnson, with Richard K. Abrams. 1983.
18. Oil Exporters’ Economic Development in an Interdependent World, by Jahangir Amuzegar. 1983.
19. The European Monetary System: The Experience, 1979–82, by Horst Ungerer, with Owen Evans and Peter Nyberg. 1983.
20. Alternatives to the Central Bank in the Developing World, by Charles Collyns. 1983.
22. Interest Rate Policies in Developing Countries: A Study by the Research Department of the International Monetary Fund. 1983.
23. International Capital Markets: Developments and Prospects, 1983, by Richard Williams, Peter Keller, John Lipsky, and Donald Mathieson. 1983.
24. Government Employment and Pay: Some International Comparisons, by Peter S. Heller and Alan A. Tait. 1983. Revised 1984.
25. Recent Multilateral Debt Restructurings with Official and Bank Creditors, by a Staff Team Headed by E. Brau and R.C. Williams, with P.M. Keller and M. Nowak. 1983.
26. The Fund, Commercial Banks, and Member Countries, by Paul Mentre. 1984.
27. World Economic Outlook: A Survey by the Staff of the International Monetary Fund. 1984.
28. Exchange Rate Volatility and World Trade: A Study by the Research Department of the International Monetary Fund. 1984.
29. Issues in the Assessment of the Exchange Rates of Industrial Countries: A Study by the Research Department of the International Monetary Fund. 1984
30. The Exchange Rate System—Lessons of the Past and Options for the Future: A Study by the Research Department of the International Monetary Fund. 1984
31. International Capital Markets: Developments and Prospects, 1984, by Maxwell Watson, Peter Keller, and Donald Mathieson. 1984.
32. World Economic Outlook, September 1984: Revised Projections by the Staff of the International Monetary Fund. 1984.
33. Foreign Private Investment in Developing Countries: A Study by the Research Department of the International Monetary Fund. 1985.
34. Adjustment Programs in Africa: The Recent Experience, by Justin B. Zulu and Saleh M. Nsouli. 1985.
35. The West African Monetary Union: An Analytical Review, by Rattan J. Bhatia. 1985.
36. Formulation of Exchange Rate Policies in Adjustment Programs, by a Staff Team Headed by G.G. Johnson. 1985.
37. Export Credit Cover Policies and Payments Difficulties, by Eduard H. Brau and Chanpen Puckahtikom. 1985.
38. Trade Policy Issues and Developments, by Shailendra J. Anjaria, Naheed Kirmani, and Arne B. Petersen. 1985.
39. A Case of Successful Adjustment: Korea’s Experience During 1980–84, by Bijan B. Aghevli and Jorge Márquez-Ruarte. 1985.
40. Recent Developments in External Debt Restructuring, by K. Burke Dillon, C. Maxwell Watson, G. Russell Kincaid, and Chanpen Puckahtikom. 1985.
41. Fund-Supported Adjustment Programs and Economic Growth, by Mohsin S. Khan and Malcolm D. Knight. 1985.
42. Global Effects of Fund-Supported Adjustment Programs, by Morris Goldstein. 1986.
43. International Capital Markets: Developments and Prospects, by Maxwell Watson, Donald Mathieson, Russell Kincaid, and Eliot Kalter. 1986.
44. A Review of the Fiscal Impulse Measure, by Peter S. Heller, Richard D. Haas, and Ahsan H. Mansur. 1986.
45. Switzerland’s Role as an International Financial Center, by Benedicte Vibe Christensen. 1986.
46. Fund-Supported Programs, Fiscal Policy, and Income Distribution: A Study by the Fiscal Affairs Department of the International Monetary Fund. 1986.
47. Aging and Social Expenditure in the Major Industrial Countries, 1980–2025, by Peter S. Heller, Richard Hemming, Peter W. Kohnert, and a Staff Team from the Fiscal Affairs Department. 1986.
48. The European Monetary System: Recent Developments, by Horst Ungerer, Owen Evans, Thomas Mayer, and Philip Young. 1986.
49. Islamic Banking, by Zubair Iqbal and Abbas Mirakhor. 1987.
50. Strengthening the International Monetary System: Exchange Rates, Surveillance, and Objective Indicators, by Andrew Crockett and Morris Goldstein. 1987.
51. The Role of the SDR in the International Monetary System, by the Research and Treasurer’s Departments of the International Monetary Fund. 1987.
International Monetary Fund, Washington, D.C. 20431, U.S.A.
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Numbers 1, 3, 4, and 21 of the Occasional Paper series are out of print.