It is a form of international reserve created by the IMF in 1970.
The purpose was to assist international liquidity by providing a complement to existing reserve vehicle such as
· the US Dollars, and
· the UK Sterling,
Supply of the first of which was determined by production factors and of the others by balance of payments outturns.
SDR’s are allocated by the IMF to its member countries in proportion
· To each country’s quota and are used, as is the rest of the quota
· To acquire other national currencies when needed for balance of payments reasons.
SDRs are therefore a universally recognized claim on national currencies and thus have the effect, although not yet all the characteristics, of a new currency.
Let me explain the meaning of value:
SDRs were first given a value equal to 0.89 grammes of fine gold, or US $1, which was the then dollar/gold parity. When the dollar came off the gold standard the SDR was fixed from 1974 in terms of a basket of 16 currencies, In 1981 the SDR was simplified to a weighted average of the five leading currencies according to their share in world trade. With the creation of the euro in 1999, the number of currencies was reduced to four.
With the subsequent devaluation of the dollar, the value was set to equal the sum of specified national currencies.
Let me explain, what is Quotas?
The IMF allocates to each member country a quota which reflects the country’s importance in world trade and payments. Any member with BoP difficulties may swap its SDRs for reserve currencies at IMF designated central banks. It can also use its own currency to buy (draw) foreign currency form the Funds pool.
The first chunk of currencies (the reserve tranche), amounting to 25 % of the members quota, may be taken unconditionally.
Four additional credit tranche each worth another 25 % of the quota may be taken under progressively tougher terms and conditions. When these options are used up there are other borrowing facilities available. The IMF also arranges standby credits in terms of severe strain on a currency.
SDRs are used as the:
· Unit of account of the IMF and
· Since 1980 have been the denomination for many certificates of deposit and bond issues.