XDR - Special Drawing Rights

What are Special Drawing Rights (SDR)?

SDR is not a currency, but a financial unit that can be exchanged for a range of strong global currencies, such as the US dollar, euro, Japanese yen, Chinese renminbi, and British pound.

Before the creation of SDR, the global financial system operated under the Bretton Woods Agreement, in which member countries were required to maintain a fixed exchange rate with the US dollar and hold reserves in gold or other strong currencies to ensure the stability of their domestic currencies.

However, as the global economy and international trade grew more rapidly, countries began facing challenges in maintaining their gold and US dollar reserves, leading to the introduction of SDR as a contingency solution.

SDR can be understood as a "global reserve fund" for IMF member countries. Especially for smaller nations with limited resources, SDR is an important supplement when they face financial difficulties or need to bolster their international reserves.

How does SDR work?

SDR is established as an international reserve asset, not existing in the form of cash or physical commodities, but used exclusively within the financial system between the IMF and member countries. In practice, SDR can be exchanged for strong currencies like USD, euro, or Japanese yen when a country needs to use it. The currency code for SDR under the ISO standard is XDR.

The value of SDR is determined based on a basket of five major currencies: the US dollar, euro, Chinese renminbi, Japanese yen, and British pound. The IMF periodically adjusts the weight of each currency in the basket, based on their role in global trade and finance. The most recent change was in 2016 when the IMF added the Chinese renminbi to the currency basket, affirming China's position in the global economy.

History of Special Drawing Rights Allocations

Since the creation of SDR in 1969, the IMF has made two major allocations to its member countries. The first allocation occurred between 1970 and 1972, totaling SDR equivalent to 9.3 billion USD. Then, between 1979 and 1981, the IMF made additional allocations, raising the total to 21.4 billion USD. During this period, SDR primarily served as a reserve tool to help countries maintain stable exchange rates.

In 1997, the IMF approved a proposal to double the amount of SDR allocated to expand global reserve resources. In August 2021, in response to the severe impact of the COVID-19 pandemic, the IMF made the largest SDR allocation in history, equivalent to approximately 943 billion USD. This allocation aimed to strengthen reserves for member countries and assist them in overcoming the economic difficulties caused by the pandemic.

SDR  for Global Support

Not only a reserve fund, SDR is also used by the IMF to assist countries through a process known as “channeling” – which involves transferring SDR from wealthier countries to poorer ones. Wealthy nations can contribute their SDR into funds such as the Poverty Reduction and Growth Trust (PRGT) and the Resilience and Sustainability Trust (RST), which then provide low-interest or interest-free loans to poor and vulnerable countries.

Since 2020, the IMF has implemented an SDR channeling program worth approximately 56 billion USD for PRGT, aimed at helping developing countries address sustainable development issues. To date, around 57 countries have received support from PRGT and RST, with a total value reaching 89 billion USD.

Challenges and Future of SDR

Currently, SDR primarily functions as a financial support and calculation tool, but in the context of a complex and volatile global economy, it is expected to expand its role further.

Many experts, including financier George Soros and economist Joseph Stiglitz, have proposed the idea of using SDRs to invest in global development goals, such as providing public goods and improving healthcare, education, and legal systems in developing countries. This proposal hopes that SDR will not only be a short-term support tool but also create sustainable development values in the long term.

Although SDR may be unfamiliar to many, it plays an important role in the global financial system. Not only does it help countries supplement their foreign exchange reserves, but it is also a tool for the IMF to assist poor and vulnerable nations.

With global economic fluctuations such as pandemics, conflicts, and environmental crises, SDR is increasingly expected to be a tool to stabilize economies and support sustainable development in the future.