Special Drawing Rights

  • Category
    Economy
  • Published
    29th Apr, 2020

Context

India will not support a general allocation of new ‘Special Drawing Rights’ by the International Monetary Fund as it might not be effective in easing coronavirus-driven financial pressure.

About

  • The Special Drawing Rights (SDR) is an international reserve asset, created by the International Monetary Fund in 1969 to supplement its member countries’ official reserves.
  • The SDR serves as the unit of account of the IMF and some other international organizations.
  • The SDR is neither a currency nor a claim on the IMF. Rather, it is a potential claim on the freely usable currencies of IMF members. SDRs can be exchanged for these currencies.
  • The value of the SDR is based on a basket of five currencies:
    • the U.S. dollar
    • the euro
    • the Chinese renminbi
    • the Japanese yen
    • the British pound sterling

The SDR interest rate (SDRi):

  • The SDRi provides the basis for calculating the interest rate charged to members on their non-concessional borrowing from the IMF and paid to members for their remunerated creditor positions in the IMF.
  • It is also the interest paid to members on their SDR holdings and charged on their SDR allocation.

Background:

  • The SDR was created as a supplementary international reserve asset in the context of the Bretton Woods fixed exchange rate system.
  • The collapse of Bretton Woods system in 1973 and the shift of major currencies to floating exchange rate regimes lessened the reliance on the SDR as a global reserve asset.
  • Nonetheless, SDR allocations can play a role in providing liquidity and supplementing member countries’ official reserves, as was the case amid the global financial crisis.

Why India is opposing SDR allocation?

  • The new SDR allocation would provide all 189 members with new foreign exchange reserves with no conditions.
  • Such a major liquidity injection could produce potentially costly side-effects if countries used the funds for “extraneous” purposes.
  • In the current context of illiquidity and flights to cash, the efficacy of an SDR allocation is not certain.
  • Currently, most countries rely on national reserves as a first line of defense.
  • Consequently, extraneous demands for these reserves, not related to domestic monetary and financial stability, would be costly, and hence cannot be supported.

About IMF:

  • The International Monetary Fund (IMF) was conceived in July 1944 at the United Nations Bretton Woods Conference in New Hampshire, United States. 
  • The IMF promotes international financial stability and monetary cooperation.
  • It also facilitates international trade, promotes employment and sustainable economic growth, and helps to reduce global poverty.
  • The IMF is governed by and accountable to its 189 member countries. It is accountable to its member country governments.
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