Special drawing rights (SDR)

Special drawing rights (SDR) is the the currency of the IMF. SDRs(Special Drawing Rights) refer to the foreign exchange reserve assets and are maintained by the IMF. Hence this is like a global currency maintained by the IMF.Countries are loaned money by the IMF not in dollars or Euro etc, but in SDR's. The SDR is an international reserve asset, created by the IMF in 1969 to supplement its member countries’ official reserves. So far SDR 204.2 billion (equivalent to about US$291 billion) have been allocated to members, including SDR 182.6 billion allocated in 2009 in the wake of the global financial crisis. 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, and the British pound sterling.

To put it more simply, it is a type of collateral that commercial banks keep when providing you a loan. The collateral is for the security of the banks in case the borrower can't repay the loan.

IMF acts as central bank of the central banks. Roles of central banks are:

1. Lender of last resort and
2. Forex dealer of last resort.

So, when a central bank find itself to not be in condition of servicing the demand of Forex in the local market, it approaches IMF for a loan. IMF issues this loan in the form of SDRs. These SDR can be sold to other central banks for desired foreign currency. Only Major currencies are covered by SDRs. Once the need is over, that loan must be repaid in SDRs only. So, central bank approaches other central banks and buys back the SDRs it previously sold.

Thus, IMF protects its member countries to fight against BOP (Balance of Payment) crisis. Based on their size on economy each country is allotted a quota in which they have a say in voting power. IMF borrows money at 0.05% and lends at 1.05%.

How does the give-and-take of SDRs work?

There are two situations that can occur:

The country has acquired a lot of SDRs: In the US, the Fed is designated with the responsibility to purchase SDRs by giving US Dollar to IMF(This is possible because USD is a member of the IMF's SDR basket). Lets assume hypothetically that 1 SDR= 1 USD. Hence Fed can acquire 1 million SDRs by giving 1million USD. So in this case, if there ever is a situation that USD has become very strong and this is affecting the exporters when they trade with China, then the US can sell these 1 million SDRs and buy the remnibi at the given exchange rate. This would raise up the demand for remnibi and introduce new USD in the market which can contribute towards supply of USD, thus strengthening the remnibi with respect to USD and helping US exporters.

The country owes a lot of SDRs to IMF: Taking the example of Pakistan owing x SDRs to IMF. This generally happens with a lot of countries which are war-torn or have excessive debt like Greece. So in this case the IMF lends these countries the required currencies from the SDR basket and hence these countries are required to pay back to the IMF in terms of SDRs. This is often better than taking loan from a country. If suppose Pakistan takes loan from US rather than IMF, then it will be required to pay back in USD. However it can take the corresponding amount from IMF in USD and can pay back the IMF in any of the currencies that make up it's SDR basket. So Pakistan can buy USD from IMF and return it the corresponding amount in remnibi. So if Pakistan owes x SDRs to IMF, this is basically converted to an equivalent amount in any of the currencies in the SDR basket according to the exchange rate for SDRs. Pakistan can then pay back in any of the currencies that it wishes to.

Bangladesh’s voting power increased from 0.15 per cent to 0.24 per cent through payment for its quota increases, the finance ministry said in a report on Wednesday.The country’s quota in IMF was last increased in 1998. Bangladesh was a shareholder of 5.33 million SDRs that worked out to 0.13 per cent of the Fund.A member is required to pay its subscription in full upon joining the Fund: up to 25 percent must be paid in SDRs or in widely accepted currencies such as the US dollar and Euro, while the rest is paid in the member's own currency.On Wednesday, the government paid Tk 600 million for the new shares. Of this, Tk 150 million or 133,325,000 SDRs was paid in foreign currency and 399,995,000 SDRs in Taka.