What is Special Drawing Rights of IMF?
Special Drawing Rights (SDRs) of the International Monetary Fund (IMF) are a unique form of international reserve asset created by the IMF in 1969 to supplement its member countries’ official reserves. SDRs are designed to provide a stable and diversified source of liquidity for countries facing balance of payments difficulties. This article aims to delve into the nature, purpose, and functioning of SDRs within the international monetary system.
The IMF creates SDRs by allocating them to its member countries in proportion to their quota subscriptions. These allocations are not subject to any borrowing or lending operations and do not involve the transfer of resources from one country to another. Instead, SDRs are simply an accounting item that increases the country’s reserve assets without affecting its external liabilities.
Nature and Purpose of SDRs
SDRs are an international currency basket, composed of a basket of major currencies. The basket currently includes the US dollar, the euro, the Chinese renminbi, the Japanese yen, and the British pound. The composition of the basket is reviewed every five years to reflect changes in the global economic landscape.
The primary purpose of SDRs is to enhance the stability of the international monetary system by providing a more flexible and diversified reserve asset. By holding SDRs, countries can avoid over-reliance on a single currency, such as the US dollar, and reduce the risks associated with currency fluctuations and reserve depletion.
Functioning of SDRs
Countries can use SDRs to make payments to other countries, purchase goods and services from international markets, or settle their obligations with the IMF. When a country uses its SDRs, the IMF transfers the equivalent amount of SDRs from the country’s reserve to the receiving country’s reserve.
In addition, SDRs can be used to support the balance of payments of member countries facing difficulties. The IMF can provide loans in SDRs to these countries, allowing them to stabilize their economies and address their balance of payments challenges.
Benefits and Limitations of SDRs
The benefits of SDRs include their stability, flexibility, and diversity. As an international currency basket, SDRs are less susceptible to fluctuations in individual currencies, making them a more reliable reserve asset. Moreover, SDRs can be used for various purposes, such as trade, investment, and financial assistance.
However, SDRs also have limitations. The amount of SDRs allocated to each country is determined by its quota at the IMF, which may not always reflect the country’s economic needs. Additionally, SDRs are not widely accepted as a means of payment in international trade and finance, which limits their utility in some contexts.
Conclusion
Special Drawing Rights of the IMF play a crucial role in the international monetary system by providing a stable, flexible, and diversified reserve asset. While SDRs have their limitations, they remain an essential tool for promoting financial stability and supporting the balance of payments of member countries. As the global economic landscape continues to evolve, the role of SDRs may further expand, making them an indispensable component of the international monetary system.
