Special Drawing Rights are Answer 1. a reserve asset created by the International Monetary Fund that can be used to settle international payments. 2. loans granted by the International Monetary Fund to countries that experience balance of payments problems. 3. the term given for official reserves taken as a whole. 4. financial assets held by the U.S. Treasury Department.
Special Drawing Rights, often referred to as SDRs, are an interest-bearing international reserve asset used by the International Monetary Fund (IMF). The SDR is based on a basket of currencies and comes with the currency code, XDR, which it may also be referred to by. The SDR serves as the unit of account for the IMF for internal accounting purposes.
SDRs are also used as a supplementary foreign exchange reserve for countries who are IMF members. As of October 2016, the basket of currencies used to value the XDR consists of the US dollar, the euro, the Chinese yuan, the Japanese yen, and the British pound sterling.
Special drawing rights were originally introduced in 1969 by the IMF. At this time, the main purpose of creating SDRs was for use as a supplementary foreign exchange reserve. This was due to a lack of US dollars and gold, which at the time were the main assets held in foreign exchange reserves. At that time, the SDR was the equivalent of one US dollar, or 0.888671 grams of gold, and was intended to be used in the context of the Bretton Woods fixed exchange rate system. After this system fell apart in 1973, the SDR was instead defined by a basket of major currencies.
SDRs still serve their original purpose as a supplement to foreign currency reserves, however, less so after 1973. When the US dollar is weak or becomes less attractive, countries may prefer special drawing rights.
One of the main purposes of SDRs is as a unit of account for internal accounting purposes by the IMF. Holding this basket of major currencies helps the IMF manage the exchange rate volatility of any single currency.
Countries have also pegged their currency to the XDR as a way to increase transparency.
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