Special Drawing Right (SDR): Working, Features, Evaluation and Other Details

Let us make an in-depth study of the working, features, evaluation, operation and steps for improvement of Special Drawing Right (SDR).

Working of SDR:

Under the new scheme of SDR, each member country is authorised to participate in the special drawing account on a specified basis.

A member country participating in SDR is free to use its holdings to meet the deficit in the balance of payment.

Possession of SDR is empowered to transfer its SDRs to the equivalent of the currency to another participating country which has been designated by the Fund.

For the participating countries, the SDRs are form of unconditional liquidity. At the same time, designated country has to provide ‘currency convertible’ to the country transferring its SDRs to it. Moreover, IMF has designated eight countries whose currencies could be obtained by a participating country against its SDR.

Thus, it is a method of supplementing the existing reserve assets in the international liquidity. Here, it must be noted that the value of the SDR was measured in gold, one SDR being equal to 0.02857 ounces of gold. In 1976, IMF demonetised gold and SDR was linked with currencies of sixteen countries with one per cent or more share in the total SDR allocation.

Features of Special Drawings Rights (SDR):

The salient features of SDR are described as following:

1. The SDR are required by the member countries to meet the requirement of international liquidity through credit creation of the bank.

2. The allocation of SDRs was on the basis of quota system held by the individual member country.

3. Special Drawing Rights have been created under Special Drawing Account.

4. SDRs have been created to maintain the confidence of the people.

5. SDRs are used by a participant country to remove the deficits in the balance of payment.

6. IMF regulates SDRs which would accept as reserves and use for the settlement of international payments.

7. The scheme of drawing rights has served the reserve assets as a store value rather than as a medium of exchange.

8. A nation imposed an interest rate related to market rates on the amount of SDRs.

9. SDRs are not only regarded as a pound or dollar but also as the inter-central bank currency.

10. SDRs were originally dominated and expressed in terms of gold. The value of drawing rights is fixed in gold.

11. SDRs provide the decumulation and accumulation of Special Drawing Accounts.

12. SDRs can be described as ‘Paper Gold’.

Evaluation of SDRs Scheme:

The SDR scheme has been considered significant bearing following advantages:

1. The SDRs schemes provides more facilities for reserve and creation of credit flexibility.

2. Special Drawing Rights permit unconditional increase of liquidity to meet the requirements of the country. In other words, under this scheme, there is no need to change domestic currency.

3. Another favour of SDRs is that it gives a permanent addition in international liquidity.

4. The scheme SDRs provide significant efforts to move away from gold standard. Thus, it relieves the world monetary authorities from maintaining an open market value of gold.

Despite the above noted favourable points of Special Drawing Rights Scheme, they are subject to criticism.

Some of the arguments are under mentioned:

1. SDRs scheme is purely financial in nature. Thus, there is probability of distrust in the new reserve assets.

2. It has been pointed out that though SDRs scheme is flexible to keep reserve of international liquidity yet there is doubt to be used to finance the acute deficits of payment.

3. It has been criticised that the value of SDRs is kept in parity only in the international money market and not within the artificially over—valued dollar.

4. It is doubted that the scheme of SDRs will solve the problem of international monetary relations because of its disturbances in the international monetary equilibrium and the currency gold switches. In fact, it is not much helpful to prevent the SDR gold switches.

5. SDRs scheme also suffers from the inequitable distribution and inefficiency among the member countries.

6. Some critics are also of the opinion that new scheme is in favour of USA (to solve the dollar crisis) and most disadvantageous the poor nations.

Operation of the SDR:

In 1970, SDRs were allocated by IMF for the first time. Under the Special Drawing Accounts, 3414 million SDRs were distributed among the 105 member countries. In 1971, under the second allocation, a total SDRs of 2940 million were distributed among 110 participants at the rate of 10.7 per cent of the quotas. Again in 1972, 3 billion was allotted to 112 participating countries. The largest allocation of SDR 2249 million was made to USA. India had received 326 million of SDRs.

A present, there was three ways of using SDRs by the member countries:

1. To obtain US—Dollars, French—France or pound Sterling from member countries of provide currency in exchange for SDRs.

2. To use SDRs for obtaining balance of its own currency held by another participant by agreement with concerned participant.

3. To use SDRs to effect repurchases and pay charges in the Fund’s General Account.

Thus, the countries are in a position to use SDRs for the purchase of other currencies and for the repayment of their debts. India had used 78.5 million SDRs is 1971 out of the total of 226.6 million possessed by her. The value of SDRs will be expressed in terms of the average value of 14 currencies rather than gold.

In 1979, IMF decided to make fresh allocation of total SDR 12 billion at the rate of 4 billion for each of the three years. Inspite of this allocation, the proportion of SDR in non- gold reserves of Fund members continued to be low even to the less than 5 per cent. In July 1981, however, its value is expressed in terms of five major currencies.

Steps for Improvement:

IMF took measures for the improvement of the working of SDRs:

(i) The value of SDRs is linked with the standard basket of 5 currencies as of US dollars, French France, Japanese Yen and pound sterling.

(ii) In 1981, the rate of interest on SDRs has been increased from 1.5 per cent to 3.99 per cent

(iii) To promote the use of SDRs as an international reserve assets, ten official financial institutions have been organised as ‘other holders’ of SDRs.

A new proposal named ‘Substitution Account’ in the IMF was proposed for the benefit of member countries. Under this proposal, new SDRs would be created in exchange for the excess Dollar holdings of member countries and will be held by IMF in the Substitution Account. This would also create an asset in which private transactions could take place. But, it is a matter of regret that this proposal failed to evoke any positive response at the behest of developing and poor countries.