INTERNATIONAL MONETARY FUND

The IMF is an international organization of 184 member countries. It was established to promote international monetary cooperation, exchange stability, and orderly exchange arrangements; to foster economic growth and high levels of employment; and to provide temporary financial assistance to countries to help ease balance of payments adjustment. (See in the Articles of Agreement.)

The Special Drawing Right (SDR) was created by the IMF in 1969 to support the Bretton Woods fixed exchange rate system. A country participating in this system needed official reserves—government or central bank holdings of gold and widely accepted foreign currencies—that could be used to purchase the domestic currency in world foreign exchange markets, as required to maintain its exchange rate. But the international supply of two key reserve assets— and the U.S. dollar—proved inadequate for supporting the expansion of world trade and financial development that was taking place. Therefore, the international community decided to create a new international reserve asset under the auspices of the IMF.

However, only a few years later, the Bretton Woods system collapsed and the major currencies shifted to a floating exchange rate regime. In addition, the growth in international capital markets facilitated borrowing by creditworthy governments. Both of these developments lessened the need for SDRs.

This is a preview of the whole essay

Today, the SDR has only limited use as a reserve asset, and its main function is to serve as theunit 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. Holders of SDRs can obtain these currencies in exchange for their SDRs in two ways: first, through the arrangement of voluntary exchanges between members; and second, by the IMF designating members with strong external positions to purchase SDRs from members with weak external positions.

The basket composition is reviewed every five years to ensure that it reflects the relative importance of currencies in the world's trading and financial systems.

the SDR was redefined as a basket of currencies,today consisting of the euro, Japanese yen, pound sterling, and U.S. dollar.

The first allocation was for a total amount of SDR 9.3 billion, distributed in 1970-72. The second allocation was distributed in 1979-81 and brought the cumulative total of SDR allocations to SDR 21.4 billion.

This allocation would double cumulative SDR allocations to SDR 42.8 billion\

SPECIAL DRAWING RIGHTS (SDRs)

The scheme of Special Drawing Rights (SDRs) was created by IMF in the year 1967. The SDRs were created to solve the problem of international liquidity. SDRs were used as the new reserve asset. The SDRs are allocated to member nations in accordance with their IMF quotes.

Main Features of the SDR- the new international money.

New type of money. SDRs is a new way to settle international payments by member countries.

Transferable assets. A country can give its SDRs to another country as a mean of payment.

Backing of SDRs. The IMF works as a central bank of the countries and now there is no backing of SDRs in gold.

Basis of SDRs. IMF creates and distributes SDRs to now 184 countries and the IMF can create new SDRs when they fell a need for additional international reserves.

Paper gold. When the SDRs was created they were backed by gold, equivalent to the US dollar. But now they are valued on the basis of currency basket of 16 member countries.

Interest bearing asset. The IMF pays interest to a country if it is holding more SDRs then its allocated quota. On the other hand, the IMF takes interest from countries that are under their allocated quota.