Special Drawing Rights- UPSC Current Affairs

Why in the News?

The International Monetary Fund lifted the yuan’s weighting in the Special Drawing Rights (SDR) currency basket, prompting the Chinese central bank to pledge to push for a further opening of its financial markets.

Probable Question

Special Drawing Rights (SDR) is often regarded as a 'basket of national currencies'. Comment                                           

Key Points

About Special Drawing Rights

• The SDR is an international reserve asset created by the IMF in 1969 to supplement its member countries’ official reserves in the context of the Bretton Woods fixed exchange rate system.
• SDR is often regarded as a 'basket of national currencies' comprising four major currencies of the world - US dollar, Euro, British Pound, Yen (Japan) and Chinese renminbi.
• The SDR is neither a currency nor a claim on the IMF.
• SDRs cannot be held by private entities or individuals.
  • Rather, it is a potential claim on the freely usable currencies of IMF members. SDRs can be exchanged for these currencies.
• SDRs are allocated based on the quota amounts of each member country.
  • The higher the quota amount, the larger the SDR allocation a country will receive. In general, stronger economies have higher quotas.
• SDRs can be used to:
  •  exchange for other currencies
  • the repay loans
  •  the payments of obligations pledges,
  • the payment of interest on loans,
  • paying for increases in quota amounts.
• Countries can buy and sell SDRs by entering into what are known as voluntary trading arrangements — VTAs — facilitated by the IMF.
• India holds 2.75 per cent of SDR quota, and 2.63 percent of votes in the IMF.

Also, watch our Daily Current Affairs video to upgrade your UPSC exam preparation:

SDR as a Paper Gold

• An SDR is called paper gold because at the time of its creation it was viewed as an asset that could act as a reserve asset that would supplement gold reserves and other currencies, thus the name, paper gold.

Why were SDRs created by the IMF?

• Adding SDRs to the country’s international reserves makes it more financially resilient.
• Providing liquidity support to developing and low-income countries allows them to tide over the balance of payments (BOP) situations like the one India has been experiencing due to the pandemic and the one it faced earlier in 1991.
• SDRs being one of the components of foreign exchange reserves (FER) of a country, an increase in its holdings is reflected in the BOP.

Criticism

• One of the biggest criticisms of SDRs is that they can give an unconditional cash injection to governments that are dragging their feet on long-overdue and necessary reforms to get their economies in better shape.
  • For example, Lebanon has 195.78 million in SDRs but its political elites have been accused of corruption and allowed the economy to spiral into chaos — and half of the population to sink into poverty.
• Further, critics argue that it is not an efficient way to help poorer countries because every new SDR allocation is distributed according to a country’s IMF quota – and that quota is determined by the country’s position within the global economy.

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