Reserve Bank of India vide its web communication dated September 1, 2021 informs us that International Monetary Fund (IMF) has made an allocation of Special Drawing Rights (SDR) 12.57 billion (equivalent to around USD 17.86 billion at the latest exchange rate) to India on August 23, 2021. The total SDR holdings of India now stands at SDR 13.66 billion (equivalent to around USD 19.41 billion at the latest exchange rate) as on August 23, 2021. This increase in SDR holdings will be reflected in the Foreign Exchange Reserves (FER) data that shall be published for the week ended August 27, 2021.

IMF International Monetary Fund symbol or sign

RBI communication is reproduced below:

https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=52158

Anyone would like to know what are Special Drawing Rights (SDRs)? How do we gain by this development?

My discussion on above subject invites your attention to IMF website updated up to 5th August 2021 . We shall learn the basics from there and proceed in reinforcing our knowledge.

What is International Monetary Fund?

The IMF was established in 1944 in the aftermath of the Great Depression of the 1930s. 44 founding member countries including India sought to build a framework for international economic cooperation. Today, its membership embraces 190 countries, with staff drawn from 150 nations.

In statistical terms……
Number of member countries –190
Year of its establishment –1944
Nationalities of staff represented –150
Executive Directors from –24
150 countries
Total amount lent to members – $1 Trillion ($1000 billion)
Current lending arrangements –29
Countries who received emergency
Funding as on Jan 29 –80
Interest rate to low-income countries –0

For hands-on technical advice, policy- oriented training, and peer learning a sum of $303 million was spent.

Time to understand Special Drawing Rights (SDRs).

All the materials in this article proudly draw the information from IMF website or other details from IMF only. Those desirous of detailed study/research need to refer to the website’s address given in reference section.

The role of SDR

SDR has its inception from Bretton Woods system collapse in 1973 and it was created to work as a supplementary reserve asset.

The SDR serves as the unit of account of the IMF and other international organizations. But to claim SDR as a currency is not a potential claim. Its claim on the freely available major currencies of member countries official reserves is an acceptable argument.

The SDR was initially defined as equivalent to 0.888671 grams of fine gold—which, at the time, was also equivalent to one U.S. dollar. We understand that with the failure of Bretton Woods system and replacement of gold with some major currencies of the member countries, SDR is defined as a basket of currencies. Its value is determined as a US dollar rate based on the spot value of basket of currencies approved by IMF.

Can I understand what are the basket of currencies and can they be changed?

Currently included currencies are US dollar, British pound, Euro, Chinese Yuan, and Japanese Yen. The SDR basket is reviewed every five years, or earlier if warranted, to ensure that the basket reflects the relative importance of currencies in the world’s trading and financial systems.

How do we understand that some currency needs to be included?

Two criteria determine this.

1. The export criterion: The currency meets the export criterion if its issuer is an IMF member or a monetary union that includes IMF members, and is also one of the top five world exporters.

2. A currency is freely usable by IMF if it is used to make payments for international transactions and is widely traded in the principal exchange markets.

Is the basket fixed with its rates and is it reviewed regularly at periodical intervals?

Yes, the basket gets reviewed. The SDR basket is reviewed every five years, or earlier if warranted, to ensure that the basket reflects the relative importance of currencies in the world’s trading and financial systems.

The reviews cover the key elements of the SDR method of valuation, including criteria and indicators used in selecting SDR basket currencies and the initial currency weights used in determining the amounts (number of units) of each currency in the SDR basket.

Let me give a few currencies with their values reviewed in 2015. However, the position is given on October 1, 2016.

Currency weights determined in 2015 fixed units of currency
US $ 41.73 0.58252
Euro 30.93 0.38671
Chinese Yuan 10.92 1.0174
Japanese yen 8.33 11.90
British pound 8.09  0.085946

The next review will take place in 2022.

What is the SDR interest rate (SDR i)?

The value is determined on weekly basis on a weighted average of representative interest rates on short-term government debt instruments in the money markets of the SDR basket currencies, with a floor of 5 basis points. It is posted on the web site of IMF regularly.

Let us hear directly from IMF website its statement on SDR allocation in 2021.

“On August 2, 2021 the Board of Governors of the IMF approved a general allocation of SDRs equivalent to US$650 billion (about SDR 456 billion) to boost global liquidity. This largest SDR allocation in the history of the IMF (effective on August 23, 2021) addresses the long-term global need for reserves, helps build confidence, fosters the resilience and stability of the global economy, and supports liquidity-constrained countries in addressing the impact of the COVID-19 pandemic.

Let us learn about SDR operations.

  • Participating members and prescribed holders can buy and sell SDRs in the voluntary market. If required, the IMF can also designate members to buy SDRs from others.
  • SDRs may be used by IMF members and the IMF itself in accordance with the Articles of Agreement and decisions adopted by the Executive Board and Board of Governors.
  • As of end-January 2021, there were 15 organizations approved as prescribed holders.
  • Prescribed holders may not however, receive allocations of SDRs.
  • Similarly, SDRs cannot be held by private entities or individuals.

Let us learn about India and its SDR story.

Let me give you IMF data on India.

  • 2021 Projected Real GDP (% Change): 9.5*
  • Country Population: 1,378.595 million
  • Date of Membership: December 27, 1945
  • Article IV/Country Report: December 23, 2019
  • Special Drawing Rights (SDR): 1086.95 million
  • Quota (SDR): 13114.4 million
  • Number of Arrangements since membership: 7

India ranks among 36 countries who are counted as partners by IMF.

Some historical facts about leading nations that contributed towards the successful functioning of IMF’s financial and knowledge sharing efforts.

Japan

Let us learn about the great contribution from Japan.

In 1990, Japan became the first partner to support the IMF’s capacity development efforts and is currently its single largest contributor, providing $730 million in funding to date. More than 100 IMF member countries across the globe have benefited from Japan’s support.

In fiscal year 2020 (FY 2020), The Government of Japan provided a new contribution of $34 million, of which $29 million financed a large portfolio of 26 bilateral programs. In the past five years, Japan has consistently been responsible for about one-fifth of all external financing to IMF CD.

Next, we shall like to learn about European Union.

European Union

The EU-IMF partnership promotes shared objectives to support economic growth in Africa and improve revenue mobilization and effectiveness of public spending in developing countries.

It is equally interesting to know that the IMF has been collaborating with the EU to support its Member and Accession states to build strong institutions and policies.

It is highly praiseworthy that since 2009, the EU has contributed about US$210 million to IMF capacity development. Over the last three years, it has been the largest contributor to IMF capacity development efforts.

Switzerland

Now it is the turn of Switzerland with its monumental efforts in helping IMF to meet the demands of its members.

Since 1997, Switzerland, through its State Secretariat for Economic Affairs (SECO), has partnered with the IMF on capacity development, and has a large bilateral program of projects supporting capacity development in Swiss priority countries.

The country’s support promotes economic stability and sustainable growth, helping countries reduce poverty. Switzerland has contributed approximately US$151 million towards IMF capacity development to date.

Conclusion

It was 1973 when Bretton Woods gold standard was battered, bruised, and yielded place to a basket of currencies to take over an uneventful foreign exchange market for valuation. IMF’s allocation of SDRs to India, one of its founder members kindled my mind to write the above article. Incidentally, most of the readers would have been post 1973 born. I am very sanguine that the above article will open your minds to learn the basics of IMF and SDRs for knowledge nirvana. Equally, I am optimistic to know the day when like Japan, India would be a major player in helping poorer countries of the world.

Reference: IMF Website

https://www.imf.org/en/Home

Disclaimer: The contents of this article are for information purposes only and do not constitute an advice or a legal opinion and are personal views of the author. It is based upon relevant law and/or facts available at that point of time and prepared with due accuracy & reliability. Readers are requested to check and refer relevant provisions of statute, latest judicial pronouncements, circulars, clarifications etc. before acting because of the above write up. The possibility of other views on the subject matter cannot be ruled out. By use of the said information, you agree that Author/TaxGuru is not responsible or liable in any manner for the authenticity, accuracy, completeness, errors, or any kind of omissions in this piece of information for any action taken thereof. This is not any kind of advertisement or solicitation of work by a professional.

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