what are special drawing rights sdrs 
special drawing rights sdr refer to an international type of monetary reserve currency created by the international monetary fund imf in 1969 it operates as a supplement to the existing money reserves of member countries created in response to concerns about the limitations of gold and dollars as the sole means of settling international accounts sdrs augment international liquidity by supplementing the standard reserve currencies understanding special drawing rights sdrs an sdr is essentially an artificial currency instrument used by the imf and it s built from a basket of important national currencies the imf uses sdrs for internal accounting purposes sdrs are allocated by the imf to its member countries and are backed by the full faith and credit of the member countries governments the makeup of the sdr is re evaluated every five years 2 the current makeup of the sdr is represented by the following table and began in august 2022 2the sdr was formed with a vision of becoming a major element of international reserves with gold and reserve currencies forming a minor incremental component of such reserves this consisted of central bank or government reserves of gold and globally accepted foreign currencies that could be used to buy the local currency in foreign exchange markets to maintain a stable exchange rate however the international supply of the u s dollar and gold the two main reserve assets wasn t sufficient to support growth in global trade and the related financial transactions that were taking place this prompted member countries to form an international reserve asset under the guidance of the imf the bretton woods system imploded in 1973 a few years after the sdr was created moving major currencies to the floating exchange rate system 3 international capital markets expanded considerably in time enabling creditworthy governments to borrow funds this saw many governments register exponential growth in their international reserves these developments diminished the stature of the sdr as a global reserve currency 2besides acting as an auxiliary reserve asset and though its stature has diminished the sdr is the unit of account for the imf its value is summed up in u s dollars and is calculated from a weighted basket of major currencies the japanese yen the u s dollar the chinese renminbi the pound sterling and the euro 2allocation of special drawing rights sdrs the allocation of sdrs to each member country is based on the member s imf quota shares the stronger a country s economy the higher quota shares it has for example the united states has 82 994 shares while afghanistan has 323 shares 4the more quota shares that a country has the more it pays into the imf which comes with greater voting power the sdr share of emerging markets and developing economies is approximately 42 2 of this amount 3 2 is for low income countries 5under the articles of agreement of the international monetary fund the imf may allocate sdrs to members under certain conditions the allocation must meet the imf s goal of meeting the long term global need to supplement existing reserve assets for a general allocation of sdrs to occur the allocation must also receive an 85 majority approval of the total voting power of members in the sdr department 2sdr 660 7 billion had been allocated as of 2022 which is equal to approximately 943 billion 2the imf allocated 650 billion of sdrs on aug 2 2021 the largest in its history the reason was to boost global liquidity during the coronavirus pandemic 2after sdrs have been allocated to each country they have a few options on how they can manage them they can hold the allocated sdrs as part of their foreign exchange reserves sell their reserves or use their reserves for example a member country can exchange an sdr for a freely usable currency 6members can also use sdrs for other reasons such as the repayment of loans payments of obligations pledges the payment of interest on loans or paying for increases in quota amounts 6requirements of special drawing rights sdrs the current requirements to be included in the sdr were established in 2000 7the board states that the sdr basket is to comprise the currencies of members or monetary unions whose exports had the largest value over a five year period and have been determined by the imf to be freely usable 8according to the imf freely usable is a currency that i is in fact widely used to make payments for international transactions and ii is widely traded in the principal exchange markets 8determining what is freely usable is gauged on metrics such as the number of shares of the currency in reserve holdings the currency denomination of international debt securities the volume of transactions in foreign exchange markets cross border payments and trade finance settling claims with special drawing rights sdrs the sdr isn t regarded as a currency or a claim against the imf assets instead it is a prospective claim against the freely usable currencies that belong to the imf member states the articles of agreement of the imf define a freely usable currency as one that is widely used in international transactions and is frequently traded in foreign exchange markets 9the imf member states that hold sdrs can exchange them for freely usable currencies by either agreeing among themselves to voluntary swaps or by the imf instructing countries with stronger economies or larger foreign currency reserves to buy sdrs from the less endowed members 10 imf member countries can borrow sdrs from reserves at favorable interest rates mostly to adjust their balance of payments to favorable positions interest rates on special drawing rights sdrs the interest rate on sdrs or the sdri provides the basis for calculating the interest rate that is charged to member countries when they borrow from the imf and is paid to members for their remunerated creditor positions in the imf it is also the interest paid to member countries on their own sdr holdings and charged on their sdr allocation 2the sdri is determined weekly based 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 five basis points it is posted on the imf website 1112