Special drawing rights (SDRs) have become an increasingly important component of the global monetary system. As an international reserve asset created by the International Monetary Fund (IMF), SDRs play a key role in finance and trade between nations. This comprehensive guide will examine the complexities of SDRs and their evolving impact on the world economy.

What Are Special Drawing Rights?

Special drawing rights are international reserve assets created by the IMF to supplement the official foreign exchange reserves of member countries. First established in 1969, SDRs were intended to support the Bretton Woods fixed exchange rate system. When this system collapsed in the early 1970s, SDRs took on a more general role as a reserve asset.

SDRs represent a claim to currency held by IMF member countries for which they may be exchanged. The IMF allocates SDRs among member countries and can use them for lending. SDRs are not technically a currency but rather a potential claim on freely usable currencies of IMF members. The value of SDRs is based on a weighted basket of international currencies.

Key Characteristics of Special Drawing Rights

SDRs have a number of unique characteristics that distinguish them from other reserve assets:

  • Creation and Allocation – SDRs are created ex nihilo (out of nothing) by the IMF. The amount of SDRs in existence is controlled through the IMF’s voluntary allocation process among members.
  • Store of Value – The SDR interest rate provides a minimum return on SDR holdings. This helps establish SDRs as a desirable store of value for asset holding.
  • Accounting Unit – Some organizations use SDRs internally as a unit of account. For example, the IMF uses SDR-based financial statements.
  • Exchangeability – SDRs are defined in terms of a basket of currencies and can be exchanged for these currencies with other IMF members.
  • Supplement to Reserves – SDR allocations do not displace existing reserves but rather supplement them. This expands overall liquidity in the global system.

History of Special Drawing Rights

SDRs have evolved considerably since their inception in the late 1960s. Here is an overview of the key developments in the history of special drawing rights:

Creation at Bretton Woods

SDRs were first defined in the IMF’s Articles of Agreement in 1969 after an amendment at the Bretton Woods Conference. The original intent was to support fixed exchange rates by providing liquidity as global reserves expanded.

Shift After Collapse of Bretton Woods

When fixed rates ended in the early 1970s, SDRs took on a more flexible role of supplementing member reserves. The First Amendment made SDRs the IMF’s official unit of account.

First Allocation and Valuation Basket

The first SDR allocation of SDR 9.3 billion was made in 1970-1972. The initial valuation basket included 16 currencies with the U.S. dollar fixed at 1 SDR.

Substitution Basket and Weighted Valuation

In 1981 a five-currency substitution basket was introduced for exchanging SDRs. A weighted valuation method based on exports replaced the fixed $1 per SDR.

Revised Allocation Methodology

After the 1997-1998 emerging market crisis, the IMF revised its rules to allow greater allocation of SDRs to developing countries. This supported stability during the Global Financial Crisis.

2009 Allocation Boosts Liquidity

In 2009, the IMF approved a general allocation of SDR 161.2 billion during the crisis to provide liquidity to the global system without adding debt.

2015 Inclusion of Renminbi

The renminbi was included in the SDR basket for the first time, recognizing China’s rising role in global finance. Weights were 41.7% dollar, 30.9% euro, 10.9% renminbi, 8.3% yen, 8.1% pound sterling.

2021 Allocation and Climate Change Criteria

In 2021, the IMF approved an SDR allocation of $650 billion to support global recovery from COVID-19. Climate resilience criteria were added for SDR eligibility.

Purpose and Role of Special Drawing Rights

SDRs serve multiple roles within the international monetary framework:

  • International Liquidity – SDR allocations act as an unconditional liquidity injection to supplement global reserves. This supports growth in global commerce.
  • Exchange Rate Stability – Increased SDR allocations limit shortages of key currencies and reduce volatility in exchange rates.
  • Diversification – The SDR’s composition from multiple currencies allows for diversification away from traditional reserve currencies.
  • Resource Transfer – SDRs can be transferred or loaned between IMF members to provide access to foreign exchange.
  • Accounting Unit – As the IMF’s unit of account, SDRs provide a stable benchmark for international finance.
  • Contingent Asset – During crises, SDRs allow members to access additional foreign exchange reserves through the IMF.

Special Drawing Rights Basket Composition

The value of SDRs is defined by its constituent basket of currencies. The composition of the SDR basket is reviewed every 5 years to reflect the relative importance of currencies in the global trading and financial systems.

Current Basket (2021-2025)

The 15th SDR basket review took effect on January 1, 2022:

  • U.S. Dollar: 41.73%
  • Euro: 30.93%
  • Renminbi: 12.28%
  • Japanese yen: 8.33%
  • Pound sterling: 6.72%

Determining Basket Composition

Basket currency selection and weights are based on:

  • Export share – The currency’s share in global exports
  • Freely Usable Criteria – The currency must be widely used and traded in forex markets
  • Reserve Holdings – The currency should be commonly held by central banks as reserves

Potential Future Changes

Over time, the weights will likely shift further toward currencies like the renminbi. Some experts argue that the SDR basket should add other currencies like the Swiss franc or emerging market currencies. There have also been proposals for a broader index or algorithm-based valuation method.

Special Drawing Rights Allocation and Holdings

SDR allocation is a key tool used periodically by the IMF to inject liquidity into the global economy. Here is an overview of SDR allocation and holdings:

Allocation Mechanism

  • The IMF has the authority to allocate SDRs at its discretion. General allocations require 85% majority approval.
  • Allocations are distributed to member countries in proportion to their respective IMF quotas.
  • Changes in IMF quotas impact how much SDRs each member receives from new allocations.

Total Allocations to Date

  • As of September 2022, the cumulative total of SDR allocations was approximately SDR 204 billion (equivalent to around $281 billion).
  • The 2009 allocation after the global financial crisis was SDR 161.2 billion.
  • The 2021 allocation of SDR 650 billion in response to COVID-19 was the largest in history.

Current Holdings

  • As of September 2022, the total amount of SDR holdings was around SDR 684 billion (equivalent to about $943 billion).
  • Around 72.5% of total SDR holdings are held by the top 10 richest IMF members. The U.S. and Euro zone each hold over 30% of total SDRs.
  • Emerging economies hold a relatively small share of SDR holdings despite receiving over 60% of the latest allocation.

Trading, Exchange, and Valuation of Special Drawing Rights

SDRs can be freely exchanged or traded between IMF members and parties they designate. The exchange and valuation process works as follows:

Voluntary Exchanges Between Members

  • IMF members can voluntarily exchange SDRs for reserve currencies with other members. These exchanges alter the composition but not the total level of global reserve assets.
  • Members can exchange SDRs through voluntary arrangements, by IMF designation, or through the IMF itself under prescribed conditions.

Determining the SDR Interest Rate

  • The SDR interest rate provides the basis for calculating the interest on SDR holdings between members.
  • The rate is determined weekly based on a weighted average of interest rates on short-term debt in the money markets of the SDR basket currencies.

Calculating the SDR’s Value

  • The value of the SDR is determined daily by the IMF based on the weighted amounts of the basket currencies valued in U.S. dollars.
  • An SDR’s value equals the sum of the weights fixed in the latest basket review multiplied by the exchange rate for each currency.
  • The U.S. dollar value is used for operational purposes while the SDR’s unit of account role is valued separately.

The Role of Special Drawing Rights in IMF Operations

The IMF utilizes SDRs extensively in providing financing, loans, and global liquidity to its members:

SDR Department

The IMF’s Finance Department manages all SDR transactions and operations through a special SDR Division. They oversee aspects from allocations to valuation to exchanges.

Loans to IMF Members

The IMF raises financing by selling or lending SDRs to member countries. These loans carry interest rates slightly above the SDR interest rate. SDR loans have been used in many IMF assistance packages.

Unit of Account

The IMF conducts all accounting, financial reporting, operations, and transactions using the SDR as the standard unit of value. This simplifies IMF financing and stabilizes the real value of resources.

Payment of IMF Charges

Members pay various IMF fees and charges in SDRs including subscription fees, service charges, and interest on loans. This further establishes the SDR’s role in IMF operations.

Technical Assistance Grants

The IMF provides technical assistance to low-income developing countries using grants paid in SDRs from a special technical assistance account funded by member contributions.

Special Drawing Rights in the Global Monetary System

SDRs now play an influential part in the global monetary framework alongside traditional reserve currencies:

Official Reserves

SDRs make up over 3% of countries’ official international reserves according to IMF data. This makes them the third most utilized clearing asset after the U.S dollar and euro.

Private SDR Instruments

Some private financial institutions offer SDR-denominated investments and market instruments like bonds, futures contracts, and over-the-counter derivatives. However, private SDR markets remain relatively small in scale.

International Clearing

The IMF has explored using SDRs as a neutral clearing unit for international financial transactions. This would reduce reliance on dominant national currencies that can distort global trade.

Basket Currencies

The composition of the SDR basket gives economic significance and monetary sway to the chosen currencies. The recent addition of the renminbi has increased China’s financial leadership.

Liquidity Support

General SDR allocations act as an unconditional liquidity injection into the global financial system. This backstop has become increasingly important during crises.

Special Drawing Rights and Global Governance

As an international reserve asset governed by the IMF, the SDR system has broader effects on global economic coordination:

IMF Governance

The IMF’s power to allocate SDRs and determine eligible currencies impacts its governance authority over the global financial architecture.

Monetary Power

A currency’s inclusion or position in the SDR basket affects its importance and amplifies the economic influence of the issuing nation.

Global Cooperation

Reform of the SDR framework usually requires international consensus and cooperation between major economies like the U.S., Euro zone, China, and Japan.

Aid Conditionality

Some experts argue the IMF should use its influence over SDR allocations to promote sustainable development policies and lending conditionality.

Financial Statecraft

Governments can utilize SDRs as a tool of financial statecraft to exert strategic influence or apply political pressure through lending and exchanges.

Opportunities and Limitations of Special Drawing Rights

In recent years, numerous proposals have aimed to expand the role of SDRs in the global monetary system. However, SDRs also face certain limitations and challenges:

Diversifying Global Reserves

Greater use of SDRs could diversify reserves away from an excessive reliance on the U.S. dollar as the primary global asset. This would spread risk and reduce volatility.


SDRs have the potential to operate as a neutral numeraire not influenced by any single nation. This contrasts with national currencies used in reserves and trade settlement.

Limited Liquidity

The overall supply of SDRs is still not sufficient for major reserve holdings or private transactions. Allocations remain infrequent and measured.

Incentives to Hold National Currencies

Some benefits like seigniorage accrue to countries whose currencies are included in the SDR basket. This discourages greater use of SDRs.

Substitution Account Limits

SDRs exchanged for reserve currencies are held in a substitution account by the IMF. This limits their impact on global liquidity.

U.S. Veto Power over Expansion

The U.S. has effective veto power over any major expansion of the SDR system due its voting share at the IMF. Significant reforms require U.S. approval.

Private Sector Use

The limited issuance and lack of SDR-denominated financial assets constrains private adoption. SDR instruments like bonds have gained minimal traction to date.

Future Outlook for Special Drawing Rights

Many experts see an enhanced role for SDRs as reforms reshape the international monetary system:

Responding to Global Crises

SDR allocations are now an established tool for injecting liquidity during crises without accumulating debt, suggesting more active future use.

Gradual Expansion of Allocations

To raise the share of SDRs in global reserves, the IMF may conduct more regular allocations of smaller size rather than massive intermittent allocations.

Complementing National Currencies

SDRs are likely to serve more as a supplement to dominant national currencies like dollars and euros rather than a full replacement.

Reforming Valuation and Composition

Changes to the SDR basket like expanding the number of currencies or shifting to a GDP-based valuation could improve the SDR’s utility and neutrality.

Leveraging for Climate Finance

SDRs could potentially be used for raising climate mitigation and adaptation finance for developing economies through lending or redistribution.


Originally created as an obscure reserve asset, special drawing rights have become an integral component of the modern international monetary framework. While still playing a supplementary role today, SDRs provide unique capabilities including unconditional liquidity, diversification, and stability that point toward an expanded position in future. As the global recovery from COVID-19 continues, the enormous 2021 SDR allocation confirms these instruments will remain highly relevant for global economic resilience. For finance ministries, central banks, investors, and companies closely tied to international trade and capital flows, deeply understanding the multifaceted workings of special drawing rights is crucial.