The concept and essence of SDRs
If you look at the structure of the reserves of the Central Bank, we can find that part of the reserves are stored in the SDR (Special Drawing Rights). The essence and purpose of SDR is the subject of this article.
The concept of SDR
SDR - is the potential right to a portion of the International Monetary Fund's money. Often the SDR is also called a synthetic currency.
When joining the IMF, each country makes a contribution. The Fund, in turn issues SDRs and distributes them among the countries in proportion to their contributions. At this point, part of the money contributed is actually exchanged for SDRs. At the end of these transactions, the country has those same SDRs in its accounts. If the country needs the money, it can sell some of the SDRs to another country or directly to the Fund, getting back dollars (or other currency). It turns out that SDR is the potential right to withdraw a portion of one's contribution from IMF fund. This right is potential because a country can only exchange SDRs if the fund has available cash.
How is the SDR rate set?
We said that a country can exchange SDRs for dollars. The question arises involuntarily as to the rate at which this can be done. In this case, the SDR is better thought of as a "basket" of four reserve currencies (U.S. dollar, yen, pound sterling, and euro), each of which is included in a certain quantity. Thus, the SDR exchange rate for dollars is exactly equal to the value in dollars of such a "basket" of currencies.
Why are SDRs needed?
Today SDRs are mainly used as the IMF's settlement currency and international reserve currency. For example, if the Fund extends a loan to a country, it is denominated in SDRs and demands it back in SDRs, which is the settlement function. In addition, SDRs are used in many countries as reserve currency. As we can see, the use of this currency today is extremely limited, but it was not always so.
When this currency was created, it had a very different purpose. It was supposed to support a system of fixed exchange rates and toswallow's standardThe SDR's role became much less important after the gold standard was abolished. As we know from history, these goals were not achieved, and after the gold standard was abolished, the role of the SDR became much less important.
Looking into the future, some predict that the SDR could become the global reserve currency that the world economy needs for stability right now. But for now it is just a thought out loud, nothing more.
Summary
Special drawing rights - The IMF's synthetic currency, which represents the potential right to a portion of the money contributed to the fund. The SDR is used for mutual settlements between member countries of this organization, as well as for reserve currency.
For a snack: how does SDR stand for?
SDR stands for Special Drawing Rights. A reasonable question arises: why SDR, because the abbreviation of the phrase "special drawing rights" should be SDR? This is what happened because in English the Special Drawing Rights - Special Drawing Rights. The abbreviation of this name is SDR, which in Russian sounds like SDR.