What are special drawing rights (SDRs)? Why are they in the news always?
International Monetary Fund (IMF) has increased the weighting of the USD and Chinese Yuan in its first regular review of the SDR evaluation. The SDR value is calculated daily, and the valuation basket is reviewed and adjusted every five years. Only in 2016 was the Chinese currency included in the basket.
This weight increase will enhance the Chinese Yuan’s status as an international currency and increase the appeal of yuan assets. This prompts the Chinese central banks to push for a further opening of their financial markets, simplify the procedures for foreign investors looking to invest in the Chinese market, and improve the business environment.
Let’s start from the beginning
Every country has foreign currencies it uses to pay for imports. Sometimes these currencies are not sufficient. So nations end up taking loans with high-interest rates. But SDR is a cheaper way to raise funds. They are like assets used by nations to buy hard currency at comparatively low interest.
But who gives you cash in exchange for SDRs? The answer is any country that wants to buy SDR. SDR is an asset, after all, that can be exchanged for hard cash anytime.
IMF gives SDRs to each country as per their quota. The problem with the SDR allocation is that richer countries receive more than poorer countries.
IMF has only allocated SDRs four times, the latest one, in 2021, as a response to the Covid-19 crisis. But only 3 percent went to low-income countries. Therefore, the countries in greatest need are not the top beneficiaries of the SDRs.
Special drawing rights (SDRs) are an international reserve asset that can be converted into five currencies: dollar, Euro, Chinese Yuan, Japanese yen, and British Pound Sterling.