Special Drawing Right (SDR), is an international financing instrument created by the International Mutual Fund (IMF), and acts as a supplemental reserve for national banking systems. It is created in response to concerns about the limitation of Gold and US Dollar as the principal currency of the word trade and financial development. In decades past, when gold was used as the primary international currency, any balance of payments deficits was paid with gold. However, in 1967 this system of SDRs was established in lieu of sending gold all over the globe, also called as paper gold. Special Drawing Rights is a system use to settle any balance of payments deficits to their international accounts. In essence, SDRs are simply an international currency that makes it easier to conduct all sorts of international transactions.
The SDR is an artificial currency allocated to member countries and can be fully converted into international currencies so they serve as a supplement to the official foreign reserves of member countries. Its unit value of an SDR reflects the foreign exchange value of a “basket” of currencies of several major trading countries (U.S. dollar, euro, yen and pound sterling).
Every five years the IMF determines which five currencies will enter the basket, and which weight will be applied to each currency. The exchange rates used by the IMF to calculate the official SDR are the noon rates in the London foreign exchange market. When the London market is closed, noon rates in the New York market are used, and European Central Bank rates are employed when the New York market is also closed.[ Image Credit : Flickr ]