SDR stands for "Special Drawing Rights." It is a financial term used to denote an international reserve asset created by the International Monetary Fund (IMF). SDRs were established in 1969 as a supplementary international reserve asset, with the aim of enhancing the liquidity and stability of the global monetary system.
The SDR acts as a reserve asset because countries can exchange it for freely usable currencies. It is composed of a basket of currencies, including the US dollar, euro, Chinese yuan, Japanese yen, and British pound sterling. The specific weights of these currencies in the SDR basket are reviewed periodically to ensure representation of the major economies and reflect relative importance in the international trading and financial system.
The value of the SDR is determined every day by the IMF based on the market exchange rates of the currencies included in the basket. It serves as a unit of account for international transactions and is widely used in the international financial community, particularly in the context of debt agreements, official transactions, and international statements.
SDRs provide member countries with additional liquidity to supplement their official reserves and meet balance of payments needs. They also serve as a measure of the IMF's financial resources and are used in the allocation of IMF financial assistance to member countries.
In summary, SDRs are an international reserve asset created by the IMF to promote liquidity and stability in the global monetary system. They are composed of a basket of currencies and serve as a unit of account in international transactions.
