# Understanding Special Drawing Rights (SDRs): Definition, Value, and Allocation

![Special Drawing Rights (SDRs): An international type of monetary reserve currency created by the International Monetary Fund (IMF) in 1969 that operates as a supplement to the existing money reserves of member countries.](https://www.investopedia.com/thmb/WQvLXDWdB9ZvIpeLno0GtGuqRcc=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/sdr.asp-final-3b506abece934ccc89789e8b43d04bc5.png)

*— Investopedia / Paige McLaughlin*

## What Are Special Drawing Rights (SDRs)?

Special drawing rights (SDRs) are an international [reserve](https://www.investopedia.com/terms/m/monetary-reserve.asp) asset created by the [International Monetary Fund (IMF)](https://www.investopedia.com/terms/i/imf.asp) in 1969 to supplement the existing reserves of member countries and enhance global liquidity.

SDRs were introduced to address the limitations of relying solely on gold and the U.S. dollar for settling international accounts. They are valued based on a basket of major currencies, the U.S. dollar, euro, Chinese renminbi, Japanese yen, and British pound, and play a key role in IMF lending and international monetary transactions.

### Key Takeaways

*   SDRs are international monetary reserve assets created by the IMF to supplement member countries' reserves.
*   Calculated from five major currencies, the value of an SDR provides liquidity but is not a standalone currency.
*   Allocations of SDRs to IMF members are based on each country's quota and economic strength.
*   SDRs offer flexibility, enabling countries to exchange them for freely usable currencies in times of need.
*   The value of SDRs is recalibrated periodically, with the most recent recalibration in August 2022.  
    

## How Special Drawing Rights (SDRs) Function as a Financial Instrument

An SDR is essentially an artificial currency instrument used by the IMF built from a basket of important [national currencies](https://www.investopedia.com/terms/n/national-currency.asp). The IMF uses SDRs for internal accounting purposes. SDRs are allocated by the IMF to its member countries.

The makeup of the SDR is re-evaluated every five years. The current makeup of the SDR is represented by the following table and began in August 2022:

The SDR was meant to be a main part of international reserves, with gold playing a smaller role. This consisted of [central bank](https://www.investopedia.com/terms/c/centralbank.asp) or government reserves of gold and globally accepted foreign currencies that could be used to buy the local currency in foreign exchange markets to maintain a stable [exchange rate](https://www.investopedia.com/terms/e/exchangerate.asp).

However, the international supply of the U.S. dollar and gold—the two main reserve assets—wasn’t sufficient to support growth in global trade and the related financial transactions that were taking place. This prompted member countries to form an international reserve asset under the guidance of the IMF.

Besides acting as an auxiliary reserve asset, and though its stature has diminished, the SDR is the unit of account for the IMF. Its value is summed up in U.S. dollars and is calculated from a [weighted](https://www.investopedia.com/terms/w/weighted.asp) basket of major currencies: the Japanese yen, the U.S. dollar, the Chinese renminbi, the pound sterling, and the euro.  

> **Important**
>
> The Bretton Woods Agreement and System imploded in 1973, a few years after the SDR was created, moving major currencies to the floating exchange rate system. International capital markets expanded considerably in time, enabling creditworthy governments to borrow funds. This saw many governments register exponential growth in their international reserves. These changes reduced the importance of SDRs as a global reserve currency.

## How SDRs Are Allocated Among IMF Member Countries

Countries get SDRs based on their IMF quota shares. The stronger a country's economy, the higher quota shares it has. For example, the United States has 82,994 shares, while Afghanistan has 323 shares.

The more quota shares that a country has, the more it pays into the IMF. This gives the country greater voting power. The SDR share of [emerging markets](https://www.investopedia.com/terms/e/emergingmarketeconomy.asp) and developing economies is approximately 42.3%. Of this amount, 3.3% is for low-income countries.

According to IMF rules, SDRs can be given to members if certain conditions are met. The allocation must meet the IMF's goal of "meeting the long-term global need to supplement existing reserve assets" for a general allocation of SDRs to occur. The allocation must also receive an 85% majority approval of the total voting power of members in the SDR Department.

> **Fast Fact**
>
> SDR 660.7 billion had been allocated as of 2022, which is equal to approximately $943 billion.

The IMF allocated $650 billion of SDRs on Aug. 2, 2021, which is the largest amount in its history. The reason was to boost global [liquidity](https://www.investopedia.com/terms/l/liquidity.asp) during the COVID-19 pandemic.

After SDRs have been allocated to each country, they have a few options on how they can manage them. They can hold the allocated SDRs as part of their foreign exchange reserves, sell their [reserves](https://www.investopedia.com/terms/b/bank-reserve.asp), or use their reserves. For example, a member country can exchange an SDR for a freely usable currency.

Members can also use SDRs for other reasons, such as the [repayment](https://www.investopedia.com/terms/r/repayment.asp) of loans, payments of obligations, pledges, the payment of interest on loans, or paying for increases in quota amounts.  

## Criteria for Inclusion of Currencies in the SDR Basket

The current requirements to be included in the SDR were established in 2000. The Board states that the SDR basket is to comprise the currencies of members or monetary unions "whose exports had the largest value over a five-year period, and have been determined by the IMF to be freely usable."

The IMF says a "freely usable" currency is one that's widely used for international payments and traded in major markets."

Determining what is freely usable is gauged on metrics such as the number of shares of the currency in reserve holdings, the currency denomination of international debt securities, the volume of transactions in foreign exchange markets, cross-border payments, and [trade finance](https://www.investopedia.com/terms/t/tradefinance.asp).

## How Claims Are Settled Using Special Drawing Rights

SDRs aren't seen as currency or claims on IMF assets. Instead, it is a prospective claim against the freely usable currencies that belong to the IMF member states. The Articles of Agreement define a freely usable currency as one that is widely used in international transactions and is frequently traded in foreign exchange markets.

Countries with SDRs can trade them for freely usable currencies through voluntary swaps or by IMF direction. IMF member countries can borrow SDRs from reserves at favorable interest rates, mostly to adjust their [balance of payments](https://www.investopedia.com/terms/b/bop.asp) to favorable positions.

##  Understanding Interest Rates and SDRi Calculation

The interest rate on SDRs, which is called the SDRi, provides the basis for calculating the interest rate that is charged to member countries when they borrow from the IMF and is paid to members for their remunerated creditor positions in the IMF. It is also the interest paid to member countries on their own SDR holdings and charged on their SDR allocation.

The SDRi is set weekly based on interest rates of short-term government debts, with a minimum of five basis points. It is posted on the IMF website.

## How Many Currencies Make Up an SDR?

The value of an SDR is made up of five currencies, which are the U.S. dollar, euro, Chinese renminbi, Japanese yen, and pound sterling.

## How Much Is a Special Drawing Right Worth?

The value or worth of an SDR is calculated daily and is based on the weights of the currencies that make up the SDR basket: U.S. dollar (43.38%), euro (29.31%), Chinese renminbi (12.28%), Japanese yen (7.59%), and pound sterling (7.44%). The value of the SDR is arrived at by summing up in U.S. dollars the value of these currencies.

## Can SDRs Replace the Dollar?

SDRs are considered to be an international reserve currency, and could technically replace the dollar in terms of global transactions. Given the strength and wide use of the dollar internationally, however, this is not likely to happen any time soon.

## Why Is an SDR Called Paper Gold?

An SDR is called paper gold because at the time of its creation, it was viewed as an asset that could act as a reserve asset that would supplement gold reserves and other currencies, thus the name, paper gold.

## The Bottom Line

Special drawing rights were introduced by the IMF in 1969 to supplement member countries' reserve assets, addressing the limits of relying on gold and the U.S. dollar. SDRs are not actual currencies but interest-bearing reserve instruments designed to boost global liquidity.

They're valued using a basket of five major currencies (U.S. dollar, euro, Chinese renminbi, Japanese Yen, and British pound) and allocated to nations based on IMF quota shares. SDRs can be exchanged or used to bolster foreign reserves, as seen with the IMF's large 2021 allocation to help countries weather the pandemic, and their valuation is recalculated daily to reflect currency market shifts.

> **Article Sources**
>
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