G20 nods to IMF for fresh SDR issue

The G20 Finance Ministers recently nodded to the International Monetary Fund to provide fresh Special Drawing Rights to its member countries. The IMF has been permitted to provide SDR of worth 650 million USD to the member countries. This will help boost the reserves of all nations and will avoid pushing low-income countries into further distress.

What are Special Drawing Rights?

  • The Special Drawing Rights is an international reserve asset. It was created by the IMF in 1969 to supplement the official reserves of its member countries.
  • The value of Special Drawing Rights is based on five currencies of the world. They are US dollars, Japanese Yen, Chinese Renminbi, British pound sterling and Euro.
  • In 2009, the IMF allocated 182.6 billion USD of SDR in the wake of global financial crisis.
  • The SDR is neither a claim on the IMF nor a currency. It is a potential claim on the freely usable currencies of IMF members.
  • The value of SDR is calculated every day.
  • The voting power of a member country in IMF is based on the quota that is measured in terms of SDR. It is primarily based on the economic position of a country.

What is the issue?

The G20 Finance Ministers including India opposed the general allocation of new Special Drawing Rights by the IMF. This is because this will not ease financial pressures created by COVID-19.

Why is the new SDR being issued?

The new Special Drawing Rights is being issued by the International Monetary Fund to help the least developed and developing countries that are facing high foreign exchange crisis due to COVID-19.

How does SDR help IMF?

The SDR is mainly used as a unit of account for internal accounting purposes. It helps the IMF manage exchange rate volatility of any single currency.

Working of SDR

When SDRs are allocated to an IMF member country, the members are given two positions. They are the SDR allocations and SDR holdings. The countries receive interest on their SDR holdings and pay interest based on their SDR allocations.

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