Special drawing rights (SDRs, code XDR) are supplementary foreign exchange reserve assets defined and maintained by the International Monetary Fund (IMF).
[3] The weights assigned to the currencies in the XDR basket are adjusted to take into account their current prominence in terms of international trade and national foreign exchange reserves.
[3] As of August 2023[update], the XDR basket consists of the following five currencies: U.S. dollar 43.38%, euro 29.31%, Chinese yuan 12.28%, Japanese yen 7.59%, British pound sterling 7.44%.
[21] Another reason they may see little use is that the number of XDRs in existence is relatively few compared to the total amount of foreign exchange reserves.
The IMF says, "expanding the volume of official XDRs is a prerequisite for them to play a more meaningful role as a substitute reserve asset.
[16] At this time, the United States had a conservative monetary policy[16] and did not want to increase the total amount of U.S. dollars in existence.
[citation needed] If the United States had continued down this path, the dollar would have become a less attractive foreign exchange reserve asset: it would not have had the necessary liquidity to serve this function.
Soon after XDR allocations began, the United States reversed its former policy and provided sufficient liquidity.
The XDR resurfaced in 1978 when many countries were wary of taking on more foreign exchange reserve assets denominated in U.S. dollars.
[23] The IMF recognized the financial crisis as the cause for distributing the large majority of these third-round allotments, but some allocations were couched as distributing XDRs to countries that had never received any[3] and others as a re-balancing of IMF quotas, which determine how many XDRs a country is allotted, to better represent the economic strength of emerging markets.
[23] During this time China, a country with large holdings of U.S. dollar foreign exchange reserves,[24] voiced its displeasure at the current international monetary system, and promoted measures that would allow the XDR to "fully satisfy the member countries' demand for a reserve currency.
[12] In 2001, the UN suggested allocating XDRs to developing countries for use by them as cost-free alternatives to building foreign exchange reserves through borrowing or running current account surpluses.
[62] To determine the composition of the XDR, the IMF takes into account several currencies important to the world's trading and financial systems.
Approximately one to two months before the end of this time period, the IMF Executive Board will re-evaluate the XDR basket; the currencies included as well as their weights can then change.
One business day before taking effect, the newly defined weights are converted to currency amounts based on an average of the exchange rate over the past three months, such that the value of the XDR in U.S. dollars remains the same before and after the change.
[16] On January 1, 1981, the five-year schedule was introduced and the XDR basket was reduced to five currencies: the United States dollar, the Deutsche mark, the French franc, the British pound, and the Japanese yen.
[66] When the euro was introduced in January 1999, it replaced the German mark and French franc and the basket consisted of four currencies.
In November 2015, the IMF announced that the renminbi now met the "freely usable" requirement and would be included in the next basket definition, changing its size back to five currencies.
The effective date of the re-evaluation was postponed to October 1, 2016, in order to "allow users sufficient lead time to adjust".
[69]: 259 In March 2021, the IMF announced that the next re-evaluation, normally scheduled for October 1, 2021, would be postponed to August 1, 2022, in order to prevent the basket's definition from changing during the COVID-19 pandemic.
A country's IMF quota, the maximum amount of financial resources that it is obligated to contribute to the fund, determines its allotment of XDRs.
[79] This means the United States has a de facto veto on all new XDR allocations, it is currently the only country that does.
The first round took place because of a situation that was soon reversed, the possibility of an insufficient amount of U.S. dollars because of U.S. reluctance to run the deficit necessary to supply future demand.
[23] After being split among the IMF member countries, the 2021 allocation gave Liberia and South Sudan each an amount equal to 9-10% of their GDP.
[22] In April 2020 prior to the large allocation regarding the COVID-19 pandemic, this amount was under 3%; by comparison, over half (of non-gold reserves) were in the United States dollar.
[7] The XDR is used in international transactions, including export quotas in the IMF members and the number of official reserve assets which were in their own currencies.