Special drawing rights

The special drawing account was set up for the purpose of conducting of all transactions and
operations involving special drawing rights. The salient features of the SDRs scheme are as
mentioned below:
The fund is empowered to prescribe certain official entities as holders of SDRs. These prescribed
holders; however, do not receive allocations and cannot use or receive SDRs in designation.
The SDRs allocated by the fund do not constitute claims by holders against the fund to provide
currency, except as prescribed by the provisions relating to the termination of participation and
liquidation;
An important features of the SDRs, is that they are not backed by any assets. The participants do not
have to transfer currency or other resources against the SDRs received in allocations; the SDRs are
simply credited to participants' accounts on the basis of their quotas in the fund at the date of each
allocation and are then available for use in accordance with the rules of the scheme. This recognizes
the fact that international reserves can be created without the need for assets to back the new
international liabilities. The scheme, thus, envisages pure fiduciary reserve creation;
Interest is paid to each other in its holdings of SDRs and charges are levied in the same time rate by
the fund on each participant's net cumulative allocation plus any negative balance of the participant
or unpaid charges. Thus, countries with SDR holdings in excess of their allocations earn interest on
the excess holdings and countries with holdings below allocations pay a charge at the same rate on
the amount of "net use" of SDRs. The interest rate is determined weekly by reference to a combined
market interest rate.
The SDRs can be used unconditionally by the participating countries. The use of fund's resources is
governed by "conditionality". The SDRs, on the other hand, have an automaticity that leads to
international liquidity being automatically increased when needed (at least within the limits given by
the size and the use of SDRs). A participant can use its SDRs to obtain freely usable currency if it
has need because of its balance of payments on its reserve position or increasing its reserves;
A participant designated by the fund is not obliged to provide currency for SDRs beyond the point at
which its holding of SDRs in excess of its net cumulative allocation are equal to twice its net
cumulative allocation or such higher limit as may be agreed between the participant and the fund. A
participant may, however, provide currency in excess of the obligatory limit or any agreed higher
limit;
The fund permits additional uses of SDRs among participants and prescribed holders. These are
currently as follows: to use SDRs in the settlement of financial obligations: to buy and sell SDRs
forward; to borrow, lend or pledge SDRs; to use SDRs in swaps; to make donations (grants) of SDRs
as security for performance of financial obligations. Such operations, which are in the nature of
voluntary transfers, are other than transactions by agreement.
The SDRs are a form of international reserve assets which are allocated by the fund to the members
choosing to participate in the special drawing account in proportion to their quotas in the fund;
The fund has the power to suspend the right of any country to use SDRs if it fails to meet certain
obligations in the SDR departments and
There are three principal ways in which the participants can use their SDRs :1) to obtain freely
usable currency in exchange for SDRs from other participant countries designated by the fund to
receive the SDRs; ii) to use and receive SDRs in transactions and operations by agreement among
the participants mainly to redeem the balances of their own currencies held by other countries and
iii) in operations and transactions with the fund's general resources account such as payment of
charges and repurchases.