Importance of Special Drawing Rights

Importance of Special Drawing Rights In order to solve the problem of liquidity, in July 1969, the Group of Ten agreed to establish Special Drawing Rights (S.D.R.'s). The essence of this plan is that they create a new international reserve asset. They

Importance of Special Drawing Rights

In order to solve the problem of liquidity, in July 1969, the Group of Ten agreed to establish Special Drawing Rights (S.D.R.'s). The essence of this plan is that they create a new international reserve asset. They can be used uncondi­tionally by the participating countries and they are not backed by gold. The new reserves are designed to supplement the gold and the reserve currencies, i.e., the pound sterling and the dollar. They are meant for use by the central banks of the Fund's member countries; they are not to be made available for commercial use for payments in the ordinary course of business. With the help of the S.D.R.'s the central banks can buy whatever currencies they need for settling balance of payments.

 

Three features of the S.D.R.'s deserve notice: Firstly, they constitute a permanent part of the reserves of each country. Secondly, a country is free to decide as to how and when to use its S.D.R.'s. Thirdly, the scheme implies that each country will be prepared to take S.D.R.'s and supply its own currency.

 

The S.D.R. facility departs from ordinary l.M.F. procedures in some ways: First, The attractiveness of the S.D.R. as a reserve asset derives from the obligation of all members to accept them. If a deficit country, say France, finds itself in need of convertible foreign currencies, it can acquire say German marks or any other currency in exchange for the S.D.R.'s. The purchase is directly made from Germany and does not affect any of the I.M.Fs holdings of the currencies involved. S.D.R. transactions are outside the regular Fund opera­tions, and the role of l.M.F. is only that of an intermediary and a guarantor, the transaction will deplete France's holdings of S.D.R. and will increase that of (in many. The French are not required to meet any fixed repayments schedule as under normal l.M.F. quota operations. Secondly, the scheme recognizes the fact that the international reserves can be created without the need for asset- to back the- new international liabilities. The use of any money depends ultimately n its acceptability in settlements. This fact has been used in connection with the special drawing rights. The resources of the new scheme ate not a pool of currencies. It is simply the obligation of the participating members to accept the Special drawing rights for settlement of payments between the member countries. Thirdly, countries now have immediate access to 25 per cent of their bank quota in the Fund but that increasingly stringent condition of approval are needed if a country wishes to use more than 25 per cent. But S.D.R.'s have an automaticity that will lead to international liquidity being automatically increased when needed.

 

 

On January 2, 1970, the l.M.F. announced the first allocations of $3,414 million worth of S.D.R.'s to 104 countries. Each country's allocation was made, at 16.8 per cent of its quota as in December last and India was allocated $126 million (Hs. 94.5 crores). On January 1, 1971 and January 1, 1972, the next two allocations of nearly $3,000 million each were made, out of which India's share was put at over a hundred million dollars in each year. With these the total global allocations of S.D.R.'s made for the first basic period of three years (1970-72) amounted to S.D.R. 93,000 million, of which the developing countries benefited only to the extent of S.D.R. 23,000 million or 24.7 per cent. Of these India received Rs. 245 crores in three years to supplement her foreign exchange reserves. In the four years ended December 31, 1973, there were over 1,000 transactions in S.D.R.'s totaling close to S.D.R. 5 billion.

 

Benefit of the scheme to India as also to other developing countries is indirect. By increasing international liquidity, the scheme provides a more assured flow of multilateral foreign aid and more liberal trade and aid policies by the richer countries. Increase in world trade facilitated by the S.D.R.'s may be regarded as a factor in boosting India's exports.

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Roberta Baxter
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Posted on Jan 30, 2012