The SDR is an international reserve asset, created by the IMF in 1969 to supplement its member countries’ official reserves. It serves as the unit of account of the IMF and some other international organisations, including the World Bank. The value of the SDR is based on a basket of five currencies—the US dollar, the euro, the Japanese yen, the British pound sterling and, from 2016, the Chinese renminbi.
The SDR is neither a currency, nor a claim on the IMF, it cannot be used directly in market transactions. Rather, it can be exchanged for these five major currencies and can therefore play a role in providing liquidity and supplementing member countries’ official reserves. SDRs are generally allocated across member states according to the IMF’s quota formula. As the quota is based largely on GDP, rich countries hold the majority of SDRs. Members can also buy and sell SDRs in a voluntary market. The SDR mechanism is self-financing and levies charges on allocations which are then used to pay interest on SDR holdings.
SDR allocations occur very rarely – the IMF has done so only four times in its history – with the latest one, in 2021, as a response to the Covid-19 crisis, accounting for 69 per cent of all the SDRs ever disbursed.