A Brief Guide to the IMF'S Currency

In this project we are going to present the Special Drawing Rights known as the SDRs, which represent the IMF’s unit of account. The project is based on an article from the Economist from 8th of April.

The article represents a brief guide to the special drawing rights. The introduction presents how SDRs are defined as the value of a fixed amount of yen, dollars pounds and euros expressed in dollars at the current exchange rate.

Also in the article it is mentioned one recent event that took place on the second of April during the G20 summit where the leaders of the most powerful countries decided to authorise the International Monetary Funds to issue $250 billion dollars in new SDRs. This measure has helped countries to augment their foreign reserves without needing to be lent.

Evan thou this seems to be a good decision, the new SDRs are allocated in proportion to countries’ existing IMF’s quotas, and the majority of this quotas belong to the rich countries such as United States, with almost 17% fallowed by Japan with only half of the United States quotas, Britain, France, China, Russia, Belgium, India, South Korea and Brazil.

The IMF is expecting that the countries with a higher level of expectation will lend their share to the ones in need, such as the developing countries such as Algeria, Bangladesh, Benin ,Cambodia, Cameroon, Chile, China, Egypt, Ghana, Guatemala, India, Indonesia, Islamic Republic of Iran, Jordan, Kuwait, Malaysia, Mexic, South Africa, Tanzania, Thailand, Uruguay, Republic of Yemen. In order to part their shares the rich countries need the IMF’s board approval, and the proposals are excepted if their decision has 85% support from the countries that compose this board.

A situation was in 1997, when almost 131 countries with 78% of the total votes in the IMF accepted the proposal, but America was against it so the proposal was never putted in action.

In the next section we are going to present the key terms from the article, and to explain how does their mechanism works.

The International Monetary Fund (IMF) is an organization of 185 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.The IMF's resources come mainly from the money that countries pay as their capital subscription when they become members.

The IMF's main goal is to assure the stability of the international monetary and financial system. The IMF promotes global growth and economic stability by encouraging countries to adopt economic policies. IMF offers technical assistance and training to help member countries strengthen their capacity to create and implement policies. Technical assistance is offered in several areas, including fiscal policy, monetary and exchange rate policies, banking and financial system supervision and regulation and statistics.

Quotas reflect the size of each member's economy. The larger a country's economy in terms of output and the larger and more flexible its trade, the larger its quota tends to be.

Quotas, together with the equal number of votes each member has, determine countries' voting power. They also help determine how much countries can borrow from the IMF and their share in allocations of special drawing rights or SDRs.

Quotas are reviewed every five years and can be increased when they consider it’s necessary by the Board of Governors. At the conclusion of the Thirteenth General Review in 2008, it was determined that no quota increase was necessary.

Special Drawing Rights are known as possible claims on the freely usable currencies of international monetary funds members. Social Drawing Rights describe the basket of major currencies used in international trade and finance. But SDR are neither a currency or a claim on the IMF, but rather a potential claim on the freely usable currencies of IMF members countries.

The SDR were created by the IMF in 1969 in order to adjust the Bretton Woods fixed exchange rate system. The Bretton Woods system of monetary management used to established the rules for commercial and financial relations between the world's major industrial states in the mid 20th century. The Bretton Woods system was the first example of a fully negotiated monetary order intended to govern monetary relations among independent nation-states. Every country that was participating to this system needed official assets in the form of government or in the form of the central bank’s holdings of gold and widely accepted foreign currencies purchase its own currency in world foreign exchange markets. Because the international supply of reserve assets like gold and like the U.S. Dollar wasn’t able to support the expansion of world trade and the financial development that was taking place at that time, the international community decided to create a new reserve asset called the special drawing rights. A few years later, the Bretton Woods system collapsed and the major currencies changed to a floating exchange rate regime. Nowadays , the SDR has only limited use as a reserve asset, and its main function is to serve as the unit of account of the IMF and some other international organizations.