Operation of Special Drawing Rights Policy of International Monetary System

On January 1, 1970 the first allocation of SDRs was made by the IMF. A total of SDRs 3,414 million was distributed among 104 participants in the Fund’s Special Drawing Account. Each participant shared an amount equivalent to 16.8 per cent of its Fund quota at December 31, 1969. China, however, opted not to receive SDRs in this initial year.

In the course of 1970 five more members of the Fund intended to join the SDRs scheme in its second allocation. The second allocation of SDRs was made on January 1, 1971. This timt, a total of SDRs 2,940 million was distributed among 109 participants at the rate of 10.7% of their Fund quotas.

Special Drawing Rights created by these two allocations amounted to roughly SDRs 6,400 million. This amounts to about 8% of other liquidity resources (i.e., gold, foreign exchange, etc.) of the member countries of the Fund.

The third allocation of SDRs amounting to 2,952 million units was made on January 1, 1972 to 112 participants. By March 31, 1973 out of 125 members 113 are participants in the SDRs scheme. African and Middle Eastern countries are not participating in the present scheme. India has so far received 326 million units of SDRs, of which 80 millions have been transferred by her.

At present, there are three alternative ways of using the SDRs by the members:

1. To obtain U.S. dollars, French francs or pounds sterling from other designated participants to provide currency in exchange for SDRs.

2. To use SDRs for obtaining balances of its own currency held by another participant by agreement with that participant.

Under these two uses, a participant is expected to use its SDRs only to meet the requirements of balance of payments or in the light of its overall exchange reserves position, but not for the sole purpose of changing the composition of the exchange reserves.

3. To use SDRs to effect repurchases and pay charges in the Fund’s general account.

In the present set up of the scheme a member participant can use the SDRs for these purposes and related transactions through the Fund’s general account in any amount.

The scheme of SDRs, at present, has achieved a fairly good success in increasing international liquidity, as it represents deliberate creation of international credit. Since its inception, a number of countries have used SDRs for the purchase of other currencies for repayment of indebtedness as well as for payment of services and other charges to the IMF, and for payment towards gold subscription in respect of quota increases. India, for instance, used 78.5 million SDRs by July 1971 out of the total of 226.6 million possessed by her.

It has been proposed thus that the scheme should be further extended to solve the problem of international liquidity in toto. For this purpose, however, the present allocative system based on IMF quota is regarded as irrational. As such, some other system should be evolved in which the allocation of SDRs are made on the basis of need in relation to economic position of the member nation.

Further, in the existing system, the IMF, the World Bank, etc., have not been allotted their own quotas of SDRs. Particularly, World Bank and other international financial institutions need to have SDR quotas which would enable them to expand the flow of soft credit to the less developed countries to meet their varying requirements.