Previous Year Question
Which of the following is/are treated as artificial currency?
ADR
GDR
SDR
Both ADR and SDR
Correct Answer: C
Detailed Solution
The Special Drawing Right (SDR) is an international reserve asset created by the International Monetary Fund. It is commonly described as an artificial currency, although the IMF technically defines it as an international reserve asset and not as a currency.
The IMF created the SDR in 1969 when concerns were emerging about a possible shortage of international reserve assets under the monetary system then based principally on the US dollar and gold.
Important features of the SDR include:
It is neither a coin nor a paper currency.
It cannot be used by individuals or private companies for ordinary market purchases.
It can be held by IMF members and certain prescribed international institutions.
IMF members can voluntarily exchange SDRs for freely usable currencies.
It serves as a unit of account for IMF transactions, loans and obligations and is also used by certain other international organisations.
SDR allocations are distributed among IMF members in proportion to their IMF quotas.
How is the SDR valued?
The SDR’s value is based on a basket of five major international currencies:
US dollar
Euro
Chinese renminbi
Japanese yen
Pound sterling
The currency weights applicable from 1 August 2022 are:
US dollar—43.38%
Euro—29.31%
Chinese renminbi—12.28%
Japanese yen—7.59%
Pound sterling—7.44%
The IMF normally reviews the composition of the basket every five years. The daily value of the SDR is calculated using fixed currency amounts and prevailing exchange rates.
Why are ADR and GDR incorrect?
An American Depository Receipt (ADR) is a negotiable certificate issued by a US depository bank representing shares in a non-US company. It enables those shares to be traded in the American financial market. It is neither a currency nor a reserve asset.
A Global Depository Receipt (GDR) is a financial instrument representing shares of a company and issued in international capital markets. It is also not a currency.
Therefore, SDR alone is treated as an artificial currency.
Additional fact: The IMF has allocated approximately SDR 660.7 billion in total. The largest single allocation—approximately SDR 456 billion—was made in August 2021 to supplement global liquidity and strengthen members’ foreign-exchange reserves during the COVID-19 crisis.