What are Special Drawing Rights?

The Special Drawing Rights (SDR) was created by the International Monetary Fund (IMF) in 1969 as an official reserve asset to alleviate shortages in relation to world trade in gold and other reserve currencies. Members of the IMF can use SDRs to finance balance of payments deficits and to settle international financial transactions.

Most conditions of carriage and trading contain a monetary limit of one sort or another. In international trade, where often different currencies are used by the sellers and buyers of goods and by the various carriers involved in the movement, it is sometimes difficult to agree the most appropriate currency for the settlement of disputes.

As national currencies fluctuate, each party will look for the most favourable currency for them. Such negotiations would take time and possibly delay settlement to the detriment of one of the parties, creating uncertainty in respect of future dealings.

The SDR replaced the gold franc as the standard unit of account for international transactions at governmental level and in the private sector. The SDR does not physically exist and may be described as an 'artificial currency' which is valued in accordance with a 'basket of five national currencies'. The value of an SDR fluctuates in accordance with the rises and falls of these currencies, and can be found listed under Rates of Exchange with other currencies in daily newspapers and financial web sites.