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Special Drawing Rights (SDR) is a form of international money created by the IMF. It is used by its members in settling transactions with each other. The SDRs are not physical money; they are merely entries on the books of the IMF. Initially, the exchange rate between the SDR and US dollar was at par, but now the valuation of the SDR is based on weight average of the exchange rates of the currencies of big IMF members.
In September 1967, the Board of Governors of the IMF decided to create new money named special drawing right (SDR). The scheme became effective in January 1970. SDRs are allocated to members in proportion to their IMF quotas. They are used in foreign payments. A deficit country can use its SDR to get the currency of the relevant surplus country. In other words, it can import goods from the surplus country for SDRs. Hence the SDR of the deficit country slip into the surplus country which gets interest on them from the deficit country.
No country is obliged to accept SDR from other countries if the amount is greater than twice its own allocated SDRs. The development of SDR is to avert international liquidity problem and to solve the issue of disequilibrium in balance of payment.
In September 1967, the Board of Governors of the IMF decided to create new money named special drawing right (SDR). The scheme became effective in January 1970. SDRs are allocated to members in proportion to their IMF quotas. They are used in foreign payments. A deficit country can use its SDR to get the currency of the relevant surplus country. In other words, it can import goods from the surplus country for SDRs. Hence the SDR of the deficit country slip into the surplus country which gets interest on them from the deficit country.
No country is obliged to accept SDR from other countries if the amount is greater than twice its own allocated SDRs. The development of SDR is to avert international liquidity problem and to solve the issue of disequilibrium in balance of payment.
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