Tuesday, 3 October 2023

IMF executive board concludes quinquennial SDR valuation review

5 min read

The executive board of the International Monetary Fund (IMF) completed the quinquennial review of the method of valuation of the basket of currencies on 11 May, 2022 that make up the Special Drawing Right (SDR). The review covered the composition and weighting of the SDR currency basket. The executive board also reviewed the corresponding interest rate instruments used to determine the SDR interest rate. The updated basket weights will come into effect on 1 August, 2022.

The last SDR valuation review was concluded in 2015. Under the existing SDR valuation method adopted by the executive board, the SDR currency basket is reviewed every five years unless developments in the interim justify an earlier review. The current review is taking place about one year later than originally scheduled, as the executive board decided in March 2021 to extend the current basket until July 31, 2022 to prioritise work on the Fund’s response to the COVID-19 pandemic, including work related to the 2021 General SDR allocation.

Executive Board assessment

Executive directors concluded the quinquennial review of the method of valuation of the SDR. They supported maintaining the current method of valuation of the SDR, including the selection criteria for inclusion in the basket and the methodologies for determining the currency weights and currency amounts in the basket, while formalising the current practice and accepted statistical method of dealing with data gaps. Directors agreed to maintain the current composition of the SDR currency and interest rate baskets and approved their updated weights in the baskets.

Directors concurred that the export criterion and the freely usable criterion should continue to guide decisions on inclusion of currencies in the basket. They also agreed to maintain the methodology introduced in the 2015 review for determining currency weights and amounts in the SDR basket. Directors encouraged future reviews to include further analysis of the weights used in the formula to ensure that it continues to adequately capture the role of currencies in global trade and financial markets. They agreed that data gaps for indicators used in the SDR valuation review should be addressed by using available data within the relevant five-year period consistent with past practice, while continuing to explore availability of alternative variables to minimise data gaps.

Directors noted that based on developments in trade and financial markets over the period 2017 to 2021, the updated weights in the SDR basket maintain the same ranking of the initial weights set in the 2015 review, with slightly higher weights for the U.S. dollar and the Chinese renminbi and, accordingly, somewhat lower weights for the British pound, the euro, and the Japanese yen. Directors concurred that neither the COVID-19 pandemic nor advances in fintech have had any major impact on the relative role of currencies in the SDR basket so far. They called for continuous monitoring of implications for the SDR valuation framework from fintech and other developments, including potential economic and financial fragmentation and high inflation. A few directors also called for monitoring the implications of economic sanctions on the valuation framework.

Directors welcomed the update on operational issues raised in previous reviews through a survey of SDR users and the finding that most users do not experience significant operational challenges using SDRs or operating in the five SDR basket currencies’ markets. They noted however that the survey identified some remaining operational challenges for the currencies in the basket. In this context, directors broadly acknowledged the progress made on financial market reforms in China, while calling for additional efforts to further open and deepen the onshore renminbi market, with some directors also stressing the need to further enhance data transparency.

Directors agreed with the managing director’s proposal for the next SDR review to take place on a five-year basis, to be concluded before end-July 2027.

SDR basket composition and size

The value of the SDR will continue to be based on a weighted average of the values of a basket of currencies comprising the U.S. dollar, euro, Chinese renminbi, Japanese yen, and pound sterling.

Currency weights in the SDR (and SDR interest rate) basket

With effect from 1 August, 2022, the IMF has determined that the five currencies that meet the selection criteria for inclusion in the SDR valuation basket will be assigned the following weights based on their roles in international trade and finance:

U.S. dollar 43.38%
Euro 29.31%
Chinese renminbi 12.28%
Japanese yen 7.59%
Pound sterling 7.44%

The amounts of each of the five currencies will be calculated on 29 July, 2022, in accordance with the new weights and will go into effect on 1 August, 2022. The calculation will be made on the basis of the average exchange rates for these currencies over the three months ending on the transition date in such a manner as to ensure that the value of the SDR will be the same on that date under both the revised valuation and present valuation baskets.

As a service to the users of SDRs and in order to provide adequate notice, the Fund will project the currency amounts in the revised basket once in May and June and every week in July 2022, and post them on the IMF's website (www.imf.org). As the currency amounts will be based on a three-month average of exchange rates, these projections will tend to iterate toward the final effective amounts, thereby keeping users informed of the likely final currency amounts in the new basket that takes effect on 1 August, 2022.

SDR interest rate

The SDR interest rate will continue to be determined as a weighted average of the interest rates on short-term financial instruments in the markets of the currencies comprising the SDR basket.

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