SPECIAL DRAWING RIGHTS

Special Drawing Rights, or SDR, are an ARTIFICIAL CURRENCY INSTRUMENT (not currency, per se) created by the International Monetary Fund, which uses them for internal accounting purposes. SDR comes with the currency code, XDR, which it may also be referred by.

Why it was created

The main purpose was not what it is today. When it was created by the IMF in 1969, the international community had to face lack of US dollars and gold, which were the main assets held in foreign exchange reserves and the only means of trade. So SDRs were earlier created as a supplementary foreign exchange reserve. In 1969, the XDR was the equivalent of one US dollar or 0.888671 grams of gold and was intended to be used in the context of the Bretton Woods fixed exchange rate system. 

What it is today

However, the system fell apart in 1973. Then the SDR was instead defined by a weighted basket of major currencies, including the US Dollar, the Euro, Japanese Yen, Chinese Yuan and the British Pound. Holding this basket of major currencies helps the IMF manage the exchange rate volatility of any single currency. Countries have also pegged their currency to the XDR as a way to increase transparency. The SDR interest rate (SDRi) provides the basis for calculating the interest rate charged to member countries when they borrow from the IMF and paid to members for their remunerated creditor positions in the IMF.

Although SDRs still serve their original purpose as a supplement to foreign currency reserves, however, less so after 1973. When the US dollar is weak or becomes less attractive, countries may prefer special drawing rights. 

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