Economy

Why in the news?

·       Recently this year, the IMF has released the release of a new basket, with updated weights for currency that will go in effect on August 1st. 

·       Based on the data from the five-year period 2017-21 The updated basket gives greater weights to currencies like the US dollar as well as the Chinese RMB and the Chinese RMB, while those for the pound, euro, and yen have been reduced.

·       It is worth noting that the IMF admits that in future there could be some disruption effect on the role of currencies, due to advancements in technology, inflation, financial and economic fragmentation, sanctions, and more. But, for the moment their impact on SDR content has been negligible. 

Indicates? 

·       What is the RMB is currently the third largest currency of the SDR basket, next to US dollar and euro. 

·       The weights of the currencies in the basket will reflect their importance to the global financial and trading systems, it is yet another indication of Chinas increasing significance to the world economy. 

·       Although Chinas RMB is becoming more significant in international trade of products and services, the dollar remains the dominant choice for international financial transactions. 

·       The proportions of the different currencies within the basket of SDRs are calculated using a formula that involves four elements for a currency.

·       They are based on their weights the volume of exports to the currency (50 percent).

·       The three financial indicator have an are weighted at a rate equal to 1/6. 

·       Reserves in forex that are based on the currency of that currency; the turnover of foreign exchange in the currency and sum of international bank liabilities and debt securities based on the currency. 

·       Figure-growing in the Chinese RMB in different indicators.

·       For 2017-21, rapid growth in exports by China has resulted in exports from RMB being able to contribute 22.3 percent of global exports.

·       This is just lower than euro and dollar denominated exports. For indicators of the financial sector, China appears to be less active in the global economy.

·       It only 2.2 percent of the global reserves of foreign currency were held in RMB in 2017-21 as compared with 64.8 dollars. 

·       Foreign exchange transactions as well as international banking bonds and liabilities, the percentages of RMB-denominated transactions are much lower than equivalent numbers for the dollar.

·       The SDR is an asset of international reserve, developed through the IMF in 1969 in order to increase its members reserves. 

·       SDR was created in 1969 to augment the official reserve of member countries.

·       SDR first was defined to be equal to 0.888671 grams of gold in fine form that was at the time was equal 1 U.S. dollar. After the demise of the Bretton Woods system the SDR was recast as an exchange of currencies. 

·       Its value SDR is determined by the five currencies of the basket: the U.S. dollar, the euro as well as the Chinese renminbi Japanese yen and the British sterling pound. 

·       The inclusion of the Chinese Yuan in the SDR signified that it was among the top five reserve currencies in the year 2016 after years of work from Chinese authorities to increase its usage across the globe. 

·       The currencies in the SDR basket must meet two requirements which are the export criteria and the freely usable criteria. 

·       A currency is considered to meet the criteria for export if its source is an IMF member or a monetary union which comprises IMF members as well as being one of the top five global exporters. 

·       To be considered "freely usable" by the IMF is to be used extensively to make payments to international transactions and widely traded in the main exchange markets. 

·       The currencies that are free-usable are able to be used for Fund finance transactions.

·       The SDR is used as the account unit of the IMF as well as other international organizations. 

·       The SDR is not an official currency nor is it an actual claim to the IMF.

·       It is more of an option to make claims on the currencies that are freely available to IMF members. 

·       SDRs can be traded against these currencies. 

·       SDR baskets are reviewed every five years.

·       SDR collection is evaluated each five years or earlier if needed to ensure that the basket is reflective of the significance of different currencies in the global trading as well as financial system. 

·       The weights of the currencies within the basket change due to cross-exchange rates as the currencies of the basket change. 

·       It is the value that an SDR is calculated daily by analyzing the exchange rate of the market. 

·       SDR allocation SDR allocation: SDR allocation: Articles of Agreement, determine that, subject to certain conditions, the IMF could assign SDRs to those who participate in the SDR Department. 

·       The all-inclusive allocation of SDRs must meet the aim of fulfilling the long-term global requirement to complement existing reserve assets. 

·       The allocation is given to members in proportion to their shares of quota at the Fund. 

·       An allocation that was unique in 2009 enabled countries who joined the IMF following 1981 (i.e. after prior allocations) to take part in this SDR scheme on an equal basis. 

·       Participants and prescribed holders can purchase and sell SDRs on the market for voluntary transactions. 

If necessary the IMF may also authorize members to purchase SDRs from other participants.