The post-war international monetary system may be characterized as the ‘currency reserve standard’, wherein the U.S. dollar has been serving as reserve asset as good as gold, at least, till the fifties. But, due to the shaky position of U.S. dollar, and for other reasons such as speculation in gold, chaos in Euro-dollar market etc., this system faced acute problems of international liquidity like balance of payments difficulties, inadequate growth of monetary reserve and fragility of gold exchange standard.
Economists have visualized three aspects: liquidity, adjustment and confidence in the problems of international liquidity. To solve these problems a reform in the existing international monetary system was regarded inevitable. Many proposal and plans have been suggested to evolve some alternative system to get rid of the difficulties faced by the existing system.
Eventually, a proposal aimed at limiting the future role of dollar and sterling and broadening the functions of the IMF has been put forward. It is called the scheme of Special Drawing Rights (SDRs) commonly held as ‘Paper Gold’. It was approved in principle at the Fund’s annual meeting at Rio de Janeiro in September1967. The SDRs scheme was, however, come into operation only since January 1970.
Under this scheme the IMF is empowered to grant member governments special drawing rights (SDRs) on a specified basis, subject to ratification. SDRs are regarded as the international reserve allocated annually by the collective decision of participating members in the fund. Possession of SDRs entitles a country to obtain a defined equivalent of currency form other participating countries and enable it to discharge certain obligations towards the general account of the fund. The creation overcome their temporary foreign exchange difficulties without putting any additional strain on the IMF resources SDRs are thus method of supplementing the existing reserve assets in international liquidity.
A precise mechanism has been evolved in the implementation of the SDRs scheme. Under this scheme a country (say country I) needing convertible foreign exchange resources had to apply to the fund for the use of SDRs. It can use its special drawing rights up to the limit of allocated amount. On receiving such an application the fund would designate another country (say country II), whose balance of payments and gross reserve position are sufficient strong called the designated country to meet the foreign exchange needs of country I. Then, country I can draw on the designated country at the most upto a total net amount equal to twice the amount of SDRs allotted to the designated country. To illustrate the point suppose country I has been allotted an SDRs quota of 1,000 units and the designated country (country II) has been allotted a quota of 1500 units, now if country I seeks convertible foreign exchange of 500 units for which country II has been and given them to country II in exchange for an equivalent amount of convertible foreign exchange programming solutions and country I thus becomes a debtor and country II a creditor country. The debtor country has to pay interest at 1.5 per cent per annum of the units surrendered to the creditor country.
It must be noted that the designated country cannot be asked to provide foreign exchange for the SDRunits in excess of twice the quote of SDRs allotted to it 1500 × 2 = 3,000 units in our illustration). In case the requirements of a country exceed twice the amount allotted to the designated country some other countries along with this country will have to be designated to meet the total requirements.