Question

According to M L Jhingan "International Economics"

"What is the purpose of creating SDR in terms of international liquidity?"

Answer 1

A revolutionary innovation made by IMF to tackle the problem of international liquidity has been the introduction of the scheme of Special Drawing Rights in early 1970’s. This scheme is intended to create and issue the SDR’s as unconditional reserve assets.

The IMF creates SDR’s at regular intervals and allocates them to the member countries on the basis of each member’s quota. For this purpose, the Fund keeps a Special Drawing Account. A country can have easy access to the reserves of any currency by agreement and the intermediation of IMF.

The transfer of reserves from one member to the other upto the limit of borrowing country’s quota is facilitated through book entries in the Special Drawing Accounts of the borrowing and lending countries. In all these transactions, the IMF acts like a clearing house.

Initially the Fund created SDR 9.3 billion over the three years between 1970 and 1972, allocating them to 112 participants in the SDR scheme. In 1978, the Fund decided to raise them by SDR 4 billion in each of the years 1979, 1980 and 1981. In 2009, allocation of SDR’s by the IMF among the member countries stood at SDR 217 billion.

Although IMF has acted as the principal source of international liquidity creation and distribution, and it has achieved also some measure of success, yet the problem of international liquidity is still far from being resolved. The surplus countries even at present are not willing to recognise that their accumulations of large exchange reserves are the root cause of the whole problem and the solution of the problem of inadequacy of international liquidity fundamentally rests in the reduction of their surpluses.

Unless they do recognize this fact and do reduce their surpluses, the LDC’s cannot get rid of their deficits and the problem of international liquidity will continue to plague the international trade relations.