Public Information Notice No. 05/171

Public Information Notice: IMF Executive Board Determines New Currency Amounts for SDR Valuation Basket

December 29, 2005

On November 23, 2005, the Executive Board of the International Monetary Fund (IMF) approved the revised amounts for the four currencies that determine the value of the Special Drawing Right (SDR). The currencies and their weights in the valuation basket are reviewed every five years in order to keep the composition of the basket stable for at least a period of time, unless the Board decides otherwise. The Board discussion was based on the staff paper on Review of the Method of Valuation of the SDR.

Background

In October 2000, the Executive Board reaffirmed the standard basket method, adopted in 1974 for determining the value of the SDR. The Board also agreed to incorporate fully the euro into the SDR basket by changing the method of SDR valuation from a member-based approach to a currency-based approach.

The SDR currently derives its value from a basket of four currencies: the U.S. dollar, the euro, the Japanese yen, and the pound sterling. The basket contains fixed amounts of the currency units which are valued at prevailing market exchange rates and summed to obtain the SDR's value. This "standard basket" method has been accepted as the method that best ensures the stability of the SDR in terms of the major currencies under floating exchange rates.

The currencies included in the SDR are the four currencies issued by Fund members, or by monetary unions that include Fund members, whose exports of goods and services during the five-year period ending 12 months before the effective date of the revision had the largest value and which have been determined by the Fund to be freely usable currencies in accordance with Article XXX (f). In the case of a monetary union, trade between members of the union is excluded from the calculation. The relative weights of component currencies are to be determined by combining the value of exports (averaged over the relevant five-year period) and official reserves held by monetary authorities outside the country or monetary union that issues the respective currency.

According to the criteria agreed by the Executive Board in previous reviews, the financial instruments in the interest rate basket should be broadly representative of the range of financial instruments that are actually available to investors in a particular currency, and the interest rate on the instrument should be responsive to changes in underlying credit conditions in the corresponding money market.

Executive Board Assessment

Executive Directors have concluded the quinquennial review of the valuation of the SDR. Directors reaffirmed that the currency basket method and SDR valuation adopted in 2000 remain appropriate. Under that approach, the SDR basket comprises the four currencies (i) issued by Fund members whose exports of goods and services had the largest value over the five-year review period and (ii) that have been determined by the Fund to be freely usable currencies as assessed by the Board in line with Article XXX (f)-that is, currencies widely used in international transactions and widely traded in the principal foreign exchange markets. The percentage weight of each currency selected reflects the largest balances of that currency held by Fund members and the largest values of exports of goods and services of the member or monetary union.

In the November 23 discussion, Directors considered developments in the variables relevant to the SDR valuation during the 2000-04 review period. On the basis of their assessment of these developments, Directors agreed that effective January 1, 2006, the currency composition of the SDR basket and the currency weights in the basket would be as follows: U.S. dollar (44 percent), euro (34 percent), Japanese yen (11 percent), and pound sterling (11 percent). In this connection, a number of Directors expressed concern about the method of rounding used in determining the weights. The staff will examine other rounding options in the context of the next review.

Regarding the SDR interest rate, Executive Directors agreed to maintain the market yields for three-month Treasury bills for the United States and the United Kingdom, and the rate of the Japanese Government's thirteen-week financing bill, as the applicable rates for the U.S. dollar, the pound sterling, and the Japanese yen, respectively for inclusion in the SDR basket. Directors agreed to replace the three-month Euribor by the three-month Eurepo rate as the applicable rate for the euro. In taking this decision, Directors noted the Eurepo now conforms more closely than Euribor with the criteria applied to the selection of instruments, particularly with respect to its risk characteristics.

Many Directors noted that the current methodology does not reflect the large increase in private international financial flows, and that it would be useful to consider supplementary financial variables in the calculation of the currency weights in the SDR basket that take these flows into account. Some Directors suggested that consideration be given to taking into account contemporaneous developments when deciding on the currency basket and the weights, noting the rapid growth of China's exports in recent years. The staff will keep these issues under review, taking into account data availability, alternative weighting schemes, and the technical issues raised in the discussion.

Directors agreed that the next review of the method of valuation of the SDR should take place in 2010, unless financial developments warrant an earlier review.