In the context of the Special Drawing Rights of the IMF, which of the statements given below is/are correct?

1. The concept of SDR was introduced as an alternative to the Triffin Dilemma.

2. The IMF does not offer any interest rate on the SDR quota deposited by the countries.

3. Trading of SDRs amongst the members is prohibited for the management of the Balance of Payment crisis.

Select the correct answer using the codes given below:

Solution

● Statement 1 is correct: Triffin Dilemma was associated with the fixed exchange rate system wherein IMF had fixed the exchange rate for every country with respect to the US dollar and this in turn was linked to gold prices. So, a country could print currency in accordance with the availability of gold in its reserves. However, this system was not effective as the supply of gold was fixed. Hence, the system of SDR was introduced as an alternative to this for the IMF. SDR or Special Drawing rights refers to the deposits made by a country in the IMF in accordance with the quota allocated to it. ● Statement 2 is incorrect: IMF offers a small rate of interest on the SDR deposited by the countries. These SDR deposits are given out to member countries as loans when they face any shortage or Balance of Payment crisis. ● Statement 3 is incorrect: SDRs are used by the IMF to extend loans to countries facing the Balance of Payment crisis. It is lent out as loans to the member countries on which the IMF charges interest. However, it can also be traded amongst the countries to solve the Balance of Payment crisis or to settle Balance of Payment transactions.