While other instruments, such as official credit lines and bilateral swap lines, are also external buffers, for most countries they principally act as a complement to their official reserves. They are generally associated with lower crisis risks (crisis prevention) as well as space for authorities to respond to shocks (crisis mitigation). Reserves remain a critical liquidity buffer for most countries. Assessing Reserve Adequacy-Further Considerations (2013) The work stream of which this paper is part aims to fill this gap by outlining a framework for discussing reserve adequacy issues in different economies. Despite the ongoing debate on reserve issues, there is little consensus about how to assess reserve holdings in different economies, even though this is an important aspect of a member’s external stability assessment. This paper brings together recent Fund work on reserve adequacy issues aiming to strengthen their discussion in bilateral surveillance. Assessing Reserve Adequacy-Specific Proposals (2015) The bottom line of this work, and its application by the Fund, is summarized in the 2016 Guidance Note to Staff on Assessing Reserve Adequacy and Related Issues. Finally, in the 2015 paper, the importance of non-precautionary motivations for some countries was noted, and the issue of reserve adequacy assessments was placed squarely in the context of Fund surveillance. Measures of the opportunity cost of reserve holdings were also presented throughout these papers. These tools generally take a broader view of potential risks, sources of shocks, and vulnerabilities underlying reserve needs than transitional metrics. In addition, the papers develop new tools for emerging and developing and credit constrained economies to assess adequacy, and suggest approaches for characterizing the reserve needs for developed economies. They outline the motivations for holding reserves in developed, emerging, and developing and credit constrained economies. A number of traditional approaches-including import and short-term debt coverage-have been used and remain relevant for particular sets of countries, typically capturing individual risks.Ī series of IMF policy papers (2011, 20) have proposed new analytical frameworks to assess reserve adequacy, supplementing traditional guidance. As such, the assessment should be based on the specific characteristics (including economic flexibility and financial integration and maturity) and vulnerabilities. These costs are an important consideration as countries decide on their “appropriate” level of reserves for precautionary purposes.Īssessing the appropriate level of reserves to hold is challenging-not just because of the multiple roles played by reserves, but also because of the complexity of quantifying external risks and vulnerabilities, and the opportunity cost each country faces. While reserves have these important benefits, they also carry an opportunity cost-from reserves earning a lower rate of return than could be achieved if the resources were used differently. They reduce the likelihood of balance-of-payments crises, help preserve economic and financial stability against pressures on exchange rates and disorderly market conditions, and create space for policy autonomy. For almost all economies, whether developed, emerging, or developing, holding prudent reserves, in conjunction with sound policies and fundamentals, can bring significant benefits.
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