IMF/World Bank International Reserves: Policy Issues Forum -- Opening Remarks by IMF First Deputy Managing Director Stanley Fischer
IMF News, April 28, 2001
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- Published: April 28, 2001
Introduction
- Event: IMF/World Bank International Reserves: Policy Issues Forum, Washington D.C., April 28, 2001.
- Speaker: Stanley Fischer, First Deputy Managing Director, International Monetary Fund.
- Participants: representatives from more than 50 countries.
- Conference focus (three topics):
- How to judge the adequacy of a country's reserves.
- How to structure reserves: currency denomination, type, and duration of instruments.
- Reserve management guidelines: underlying principles and promotion.
Crisis Prevention
- Reserves are a key determinant of a country's ability to avoid economic and financial crisis, especially for emerging markets open to volatile international capital flows.
- Fund's strengthened contribution:
- Surveillance: greater focus on policy areas that leave countries vulnerable (reserve management, macroeconomic policies, exchange rate regimes, financial sector soundness, debt management).
- Transparency and international standards: publication of many IMF staff reports and proliferation of international standards and codes of conduct.
- Early warning and information initiatives:
- Strengthening methodology for early warning systems.
- Creating an International Capital Markets Department.
- Regular meetings with private sector through the Capital Markets Consultative Group.
- Lending instruments:
- Introduction of Contingent Credit Lines (CCL) to give countries financial incentives to adopt crisis-resistant policies; expectation that "we will see the CCL coming into active use within a few months."
Adequacy of Reserves
- Traditional rule of thumb:
- Reserves sufficient to pay for three or four months of imports; median reserve levels during the last 50 years were mostly in that range.
- Shift in thinking due to growth of capital flows in the 1990s:
- Private capital access is uncertain and inflows subject to rapid reversals.
- Empirical evidence: ratio of short-term external debt to reserves is the single indicator best correlated with incidence of foreign exchange crises.
- Holding reserves in excess of short-term debt reduces crisis depth in emerging markets during international contagion.
- IMF staff and Executive Board view:
- Holding reserves equal to short-term debt is an appropriate starting point for countries with significant but uncertain access to capital markets.
- Countries may need reserves well in excess of this level depending on:
- macro-economic fundamentals;
- exchange rate regime;
- quality of private risk management and financial sector supervision;
- size and currency composition of external debt.
- Role of stress tests:
- Evaluate potential balance of payments variations across scenarios.
- Particularly suitable for country-specific assessment.
- Holding reserves equal to short-term debt as a starting point has intuitive appeal: allows a country to honor all debt obligations for a year if current account is in balance, no capital flight, no new capital inflows, and creditors refuse to roll over maturing debts.
- Observed changes in reserve levels:
- Import coverage increased from 6 months in 1997 to 7 months in 2000 for emerging market economies.
- Reserve holdings rose from 125 percent of short term debt in mid-1997 to 200 per cent in late-2000.
- Applicability:
- Short-term debt yardstick is more appropriate for emerging market countries with access to private capital.
- For industrialized countries or those without significant access to private capital, traditional guides (past volatility of reserves and the current account) remain useful.
Composition of Reserves
- Implications of the new adequacy approach:
- Currency composition should broadly reflect the composition of potential capital outflows rather than trade flows.
- Avoid instruments that suffer disproportionate credit or liquidity risks during international contagion or turmoil.
- If reserves are judged more than adequate, investment in instruments with somewhat longer duration makes sense.
- Further details to be discussed in conference presentations by Mr. Grava and Ms. Yip.
Reserve Management Guidelines
- Identified deficiencies during recent crises:
- Investment of reserves with foreign branches of domestic banks.
- Pledging of reserves as collateral rendering them illiquid and unusable.
- Incorrect measurement of net foreign currency positions exposing entities to large unintended exchange rate risks.
- Speculative positions in foreign currencies and investments in derivative instruments resulting in large losses.
- Consequences:
- Restricted ability to respond effectively to financial crises and possible accentuation of crisis severity.
- Significant financial and reputational costs; several countries incurred large losses with direct or indirect fiscal consequences.
- Fund and Bank response:
- Developing voluntary Reserve Management Guidelines to help governments strengthen policy frameworks for reserve management.
- Objectives of the Guidelines:
- Help authorities articulate appropriate objectives and principles.
- Build adequate institutional and operational foundations for good reserves management practices.
- Design principles:
- Intended for a broad range of countries at different stages of development and with various institutional structures.
- No unique set of practices or institutional arrangements prescribed.
- Development process and outreach:
- Encouragement and input from practitioners; an outreach meeting in Washington included reserve managers from about 30 countries.
- Five regional outreach meetings planned to follow up in spring and summer; guidelines expected to be finalized by the time of the annual meetings.
- Linkages:
- Guidelines will complement the Debt Management Guidelines elaborated by the Fund and endorsed by the Board.
- Both provide elements of a comprehensive framework for asset and liability management.
- Coordination among relevant agencies may be required to ensure consistent and supporting policies.
- Uses:
- Framework for Fund and Bank technical assistance.
- Focal point for discussion between national authorities and the Fund on necessary improvements.
- Stefan Ingves, Director of the Monetary and Exchange Affairs Department of the IMF, will address guidelines later in the conference.
Better Data on Reserves
- Importance of accurate and timely reserves data for market participants and the official sector.
- IMF reserve data reporting template:
- Designed with help from the G-10 and central banks to inspire confidence and reduce uncertainty and volatility.
- Currently reserve data for 45 countries are posted in this format and accessible through the IMF's website.
- Countries are expected to use the template when providing data to the Fund for surveillance; they may provide data more frequently than the required once monthly if they wish.
Conclusion
- Substantial and well-managed reserves are crucial to crisis prevention but are not costless.
- The CCL offers a cheaper way of gaining access to foreign currency than holding reserves.
- Policymakers face trade-offs in reserves policy; further perspectives expected from Mr Fraga at lunchtime.
- Acknowledgements: Ken Lay, Jennifer Johnson Calari, Nonna Ponferrada (from the World Bank); Christian Mulder, Ydahlia Metzgen, Arne Petersen, Peter Dattels (from the Fund); thanks to speakers, discussants, and attendees.
Opening Remarks by Stanley Fischer, First Deputy Managing Director, International Monetary Fund, Washington DC, April 28, 2001.