## IMF Survey : IMF Unveils New Way of Assessing Country Reserves

_IMF News, April 24, 2015_

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**Canonical URL:** [IMF Survey : IMF Unveils New Way of Assessing Country Reserves](https://www.imf.org/en/news/articles/2015/09/28/04/53/sopol032515a)

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## Bibliographic details
- Published: April 24, 2015

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### Purpose and scope of the new framework
- The IMF has developed a new framework for determining the appropriate level of international reserves held by its member countries.
- Aim: help strike a balance between the benefits and costs of holding reserves.
- Intended use: to inform discussions of reserve adequacy in the context of the IMF’s regular “health checks” of members’ economies (Article IV consultations).

### Role and objectives of reserves
- Reserves defined as the assets denominated in foreign currency, plus gold, held by a central bank.
- Roles of reserves include:
  - Build confidence in the national currency.
  - Counter disorderly market conditions.
  - Support the conduct of monetary policy.
  - Build assets for intergenerational purposes.
  - Influence the exchange rate.
- Reserves held for precautionary purposes:
  - Provide space for authorities to respond to potential shocks.
  - Prevent chaotic market conditions and avert economic dislocation.
- Reserves held for nonprecautionary purposes:
  - Example: oil-exporting countries setting aside a portion of revenue to preserve wealth for future generations.

### Challenges in assessing reserve adequacy
- Multiple roles of reserves and complexity of quantifying external risks across countries make assessment difficult.
- The global financial crisis highlighted importance of adequate reserves but little consensus existed on determining desired reserve levels.

### Greater country specificity in assessment
- Framework classifies countries based on:
  - Strength of market access.
  - Depth and liquidity of their markets.
  - Flexibility of their economies.
- Reserve needs by country group:
  - More mature (advanced) countries: focus on limiting market dysfunction, including shortages of foreign currency liquidity in financial institutions.
  - Emerging markets and low-income economies gaining market access (frontier economies): focus on mitigating risk of crises from potential current and capital account shortfalls.
  - Countries with limited market access: often need reserves to smooth domestic absorption of current account shocks.
- Additional guidance provided for specific country types within these categories, including:
  - Countries with capital controls.
  - Commodity-intensive countries.
  - Dollarized economies.
- Builds on work published in 2011 and 2013 and devotes more attention to advanced economies than earlier methods.

### Balancing costs and benefits
- Holding too little reserves can be problematic; holding too much can also be costly.
- Opportunity cost: reserves may earn a lower rate of return than alternative uses.
- Specific concern for low-income countries: public capital not held in reserves could instead be spent on infrastructure with potentially greater long-term dividends.
- The framework seeks a desirable range of reserve holdings where additional reserves’ benefits justify their costs.
- Recommended discussion topics within Article IV consultations:
  - Authorities’ stated objectives for holding reserves.
  - Assessment of reserve needs for precautionary purposes.
  - Discussion of the cost of reserves.
- Consideration of external buffers beyond reserves:
  - Central bank swap lines.
  - Credit lines from international financial institutions.
- Assessment should also take into account risks over the medium term.

### Spillovers and external analysis
- A country’s reserve accumulation can have important outward spillovers on other countries.
- Analysis of reserve accumulation spillovers is discussed in the IMF’s Spillovers Report and the External Sector Report.

*IMF Survey, April 24, 2015*

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## Content in this bundle

- [021411bpdf (PDF)](/-/media/websites/imf/imported/external/np/pp/eng/2011/_021411bpdf.pdf){rel="external" type="application/pdf"}
- [111313dpdf (PDF)](/-/media/websites/imf/imported/external/np/pp/eng/2013/_111313dpdf.pdf){rel="external" type="application/pdf"}
- [121914pdf (PDF)](/-/media/websites/imf/imported/external/np/pp/eng/2014/_121914pdf.pdf){rel="external" type="application/pdf"}

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## References

- [https://www.imf.org/en/News/country-focus](https://www.imf.org/en/News/country-focus)
- [PRESS CENTER](http://presscenter.imf.org/)
- [Policy](https://www.imf.org/en/news/search)
- [Press release](http://www.imf.org/external/np/sec/pr/2015/pr15176.htm)
- [External imbalances report](http://www.imf.org/external/pubs/ft/survey/so/2014/res072914a.htm)
- [New spillover risks](http://www.imf.org/external/pubs/ft/survey/so/2014/pol072914a.htm)
- [Networks and systemic risk](http://www.imf.org/external/pubs/ft/survey/so/2014/res052314a.htm)
- [Spillovers Report](http://www.imf.org/external/pubs/ft/survey/so/2014/POL072914A.htm)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2015/09/28/04/53/sopol032515a_