## 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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## Bibliographic details
- 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.*

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## References

- [Hungary and the IMF](http://www.imf.org/external/country/HUN/index.htm)
- [IMF Policy Advice -- A Factsheet](https://www.imf.org/en/about/factsheets/imf-surveillance)
- [Speeches](https://www.imf.org/en/news/searchnews)
- [PRESS CENTER](http://presscenter.imf.org/)
- [https://www.imf.org/external/np/omd/bios/sf.htm](https://www.imf.org/external/np/omd/bios/sf.htm)
- [IMF Surveillance](https://www.imf.org/external/np/exr/facts/surv.htm)
- [How Does the IMF Lend?](https://www.imf.org/external/np/exr/facts/howlend.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/sp042801_