How is the gross international reserves calculated?
Gross Foreign Assets of the CBA
ross foreign assets of the CBA are defined based on
residency
criteria. All the CBA financial claims on nonresidents are
included in gross foreign assets. Unlike foreign assets,
gross
foreign reserves or international reserves are the most liquid
part of
foreign assets that are held by the Central Bank and can be used
for
direct financing of external and internal payments.
According to the definition of Balance of Payments Manual,
fifth
edition, IMF (1993), a country's international (foreign)
reserves are
"those external assets that are readily available to and
controlled by
monetary authorities34 for direct financing of payments
imbalances, for
indirectly regulating the magnitude of such imbalances
through
intervention in exchange markets to affect the currency exchange
rate,
and/or for other purposes." From the definition follows that
the
country's foreign (international) reserves must satisfy three
conditions:
(i) must be foreign assets of the CBA, i.e. claims on
nonresidents, (ii)
controlled by the CBA and be readily available, (iii) be
financial assets
of sufficient liquidity.
The concept of international liquidity is important for
foreign
assets. In accordance to which assets are divided into
convertible and
non-convertible currencies, as well as into assets in the
Armenian dram.
The possibility of foreign reserves to be "readily available
for
financing of payments imbalances" is important as well, which
also means,
that the reserves must be denominated in convertible foreign
currencies
and have high liquidity to be readily available for carrying out
external
transactions. Thus, taking into account the above-stated and
also the
features of the given country (especially the foreign trade
partners of
the given country) the international reserves comprise assets
only in
free convertible currencies, including SDR and Euro, currencies
included
in their baskets, as well as currencies of some other
developed
countries: Swiss Franc, Swedish, Danish, Norwegian Crone,
Canadian and
Australian Dollar. Monetary gold is also considered a free
convertible
financial asset and is included in international reserves.
Thus, gross international reserves of the Central Bank include
only
liquid foreign assets denominated in convertible currencies, and
are the
total sum of all foreign assets, excluding those in
non-convertible
currencies and Armenian dram, as well as illiquid foreign
assets. If the
CBA performs swap operation with resident banks, international
reserves
change by the sum of the currency exchanged, and their future
flows are shown in the standard foreign currency liquidity
template
Foreign (international) reserves consist of following
components:
1. Gold,
2. SDR holdings,
3. Reserve position in the IMF,
4. Other foreign currency assets.
Gold - consists of standard gold bullion (monetary gold) the
Central Bank
owns (these must be at least 995/1000 pure), as well as gold
on
metal accounts with foreign prime banks and gold deposits at
nonresident financial corporations. Gold is treated as a
financial
instrument because of its historical role in the
international
financial system and high liquidity in the international
markets.
All other non-standard gold the Central Bank owns is not
monetary
gold and should be classified as nonfinancial asset. Holdings
of
other precious metal standard and non-standard bullion are
also
treated as nonfinancial assets and are excluded from foreign
reserves.
SDR holdings - are financial assets created by the IMF and
allocated to
member countries, excluding those in the reserve position.
SDR
holdings represent unconditional rights to obtain other
foreign
exchange or reserve assets from other IMF member countries.
Unlike
other financial assets, monetary gold and SDR holdings are
not
claims on any other party, but at any time may be exchanged
into
claims on nonresidents, i.e. converted into foreign exchange
issued
by a nonresident Central Bank.
Reserve position in the IMF - is expressed in SDR and equals to
the value
by which the quota of the country exceeds IMF holdings of
national
currency that is not related to purchase of reserve asset35.
Other foreign currency assets comprise several financial assets,
which
are included in foreign reserves depending on possibility of
their
use by the Central Bank:
• Cash foreign currency - consist of foreign notes and coins
held by
the Central Bank that are in circulation in one or several
foreign
countries and are legally used for making payments. They may
also
be withdrawn or be under withdrawal but available for exchange
by
banknotes in circulation. Cash foreign currency owned is a
claim
on the issuer country or central bank. Withdrawn notes and
coins,
as well as commemorative coins of all types of foreign
countries
are not included in foreign reserves.
• Correspondent accounts in nonresident banks - comprise the
balances of Central Bank correspondent accounts in foreign
exchange in foreign first class banks.
• Deposits - comprise all deposits of the Central Bank in
foreign
first class financial corporations (including banks).
Restricted
deposits and deposits with limitations are not included into
foreign reserves.
• Securities - foreign reserves include only high liquid bonds
and
shares issued by nonresidents and consist of: (i) promissory
notes
and transferable promissory notes in foreign currency, (ii)
bondsissued or warranted by governments of other countries,
Central
Banks or other prime banks or financial corporations.
• Repo agreements with nonresident financial corporations, as
well
as trust operations with these corporations are also included
in
foreign reserves, if Repo securities are liquid enough and
assets
handed over to trust management can be used by the Central
Bank
for making payments after a very short period of time upon
request.
• Credits - only short-term credits to and used overdrafts
of
foreign first class banks and nonbank corporations in
foreign
exchange (due for payment upon request) are included in
foreign
reserves. This category covers also short-term accounts and
other
short-term receivables of the CBA from nonresidents.
Long-term
loans and receivables are not included in foreign reserves.
Gross Foreign Liabilities of the CBA
Gross foreign liabilities are all claims of nonresidents on
the
Central Bank of Armenia. Like foreign reserves, these claims can
be
denominated in convertible and non-convertible foreign
currencies and in
the Armenian dram. Liabilities denominated in the Armenian dram
included
in foreign liabilities can be treated as convertible, because
unlike
foreign claims on nonresidents, foreign liabilities in dram
are
sufficiently liquid in Armenia, especially as the liabilities of
the
Central Bank. Thus, foreign liabilities of the CBA in dram are
equal to
foreign liabilities in foreign currencies, as they can be
converted into
free convertible foreign currencies upon request.
All liabilities to nonresidents are included in foreign
liabilities
of the CBA, despite accurate measurement of foreign liquidity
requires to
include only short-term (with residual maturity up to one year)
foreign
liabilities. Considering that the CBA's foreign reserves serve
also for
the repayments and servicing of the Governments' foreign loans,
this
safe-side approach is acceptable.
Thus, gross foreign liabilities include:
1. all credits from IMF (direct loans and foreign exchange
purchase-repurchase agreements),
2. correspondent accounts of nonresident banks in the CBA,
3. deposits of nonresidents in the CBA,
4. credits and overdrafts from nonresident banks and other
financial institutions,
5. other liabilities to nonresidents.
Credits from IMF - include credits from IMF covering
Systemic
Transformation Facility (STF) and Poverty Reduction and
Growth
Facility (PRGF, former ESAF).
Correspondent accounts of nonresident banks in the CBA - include
all
correspondent accounts of nonresident banks in the CBA.
Deposits of nonresidents - include all deposits of nonresident
banks,
financial institutions, legal entities, and international
organizations in the CBA.Credits from nonresident banks -
include all credits and used amounts of
overdrafts provided by foreign banks to the CBA.
Other liabilities to nonresidents - include REPO agreements with
foreign
financial organizations and banks, payable accounts to
nonresidents,
liabilities on L/C and all other liabilities to
nonresidents.
Net Foreign Assets of the CBA
Net foreign assets (NFA) are observed to reflect the
external
position of the CBA. NFA are the difference of foreign assets
and foreign
liabilities. NFA are very important indicator for the monetary
policy.
They reveal the influence of external sector on the monetary
indicators.
In particular, it allows estimating the origination of monetary
base
stipulated by acquisition of net foreign assets by the CBA.
The calculation of NFA of the CBA has some features. Several
indicators of NFA are calculated for different purposes:
• general NFA embodies the difference between all foreign assets
and
foreign liabilities of the CBA,
• NFA denominated in convertible foreign currencies embodies
the
difference between the CBA international reserves (i.e.
foreign
assets in freely convertible foreign currencies) and the CBA
foreign liabilities in convertible foreign currencies and
Armenian
dram.
Besides the above-mentioned indicators there is another feature
to
calculate foreign assets (mentioned also in the Sectoral balance
sheets).
Amounts, received from privatization of state enterprises are
accumulated
in the special privatization account of Government in the
CBA,
constituting at the same time part of gross foreign
reserves.
Nevertheless, they are bounded assets and as those are not
included in
NFA.
Thus, besides the above-mentioned indicators, the following
indicators are calculated:
• foreign reserves excluding privatization accounts which is
the
difference of foreign reserves of the CBA and balances on
the
special privatization account of the government,
• net foreign assets in convertible currencies excluding
privatization accounts, which is the difference of CBA net
foreign
assets in convertible currencies and balances on the special
privatization account of the government,
For monetary policy programming purposes NFA are also
calculated
based on fixed (program) exchange rate (Appendices 2.6 and 2.7).
For
certain period of time (usually one year) exchange rates are
fixed not
only for the Armenian dram in respect to other currencies, but
also for
the exchange rates of main convertible currencies in respect to
US dollar
(Appendix 2.5). This allows eliminating the influence of
exchange rate
fluctuations on the level of NFA. Nevertheless, in the case
of
significant fluctuations of foreign exchange rates the NFA
calculated
based on fixed exchange rates can deviate significantly from the
one
based on market rates. That is why NFA are calculated and
published based
on both fixed and market exchange rates, with corresponding
footnotes.
