How is the gross international reserves calculated?

Answer 1

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.