Reserve assets

Reserve assets, unlike other items in the financial account, are under the direct control of the state and can be used by it to achieve the goals of economic policy.

Reserve assets (reserve assets) – international highly liquid assets of the country, which are under the control of its monetary authorities or government and at any time can be used by them to finance the balance of payments deficit and regulate the national currency.

It should be noted that reserve assets are only the second echelon of protecting the balance of payments. In case of significant account imbalance current operations, i.e. the lack of an inflow of sufficient funds to pay for the import of goods and services, the government at first usually resorts to measures such as currency devaluation to stimulate exports or attract additional external loans. Only when the possibilities of these measures have been exhausted (the depreciation leads to hyperinflation, and they do not give new external loans) does the government use reserve assets to pay external accounts. Most often, the availability of sufficient reserve assets is considered as a moral and psychological tool to maintain confidence in the national currency, to ensure the attraction of external loans and maintain macroeconomic stability.

Reserve assets shown in the balance of payments include only real-life assets. Even if it is fundamentally possible to conclude an agreement between the national central bank and the foreign central bank on the operation of swaps, the potential possibility of obtaining reserve assets under such agreements does not give rise to classifying them as real-life reserve assets of the country. However, national assets pledged to non-residents are reserve assets. Thus, the main criterion for classifying or not classifying an asset as a reserve is to determine whether the government or the central bank can exercise real and direct control over it. In the narrow sense of the word, they can only control the assets that belong to them. However, since the government exercises control over the entire territory of the country in the broad sense of the word, almost any asset belonging to the residents of a given country falls under its control. But for the purposes of the balance of payments, control over reserves is considered real and direct only if they are owned by the monetary authorities. If commercial banks legally own foreign assets, but they can only perform operations on conditions established by monetary authorities, then it is believed, that the monetary authorities have direct and real control over these assets. Reserve assets also include highly liquid government assets. For example, government accounts in foreign currency are a reserve asset, while state-owned mansions or land abroad are a foreign asset, but cannot be considered a reserve asset, since this type of asset is not liquid enough (cannot be quickly converted into cash and used to finance the balance of payments).

Of course, reserve assets do not lie in dead cargo, they are invested in highly liquid and usually the most reliable monetary instruments in the global financial market – treasury bills, shares of large companies, part is simply deposited with foreign banks. A specific case of reserve asset investment is the purchase of World Bank bills that use the collected funds to help developing countries. Balances in government foreign currency accounts, loans provided to international organizations, central bank currency swaps with commercial ones are also considered reserve assets. If some country provides in some form foreign currency funds to a foreign country, then these funds can be considered a reserve asset of the creditor country only if they are paid by the debtor at the first request of the creditor, are repaid from the reserve assets of the debtor and are an obligation to the central bank or the government of the creditor country. If these three conditions are not met, then the funds provided to a foreign state are no longer considered reserve assets of the creditor country.

In general, reserve assets, the change of which is shown “under the line” in the balance of payments, represent the amount of the following assets:

Monetary gold is sample gold not lower than 995/1000, located in the storage facilities of the Central Bank or government, which at any time can be sold for foreign currency in the world market or to international organizations. Non-metallic gold may be at the disposal of any resident and is not considered a reserve asset. Monetary authorities can increase their stocks of monetary gold by monetizing it – buying mined gold in state reserves and purchasing commercial gold in private markets. Monetary authorities can also sell part of the monetary gold from stocks, thereby dismantling it; Special Drawing Rights (SDRs) – IMF-issued artificial reserve asset, which is distributed among member countries in accordance with their quotas and which can be used to purchase foreign currency, provide loans and make payments. Countries can purchase SDRs from each other, make payments to SDRs. However, SDRs represent no more than 3% of the world’s reserve assets and for practical purposes do not play a significant role; The reserve position in the IMF is the amount of the reserve tranche (share) of the country in the IMF and the debt from the IMF to this country. The reserve tranche is 25% of the country’s quota in the IMF capital and can be obtained back by the country with virtually no conditions. Purchases of foreign currency for the national as part of the reserve tranche, which is not considered a loan from the IMF, as well as obtaining an IMF loan, lead to an increase in the reserve assets of the purchasing country; Currency assets are usually the most significant part of international assets, consisting of requirements for non-residents in the form of foreign currency, bank deposits, government securities, other securities, financial derivatives, shares of private enterprises and claims arising from agreements between national and foreign Central Bank, as well as government bodies; Other requirements are the residual category, including all other requirements in foreign currency (cash currency or deposits) or securities that may be included in the definition of international assets of the Central Bank.

In the financing part of the balance of payments, which, by definition, shows the flows of real and financial resources, it is not the reserves that are reflected, but the flows of reserve assets, i.e. change in reserve assets at the beginning and at the end of the year.