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ECONOMY
because central banks can never be so the foreign-exchange reserves, and during
certain whether they own sufficient foreign- the crisis from 1998 the Russian central
exchange reserves, they behave as bears: the bank within a period of one month spent
more fat they build up in summer, the more as much as 40% of the foreign-exchange
peaceful winter they will have reserves.
“ideal” measure of foreign-exchange re- The recent experience of the large de-
serves, the governors of central banks, the veloping countries also confirms that these
ministers of finance, the investors, and the unpleasant events are not isolated histori-
market analysts often give different esti- cal episodes, and that the story repeats. For
mations of the level of foreign-exchange example, the Chinese foreign-exchange re-
reserves. In this regard, there is an illustra- serves reached 4,000 billion dollars in the
tive example about China, the country with middle of 2014, and then, in less than one
the greatest foreign-exchange reserves. year, they reduced to 800 billion dollars,
Hence, in 2003, when the Chinese foreign- which is a fall of 20%. Russia experienced
exchange reserves were approximately 400 a similar destiny, and during 2014 it lost
billion dollars, the International Monetary approximately 130 billion in the defense of
Fund estimated them as more than suffi- the national currency, i.e. approximately
cient, measured according to the conven- 30% of the foreign-exchange reserves. Dur-
tional measures. In 2006, the foreign-ex- ing 2014/2015, Indonesia and Malaysia lost
change reserves doubled, and the Governor 13.5% and 30% of the foreign-exchange re-
of the Chinese central bank (People’s Bank serves, respectively, while Saudi Arabia
of China) assessed them as “sufficient”. In spent approximately 120 billion dollars in
2011, the foreign-exchange reserves were as 2015 (16% of the foreign-exchange reserves).
much as 3,000 billion dollars and the Lon-
don “Economist” assessed them as vast. It seems that this insecurity in terms
When in May 2014 the reserves reached of the adequate level of foreign-exchange
4,000 billion, the Chinese Prime Minister reserves leads to accumulation of greater
stated that they are a “great burden”. How- reserves by central banks within time, in
ever, in October 2015 the “Financial Times” order to eliminate the speculations about
wrote that even 3,500 billion are “too lit- their “adequacy”. In addition, after spend-
tle”. As one can notice, for slightly longer ing an important part of foreign-exchange
than a year, the Chinese foreign-exchange reserves in the periods of crisis, in the fol-
reserves were estimated from “excessively lowing period the developing countries in-
large” to “insufficient”. crease the reserves at even a greater level.
Such behavior of central banks certainly
Closely related to this issue is the per- represents part of the explanation of the
spective that the change of foreign-ex- trend of constant growth of foreign-ex-
change reserves in a specific time period change reserves. Namely, because central
has more meaning than the absolute level banks can never be so certain whether they
of reserves. Actually, experience shows own sufficient foreign-exchange reserves,
that on several occasions the developing they behave as bears: the more fat they
countries were forced to spend major part build up in summer, the more peaceful win-
of their foreign-exchange reserves whereby ter they will have. Of course, the storage
what previously seemed sufficient or great of foreign-exchange reserves causes great
level of reserves, melted after a short time, costs (low or negative interest rates, costs
encouraging the central banks to increase for storage of gold and a missed opportu-
the foreign-exchange reserves even more nity from their investment for produc-
in the following period. Hence, during the tive purposes), however the central banks
Asian crisis, Malaysia, Indonesia and Thai- rather prefer the security in terms of costs.
land spent approximately 25% to 35% of And in this regard, the foreign-exchange
reserves have a crucial role as a support of
the credit rating of the state debt giving se-
curity to the investors that the country is
able to pay its future obligations.
24 September 2016
