International reserves of the country help to cope with financial crises and protect the economy from external shocks – NBM
This statement is contained in the new information materials of the National Bank of Moldova, which it distributes in partnership with the Independent Analytical Center Expert-Grup as part of the National Campaign for Financial Education of Citizens, informing them on various topics in the financial sector. In its new publication on the topic “What are international reserves and what role do they play in the economy”, the NBM noted that international reserves (official reserve assets) are external assets that are controlled by the country's monetary authorities (in Moldova - the National Bank) and are freely available to them to cover the needs for financing the balance of payments, fulfilling external obligations, currency interventions to mitigate excessive fluctuations in the official exchange rate and for other related purposes, such as maintaining confidence in the national currency and the economy. International reserves are necessary to achieve at least three important goals of the country: managing financial crises, obtaining and repaying foreign loans, attracting investment. As noted by the NBM, international reserves can be considered as an insurance fund or a safety net that allows protecting the economy from external shocks. For example, in the event of a spontaneous increase in prices on foreign markets for products we import (for example, a rapid increase in prices for natural gas or fuel), there may be a need to quickly pay large amounts in foreign currency. The market cannot always cover this need for currency, which can lead to a sudden depreciation of the national currency. To prevent such strong fluctuations, the National Bank can intervene in the foreign currency market, selling the required amount of currency from its reserves and thus avoiding too large fluctuations in the exchange rate. Another example can be panic in the foreign exchange market caused by extraordinary events, such as war. Thus, in February and March 2022, when the population of Moldova “stormed” exchange offices to exchange their lei for US dollars and euros, the National Bank provided the necessary currency to the market by selling about $370 million from international reserves. Thus, it was possible to avoid a sudden depreciation of the Moldovan leu and, as a result, galloping inflation, which could have been provoked without the intervention of the NBM. After the market calmed down, the population began to exchange currency back for lei, and the state's international reserves were restored by the NBM purchasing currency on the market. Thus, international reserves fulfilled their stabilization role - one of the functions for which they were created. As indicated by the National Bank, another use of international reserves is servicing the external public debt. The state collects its income in lei (from taxes and duties), but must repay foreign loans in foreign currency. Therefore, when the Ministry of Finance repays an external loan or pays interest on this loan, payments are made at the expense of international reserves. In the hypothetical absence of reserves, the state's failure to fulfill financial obligations would lead to a deterioration in the country's rating and the impossibility of obtaining external financing to cover budget expenditures. In addition, the volume of international reserves has a great impact on the country's reputation and its attractiveness to investors. When a country has sufficient international reserves, foreign investors have confidence that if they want to withdraw their investments or profits in foreign currency, they can do so at any time without significant losses caused by exchange rate fluctuations. The NBM notes that there are several indicators by which the adequacy of international reserves is assessed: coverage of at least 3 months of imports of goods and services; full coverage of short-term external debt; coverage of 20% of the M2 money supply; coverage of 100-150% of the sum: 30% of short-term external debt + 15% of other external liabilities + 5% of M2 + 5% of exports of goods and services. An important feature of international reserves is security, which means that reserves are kept only in reliable financial institutions and in low-risk instruments issued by institutions with a very good reputation. Another characteristic feature of international reserves is their immediate availability or, in other words, a high degree of liquidity. Liquidity is the ability of assets to quickly and at an acceptable price turn into money. To ensure this feature of reserves, investments are made in highly liquid international assets, such as freely convertible currencies (in cash or on accounts), securities in these currencies and monetary gold.//26.11.2024 – InfoMarket.
