Measuring reserves and assessing international reserves adequacy in fully dollarized economies can be challenging. The role of international reserves may be different for these countries compared to countries with their own currencies. In addition, quantifying external risks and the opportunity costs that they face may be complex. This paper complements existing research by: first, exploring the challenges and judgements needed in measuring international reserves in dollarized economies according to country circumstances; and second, deriving a “synthetic” measure of international reserves for Panama and assessing its adequacy. As Panama does not have official international reserves, this paper proposes to use the statutory liquid assets in its banking system as its closest approximation. The paper is arranged in six parts: Section A provides an introduction. Section B summarizes the experiences of a sample of dollarized countries. Section C illustrates a stylized balance sheet of a central bank, depicting how international reserves are shown in a country with a central bank. Section Sections E discusses the liquidity buffers in Panama’s banking sector, while Section F synthesizes the illustrative measures of Panama’s international reserves to gauge reserves adequacy using the IMF metric. Section G discusses an indicator for government liquidity. Finally, section H concludes with a discussion of the policy implications.
1. RMI faces several long-standing issues. RMI is a fragile state, located remotely in the Pacific. Its small and dispersed population with high migration rates to the U.S. constrain potential growth. RMI is very vulnerable to climate change because of its low elevation. Sizable budgetary grants under the Compact of Free Association Agreement (COFA) 1 between the Republic of Marshall Islands (RMI) and the United States (US) will expire in FY232, 3. The loss would be only partially compensated by disbursements from a Compact Trust Fund (CTF) set up for this purpose, and RMI could face substantial budget deficits (“fiscal cliff”) without offsetting policy measures. The US and RMI administrations are currently negotiating a new agreement, but the terms are uncertain.