Chapter

Appendix 6. Reserve Assets and Currency Unions

Author(s):
International Monetary Fund. Statistics Dept.
Published Date:
October 2013
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A6.1 The purpose of this appendix is to provide further methodological guidance for reserve assets in the circumstance where an economy is a member of a currency union (CU). This appendix draws primarily from Appendix 3 of BPM6, “Regional Arrangements: Currency Unions, Economic Unions, and Other Regional Statements.”

A6.2 The growth in the number of economies who are members of CUs, and, especially, the creation of the euro in the broader framework of the European Union, has led to an increased interest in questions about reserve assets of members of a CU. In particular, questions have arisen about how the methodological advice differs for economies that are residents versus nonresidents of a CU in regard to determining what is a domestic or foreign currency, what claims on nonresidents qualify for reserve asset treatment, and what are reserve-related liabilities. This appendix provides guidance on these and related topics.

What is a Domestic or Foreign Currency?

A6.3 From the viewpoint of national authorities of a currency union, the currency issued by the currency union has some characteristics of a foreign currency in that national authorities do not have the same degree of monetary autonomy as an economy that issues its own currency. Nonetheless, for members of a currency union, “the currency issued in a CU is the domestic currency of the CU. It should always be considered a domestic currency from the viewpoint of each member economy, even though the currency can be issued by a nonresident institution (either another CU national central bank (CUNCB) or the currency union central bank (CUCB))” (BPM6, paragraph A3.16).

A6.4 Reserve assets must be foreign currency assets (BPM6, paragraph 6.64). Claims denominated in the domestic currency are not reserve assets. According to BPM6, paragraph 3.95: “Domestic currency is that which is legal tender in the economy and issued by the monetary authority for that economy; that is, either that of an individual economy or, in a currency union, that of the common currency area to which the economy belongs. All other currencies are foreign currencies.”

A6.5 One consequence of the above is that, in a CU, from a national perspective, holdings of domestic currency can be a claim on a nonresident, but it cannot be a reserve asset.1

What Claims on Nonresidents Qualify for Reserve Asset Treatment?

A6.6 Reserve assets, other than gold bullion, must be claims on nonresidents (BPM6, paragraph 6.65). BPM6, paragraph A3.29, states: “Reserve assets shown in the balance of payments and International Investment Position of the CU should include only those assets that (a) represent claims on nonresidents of the CU and (b) meet the criteria described in Chapter 6. Also, the definition of the reserve assets at the CU level and at the member country level should be the same; in other words, with respect to national data, reserve assets should include only those assets that qualify as reserve assets at the CU level.”2 This approach to reserve asset treatment reflects that the policy decisions for a currency of a currency union are taken at the currency union, not national, level. This treatment is consistent with current practice in currency unions.

A6.7 The above guidance means that reserve assets for a member of a CU must meet all of the criteria for reserve asset treatment that must be met by an economy that is not a member of a CU, and—except for gold bullion—an additional criterion that only claims by a member of a CU on nonmembers of the CU can meet the criteria for reserve asset treatment. Foreign currency claims that meet all the criteria for reserve asset treatment but are claims on residents of the CU should be included in Section I.B. (other foreign currency assets, under the relevant financial instrument) of the Reserves Data Template.

Treatment of National Agencies in a Currency Union

A6.8 The statistical treatment of national agencies in a currency union has implications for the compilation of the Template at the member country and union level. BPM6 identifies two types of CUs, “centralized” and “decentralized.”

A6.9. In the centralized model, a CUCB is owned by the member economies, the common currency is issued by the CUCB, and central bank operations in each economy are carried out by a national (resident) authority. Typically, the CUCB maintains a national office in each member country that acts as the central bank for that economy and that, for statistical purposes, is treated as an institutional unit, located in that economy, and that is separate from the headquarters of the CUCB. (In the rare case where this is not the case, a national office institutional unit is to be created for statistical purposes, to record the central bank transactions and positions with the residents of the domestic economy.) In recording reserve assets at the national level, assets held by the CUCB on behalf of its member economies (including gold, reserve position in the Fund, SDRs, and, more generally, any foreign assets meeting the criteria for reserve asset treatment) that are assigned to a member economy in the accounts of the CUCB, are to be shown in the Reserves Data Template of the member economy. This model is of the type observed in Africa and the Caribbean.

A6.10. In the decentralized model, the CU comprises a CUCB and CUNCBs of the member economies, with the CUCB owned by the CUNCBs. (Thus, in this model, the CUCB is owned by the CUNCBs, whereas in the centralized model, the CUCB owns the monetary authority in each member economy.) In the decentralized model, in each economy, monetary activities with residents of the CU are carried out by national central banks having their own assets and liabilities. Where reserve assets are held by the CUNCBs (i.e., the assets are actually recorded on their balance sheets), the institutional setting may in certain circumstances result in some restrictions on the effective control over these assets by the CUNCBs. That is, CUNCBs may be able to transact in some of the reserve assets only with agreement of the CUCB. Provided there is no transfer of ownership to the CUCB, and the foreign assets owned by the CUNCBs can be mobilized by the CU to meet balance of payments needs (i.e., they are reserve assets of the CU), the lack of complete control due to operational constraints at the CU level should not preclude a CUNCB from classifying them as reserve assets in the national Reserves Data Template. This model type was developed by the euro area in the 1990s.

What are Reserve-Related Liabilities?

A6.11BPM6, paragraph A3.30, states: “Similarly, liabilities classified as reserve-related liabilities in the national data should include only those liabilities that qualify as reserve-related liabilities at the CU level.” This means that, similar to the treatment of reserve assets (which includes selected claims on nonresidents of the CU and excludes all claims on residents of the CU), reserve-related liabilities should include selected liabilities to nonresidents of the CU and exclude all liabilities to residents of the CU.

A6.12 However, predetermined and contingent short-term net drains on foreign currency assets (reported in Sections II and III of the Reserves Data Template) should include the monetary authorities’ short-term foreign currency obligations to all counterparties, including to other economies in the CU, to economies outside the CU, and to residents of the same economy. This treatment is consistent with that for economies that are not in a CU (see paragraphs 141 and 180 of these Guidelines).

For IMF operational purposes, there may be instances where the IMF provides financial assistance under a Fund-supported program to a member of a currency union that ultimately results in the member holding increased amounts of its domestic currency to address its balance of payments needs. For instance, from a Fund legal perspective, the euros acquired by euro area members have a dual nature in that a common currency such as the euro has characteristics of both a “domestic” and a “foreign” currency to euro area members. Indeed, the sale of euros by the Fund to a euro area member drawn on another member’s account with the Fund is regarded, for operational purposes, as a sale of another member’s currency, which is authorized by the Articles of Agreement (Article V, Section 2(a)), as euros held by euro area member countries can be claims on nonresidents.

The reference to Chapter 6 in this paragraph refers to that chapter in BPM6. For additional information, see also Appendix 7, “Frequently Asked Questions,” in this document.

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