Abstract
The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.
Summary of WP/92/107
“Fund Transactions and Reserve Creation” by Samir Fawzi
Many Fund transactions result in the creation or absorption by the Fund of international reserves in the form of foreign exchange and Fund-generated reserve assets. Sales of members’ currencies and SDRs by the Fund--mainly in purchase transactions --allocations of SDRs, and borrowing by the Fund from members in their own currencies generally increase the level of international reserves held by monetary authorities. Repurchases by members of their outstanding obligations to the Fund in currencies and in SDRs and repayments of Fund borrowing in the creditor’s own currency tend generally to have a contractionary effect on the level of members’ reserves.
This paper illustrates the immediate, as well as the second-round, effects of Fund transactions on the gross reserves of the members involved, taking account in each case of the currency used and members’ positions in the Fund. In a Fund transaction, the effects on members’ international reserves differ according to the currency used, and the choice of currency or currencies to be used is determined by the Fund. The purchase of a freely usable currency (any of the G-5 currencies) adds that currency to the purchaser’s reserves, whereas a purchase of another currency converted--at the purchaser’s request-- into an equivalent amount of a freely usable currency does not have the same effect because the central bank of the member whose currency the Fund used buys back its currency and transfers to the purchaser a freely usable currency that is already part of the existing stock of international reserves. Different effects on members’ reserves also result from their positions in the Fund at the time a transaction is undertaken. A purchase in the reserve tranche of the currency of a member not indebted to the Fund adds the amount of the purchase to international reserves, reflecting the increase in the reserve tranche position of the member whose currency is used, while the composition, but not the total, of the reserve holdings of the purchaser changes. If the member whose currency is purchased is indebted to the Fund, then there would not be any reserve creation because the reduction in the Fund’s holdings of its currency is normally attributed to repaying outstanding liabilities to the Fund.
The paper also estimates the net annual reserves created or absorbed by the Fund in the 1980s. Fund transactions resulted in additions to international reserves in the first half of this decade and to reserve declines in the latter half. These changes in reserves created or absorbed by the Fund were found to be negatively correlated with changes in other nongold reserves for most of the 1980s. This negative correlation reflects the fact that the demand for Fund resources (which by itself generates reserves) generally increases (falls) when world liquidity is relatively tight (plentiful), the Fund can, therefore, be seen as a natural “shock absorber” in the face of exogenous supply or demand shifts in the members’ external transactions, thus contributing to a stable international monetary system.