Reserves and related items group E

Group E consists of official reserve assets, the use of IMF credit and loans, and exceptional financing. These categories represent only purchases and sales by official monetary authorities, such as the Federal Reserve System of the USA or the Bank of England. Changes in reserves and related items are necessary to account for the deficit or surplus in the balance of payments.

Reserve assets are government-owned assets. They include monetary gold, convertible foreign currencies, deposits, and securities. For most countries, the principal convertible currencies are the US dollar, the British pound, the euro, and the Japanese yen. Credit and loans from the IMF are usually denominated in special drawing rights. Special drawing rights (SDRs), sometimes called "paper gold," are rights to draw on the IMF. SDRs can be used as means of international payment. Exceptional financing is financing mobilized by a country's monetary authorities that is not regarded as official reserves. Examples of this account include postponing the repayment of foreign-currency debt and drawing on private bank loans to finance transactions that would otherwise deplete the country's reserve assets.

The reserve account of a country also includes its liabilities to foreign official holders, which constitute foreign authorities' reserves. A country's liabilities to foreign official holders are sometimes called its foreign reserve assets. For example, US liabilities to foreign official holders, such as the European Central Bank or the Bank of Japan, refer to foreign official deposits with US banks and official holdings of US Treasury securities. Foreign governments frequently wish to hold such assets in the USA because of their interest earnings.

Foreign currencies account for approximately 90 percent of the total reserve assets held by IMF member countries. Among foreign exchanges, the US dollar has been, and still is, the most important asset. Table 3.2 shows that the dollar share of world foreign-exchange reserves declined from 1987 to 1990, increased from 1993 to 1998, and has been relatively flat at around 68 percent since 1998.

Some economists forecast that the dollar, which represented 76 percent of world reserves in 1976, will lose market share in the years ahead. Because Europe created its new single currency, known as the euro (€), on January 1, 1999, some governments and many private investors are likely to switch some of their reserves out of dollars and into euros. The creation of the euro is regarded as the most important development in the international monetary system since the end of the Bretton Woods Agreement in 1973. In addition, many governments desire to diversify their reserve portfolios.

The net result of all activities in groups A—D in table 3.1 must be financed by changes in reserves and related items. Thus, these two items — "Total, groups A—D" and "Group E" — are identical except that the sign is reversed. In other words, the net result of all activities in groups A—D was financed by various accounts in group E.

Accounting treatment of the reserve account The reserve account presents a great difficulty when one tries to classify its transactions either as debits or credits. On the one hand, an increase in any of the reserve assets represents a use of funds or a debit entry (—) in the balance of payments. On the other hand, a decrease in any reserve asset indicates a source of funds or a credit entry (+). By the same token, a decrease in any official liability is entered as a debit, and an increase in any official liability is recorded as a credit. In other words, any transaction that finances the balance-of-payments surplus should be recorded as a debit (increase in reserve assets and decrease in official liability); any transaction that finances the balance-of-payments deficit should be recorded as a credit (decrease in reserve assets and increase in official liability).

Was this article helpful?

0 0
Forex Fortunes Guide

Forex Fortunes Guide

Guaranteed To Transform You Into A Professional Trader. This Book Is One Of The Most Valuable Resources In The World When It Comes To Create Fortunes Guide. The Mindset Behind The Most Successful Forex Traders In The World. The Costs of NOT Getting All The Info You Need Are Just Too High.

Get My Free Ebook

Post a comment