Foreign exchange reserves

Foreign exchange reserves are a stock of foreign currencies held by the national central bank, the possession and change of the amount of foreign exchange reserves is one of the instruments allowing the government obliged to defend a fixed exchange rate, to maintain this exchange rate.

History

In the first period of Polish economic changes, foreign exchange reserves were extremely small. However, with the increase of modernization and openness of the country to what the world offers, foreign capital began to reach our country. The National Bank of Poland exchanged foreign currencies such as the dollar, franc and brands for the Polish currency, which was transferred to the purchase of privatized enterprises. The nineties were the time when they were the largest increases in Polish foreign exchange reserves. At that time, foreign exchange law was in force, so financial institutions and exporters had to sell foreign currencies to the National Bank of Poland. Since about 1998, you can see a regular increase in reserves, all due to exchange rates and reserve supervision activities.

Where are the reserves from?

Foreign exchange reserves arise at the moment when the central bank acquires currencies, for example, it buys the euro from the executive, which is obtained from European Union funds. In order to pay for this currency, the National Central Bank circulates the Polish currency. The bank can not finish this because it would lead to inflation and its main task is to keep prices at the same level. So he is obliged to collect the surplus of the zloty from the market. Thanks to that, it uses the sale of short-term securities that bear interest. At the expense of interest is this fact, it should be equated with profit from managing foreign exchange reserves.

Value of reserves

The central bank's foreign exchange reserves are designed to:

• Emphasize the creditworthiness of the state, as a result, reduce the cost of financing on the global economy and barriers to instability of the zloty exchange rate.
• Guarantee covering coverage from abroad and imports

Currencies dominating in the NBP structure

Nominations outclassing in the structure of the National Bank of Poland:

• Dollar
• Euro
• Pound

Foreign exchange reserves in Europe

With reserves, the European Central Bank has sufficient liquidity reserves to cope with currency tactics in the event of a crisis. These resources were created from the capital provided by the national central banks of the euro area with the start of the third phase of the economic and monetary union. When controlling foreign exchange resources, the European Central Bank uses further criteria:

• Return on investment
• variability
• Safety

The budget of the European Central Bank's foreign exchange reserves includes:

• American dollars
• Japanese yen
• Chinese yuan
• Gold
• A conventional monetary unit

The distribution of reserves over time is evolving as a result of the correlation between the value of the capital investment rate and the interference of the European bank in exchange rates and gold prices. The European Central Bank is tasked with coordinating reserves in currencies such as the dollar, Japanese yen and the Chinese yuan. On the other hand, operational processes are centrally managed by national banks and they are able to supervise jointly. When the European Central Bank wants to monetize gold, it strictly adheres to central bank agreements. The European Central Bank must approve the tasks carried out by the central national banks regarding foreign exchange reserves. This condition applies to exchanges that may affect exchange rates, liquidity management or go beyond the standards set by the European Central Bank. Precedence is currency exchange, which fulfill obligations towards international systems, i.e. The Bank for International Settlements or the International Monetary Fund. However, the investment activities of the national central banks on foreign financial economies are not dependent on the ECB's prior approval, as they do not affect the Group's monetary and exchange rate policy.

Country classification

At the end of 2014, Poland was ranked nineteenth in the world in terms of the amount of foreign exchange reserves. And from information in 2017, she found herself in the main five nations of the European Union. For four years from 2009, there was a dual increase in reserves in Poland, which resulted in an increase in authenticity in the field of international contacts. At the time of signing the Accession Treaty, the National Bank of Poland became the national central bank of the Eurosystem. It is his duty to donate a fragment of foreign exchange reserves to the European Central Bank, gaining the right to participate in the process of disposing of the reserves of European Banks. The first place in the ranking of countries with the largest foreign exchange reserves falls to China, according to information in 2017, it amounted to over US$3 million. However, the specialists speak a bit with bias on this subject because it is important how the stability of the economy influences. In this case, China falls to the third place in the overall ranking, while the leader is Saudi Arabia, where reserves cover almost five years of imports. Poland's foreign exchange reserves would be enough for about half a year.

Changes in foreign exchange reserves

Changes in foreign exchange reserves cause changes in the demand for money:

• In the situation of surplus in the balance of trade - an increase in foreign exchange reserves causes a decrease in demand for money and allows a reduction in the money supply deficit (by buying more foreign currencies from exporters than selling to importers)
• In a situation of a deficit in the trade balance - a decrease in the amount of foreign exchange reserves results in an increase in demand for money and allows a reduction in the excess money supply (the central bank sells more foreign currencies to importers than it buys from exporters)

If the situation of the oversupply of money is serious and the foreign exchange reserves are reduced so that they are depleted, the government may apply for a loan to top up its foreign exchange reserves with the International Monetary Fund.

Foreign exchange reserves — recommended articles

Currency crisis — Forward market — Money emission — European monetary system — Deposit rate — Currency Convertibility — Capital flow — Inflation target — International Monetary Fund

References

• Rodrik, D. (2006). The social cost of foreign exchange reserves. International Economic Journal, 20(3), 253-266.
• Polterovich, V., & Popov, V. (2003). Accumulation of foreign exchange reserves and long term growth.
• Mohanty, M. S., & Turner, P. (2006). Foreign exchange reserve accumulation in emerging markets: what are the domestic implications?. BIS Quarterly Review, September.