International Reserves, Exchange Rate Differences and the CNB’s Financial Result

Published: 14/1/2020
Publication Surveys
Issue S-38
Author Igor Ljubaj
Date January 2020
JEL E58, E59, N20
ISSN 1334-014X


international reserves, CNB, financial result, exchange rate differences, financial independence


International reserves are liquid foreign assets readily available to the central bank for mitigating the effects of possible balance of payments imbalances. When monetary policy is based on maintaining the stability of the domestic currency, as it is the case of the Croatian National Bank (CNB), the role of international reserves is even larger; international reserves as foreign exchange assets usually account for most of the central bank’s assets, while liabilities are denominated in the domestic currency, so that a currency mismatch between the assets and the liabilities tends to arise. Any change in the exchange rate of the domestic currency against world reserve currencies will lead to the calculation of unrealised exchange rate differences. This also was why in 2017 and 2018 the CNB recorded the first negative result since 2003. In 2017, it was mostly due to the strengthening of the euro against the dollar in the global foreign exchange market, while in 2018, it was due to the strengthening of the kuna against the euro. As a result of both circumstances, international reserves in kuna terms were reduced, while, excluding the exchange rate differences, the CNB's revenues exceeded expenditures, as they had in all the previous years. The large amount of exchange rate differences was also a consequence of the considerable increase of international reserves in the recent period, exchange rate differences thus being much larger for the same change in the exchange rate. Some central banks, indeed, lost their entire capital because of the large foreign exchange losses. The CNB’s capital was never in jeopardy, because losses were easily covered from general reserves created in the previous years. For the CNB, accession to the euro area will require the application of ECB accounting guidelines, which are more appropriate for the central bank’s operation. Then, because of a different accounting treatment, exchange rate differences will no longer impact the financial result in the same way as it does today. This will increase the stability and predictability of the financial result, as well as the probability of the allocation of profits to the state budget.