Bosnia and Herzegovina: Technical Assistance Report-Implementation of a New Reserve Requirement Framework

International Monetary Fund

No 2019/316, IMF Staff Country Reports from International Monetary Fund

Abstract: This Technical Assistance (TA) report on Bosnia and Herzegovina highlights that the negative spread in a context of structural lower returns on foreign exchange reserves and sizable capital inflows has led to a gradual and steady erosion of the currency board coverage ratio. The Central Bank of Bosnia and Herzegovina (CBBH) requested Technical Assistance to review its reserve requirement framework. The mission recommends aligning the remuneration of reserve requirements on foreign exchange liabilities to the CBBH’s opportunity cost. The mission also recommends prescribing the fulfilment in foreign currency of the reserve requirements for foreign currency liabilities. It also suggested altering the remuneration scheme of domestic reserve requirements. In order to be neutral from an intermediation perspective, the reserve requirement remuneration should be aligned to the market-neutral uncovered interest rate parity rate, whereas the remuneration of excess reserves may take place significantly below the market-neutral rate but at or above the foreign currency remuneration rate. The CBBH may benefit from a constructive dialogue with the Area Department or TA to set the new rates of remuneration of domestic reserve requirement and excess reserves.

Keywords: ISCR; CR; remuneration rate; coverage ratio; opportunity cost; FX reserve; asset yield; management implication; maturing FX funding; reserve requirements; reserve account; Reserve requirements; Currencies; Government liabilities; International reserves; Reserve currencies; Eastern Europe; Southern Europe (search for similar items in EconPapers)
Pages: 55
Date: 2019-10-24
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