1 

 

Annex:  Foreign Exchange Reserve Accumulation – Recent

Developments and Adequacy Measures1

Global foreign currency reserves rose sharply in the years prior to the global economic crisis, and 

continued to rise in the early months after the onset of the financial crisis, peaking at $7.15 

trillion in July 2008. Between July 2008 and February 2009, during the height of the crisis, 

foreign currency reserves fell by 5.8 percent, largely as a result of efforts by emerging markets 

and some advanced economies to stem currency depreciation.2 Since February 2009, foreign 

currency reserves have resumed their rapid upward rise, reaching $8.1 trillion at the end of 2009. 

This annex examines recent developments in the reserve holdings of the 17 foreign economies 

discussed in this Report. Further, it examines the adequacy of reserves in these economies based 

on standard indicators. Since early 2009, many of the 17 economies have been rapidly reaccumulating reserves, so that holdings in all but 7 exceeded their pre-crisis levels by the end of 

2009. Further, reserves of nearly all the emerging market economies exceed standard adequacy 

benchmarks, and none of the emerging market economies falls short of the benchmarks. 

Reserve Accumulation 

As Figure 1 indicates, these 17 economies account for the bulk of global foreign currency 

reserves (75 percent as of December 2009). The reserves of these economies as a group also 

declined between July 2008 and February 2009, but at a less rapid rate (4.1 percent) than global 

reserves. 

Table 1 shows the monthly growth rate in foreign currency reserves for each of the 17 economies 

in three recent periods: January 2005-July 2008, July 2008-February 2009, and February 2009-

December 2009. In the first period, all 17 economies accumulated reserves, except Switzerland.3

 

Brazil, Russia, and Saudi Arabia accumulated reserves at a rate of more than 3 percent a month. 

In dollar terms, the largest accumulator, China, was adding an average of $29 billion a month in 

foreign currency reserves; far more than Russia, Saudi Arabia, and Brazil, which were adding 

$8.5 billion, $7.4 billion, and $3.2 billion a month on average, respectively. 

During the height of the global economic and financial crisis reserves declined in 12 of the 17 

economies. In the five economies where reserves continued to rise, they did so at a much slower 

pace than in the pre-crisis period. In part, this shift reflected weakening current account 

positions and faltering capital inflows during the crisis period. The decline in reserve 

accumulation also resulted, in some cases, from governments selling reserves to prevent a rapid 

depreciation of their currency. Some governments used a portion of their reserves to fund 

1

 This annex was prepared by Patricia Pollard; see also Russell Green and Tom Torgerson, “Are High Foreign 

Exchange Reserves in Emerging Markets a Blessing or a Burden?” Department of the Treasury: Office of 

International Affairs, Occasional Paper No. 6, March, 2007. 2

 The appreciation of the dollar during the July 2008 to February 2009 period also had an effect in reducing the 

reported value of foreign currency reserves, by reducing the dollar value of reserves held in other currencies. 3

 An increase in reserves does not imply that a central bank was actively adding to its stock of reserves. In some 

cases the increase may have resulted from investment returns on the reserve portfolio. Since central banks tend to 

hold most of their reserves in highly liquid, government securities, these can only explain small increases in 

reserves. 
stimulus programs, and some drew down reserves for both purposes. In percentage terms, the 

largest declines in reserves occurred in Russia and Malaysia. Russian reserves also declined the 

most in dollar terms – $120.1 billion over the 7-month period. 

Between February and December 2009, all 17 economies, with the exception of Norway, Saudi 

Arabia, and Venezuela rebuilt reserves. Switzerland accumulated reserves at a rate of 7.8 

percent a month, more than double the rate of accumulation in any other of the 17 economies, 

and in stark contrast to its loss of reserves in the pre-crisis period. Switzerland’s reserve 

accumulation stemmed from its intervention policy adopted in March 2009 to prevent a rapid 

appreciation of the Swiss franc against the euro and safeguard its recovery, as discussed in the 

main text of this Report. 

In dollar terms, China’s reserves increased by $487.1 billion between February and December 

2009, more than six times the rise of any other economy, as it continued to intervene heavily to 

hold the RMB pegged to the U.S. dollar. This increase was more than the stock of foreign 

currency reserves held by any other economy except Japan. Korea was the next largest 

accumulator of foreign currency reserves in dollar terms, adding $73.3 billion to its holdings. 

Korea’s reserves had declined by $64 billion between March and November 2008, as it sold 

foreign exchange in the face of heavy downward pressure on the won. 

Although the foreign currency reserves of most of the 17 economies stood at record levels by the 

end of 2009, reserves in seven economies (Russia, India, Euro area, Malaysia, Mexico, Norway, 

and the United Kingdom) remained below pre-crisis levels. 

For most of the emerging market economies, the growth in reserves between February and 

December 2009 was associated with an appreciation of the nominal effective exchange rate, as 

shown in Figure 2. For a few countries, most notably China, the increase in reserves was 

associated with a decline in the nominal effective exchange rate, indicating that reserve 

accumulation may have been used to prevent exchange rate appreciation. 

Reserve Adequacy 

Governments accumulate reserves for a variety of reasons. A small amount of foreign currency 

reserves may be needed for day-to-day transactions including debt repayments, payments to 

international organizations, and payments for imports. The latter may be most important for low 

income countries. Countries with pegged exchange rates need to hold reserves to offset 

downward pressure on their currencies. Even economies with flexible exchange rates hold some 

reserves in order to intervene in foreign exchange markets to prevent a disorderly depreciation of 

their currency. Governments also hold reserves to provide a defense against substantial and 

rapid capital outflows that could cause a loss of investor confidence and a currency crisis. This 

self-insurance motive has received the most attention in recent years and is often seen as one 

reason for the increase in global reserves since the financial crises of the late 1990s. 

Although there is no single measure of the amount of reserves a country should hold as insurance 

against a currency crisis, three benchmarks are typically used to provide a rough guide to 

adequacy: reserves to short-term external debt; reserves to a broad measure of money (typically 

M2); and, reserves to imports. 
The three benchmarks are: 

• Reserves sufficient to cover external debt coming due within 12 months. This 

benchmark is the most preferred measure for measuring risk of a capital account crisis. 

During a financial crisis countries have found that they are unable to rollover short-term 

debt. 

• Reserves equal to 5-20 per cent of M2. Reserves in this range are considered adequate to 

support confidence in the value of local currency and reduce the risk of capital flight. 

This benchmark is most relevant to countries with managed exchange rates. 

• Reserves sufficient to cover 3 to 4 months of imports. The reserves to imports ratio is 

considered most relevant to low income countries exposed to current account shocks and 

lacking significant access to capital markets. 

Measures of reserve adequacy for most advanced economies stand in stark contrast to those for 

the emerging market economies (Table 2). With highly developed financial markets, the 

advanced economies, as a group, see little need to hold reserves to reduce the risk of a capital 

account crisis, or signal their credit worthiness to lenders. Central banks of these economies also 

provide swap lines to each other to deal with temporary illiquidity as occurred in late 2008. Only 

Japan has reserves in excess of the adequacy benchmarks across all categories. 

At the end of 2009, all of the emerging market economies in the sample had reserves in excess of 

the benchmarks for import coverage and short-term debt. Most had reserves above the 

benchmark for coverage of the money supply. Saudi Arabia and China had both the highest ratio 

of reserves to imports, with enough reserves to cover imports for more than two years, and by far 

the highest ratio of reserves relative to short-term external debt.4

 China’s reserves could cover 

the short-term debt of all 12 emerging market economies in the table, and still be above the 

benchmark for adequacy. 

The data indicate that not only are the absolute levels of foreign currency reserves rising rapidly, 

but generally so too are the reserves relative to short-term external debt, monetary aggregates, 

and imports. Even the countries that rank highest in terms of these standard indicators of reserve 

adequacy built up reserves through most of 2009. Additional research into adequacy measures 

could help refine our knowledge of these reserve metrics. The IMF, for example, is particularly 

well-suited to pursue this line of research. Even allowing for a high degree of uncertainty around 

the benchmarks, these results indicate that the need to rebuild reserve levels to provide insurance 

against capital crises does not provide an adequate explanation for the strong rise in reserves in 

2009. 

 

 

4

 Most of Saudi Arabia’s reserves are held to smooth consumption during oil cycles and provide for long term 

income needs. 
 

 

China

Korea

Singapore

Taiwan

Brazil

Mexico

Saudi Arabia

Switzerland

Hong Kong

Venezuela ‐10

‐5

0

5

10

15

20

25

30

‐10 15 40 65 90 115

NEER

Foreign Exchange Reserves

Figure 2

Reserves and the Nominal Effective Exchange Rate

(percent change,June 2009‐December 2009)

Russia

India

Malaysia

2500

3500

4500

5500

6500

7500

Jan‐05 Sep‐05 May‐06 Jan‐07 Sep‐07 May‐08 Jan‐09 Sep‐09

billions

Sources:  IMF and HAVER

Figure 1: Foreign Currency Reserves

8500

$

global

17 economies
 M

Table 1:  Foreign Currency Reserves

onthly percentage increase Reserves

Jan 2005‐

Jul 2008

Jul 2008‐

Feb 2009

Feb 2009‐

Dec 2009

Dec 2009   

($ billions)

China 2.62 0.51 2.30 2,399

Japan 0.41 0.05 0.17 997

Russia 3.62 ‐4.23 1.57 399

Saudi Arabia 3.53 0.74 ‐0.68 397

Taiwan 0.43 0.16 1.70 348

Korea 0.52 ‐2.91 2.82 265

India 2.10 ‐3.02 0.80 259

Brazil 3.13 ‐0.26 2.18 229

Euro Area 0.43 ‐2.38 0.46 195

Singapore 1.08 ‐0.69 1.21 187

Mexico 0.94 ‐0.87 0.57 94

Switzerland ‐0.39 ‐0.65 7.76 91

Malaysia 1.46 ‐4.67 0.13 86

Norway 0.27 ‐0.04 ‐0.64 46

Canada 0.70 0.04 0.42 43

United Kingdom 0.73 ‐2.61 0.42 38

Venezuela 0.60 ‐3.64 ‐0.24 17

17 economies 1.58 ‐0.61 1.42 6,091

Global 1.61 ‐0.86 1.58 8,097
18.3 21.8 146.8 122.9 225.0 185.7

9.0 8.0 22.7

7.4

16.3 21.5 37.3 35.0 265.8 320.4

19.2 28.7 27.5 26.7 1249.0 1790.6

14.0 12.6 102.3 339.5 318.3

8.8 9.9 176.0 188.7

7.8 8.4 39.4 29.9 421.2 467.2

4.8 256.2 252.9

20.9 25.1 71.5 77.0 408.1 522.6

31.7 68.4 171.0 176.3 1066.5 1376.7

7.4 9.1 78.7 71.0 126.2 147.9

14.9 24.1 336.6 378.1 730.2 941.1

6.8 33.2 347.1

Table 2: Measures of Reserve Adequacy

Months of Import

Coverage

As a Percent of

M2

As a Percent of

Short‐term Debt

2007 2009 2007 2009 2007 2009

Advanced Economies

Canada 1.2 1.6 5.2 4.8 14.3 16.2

Euro Area 1.2 1.3 1.9 1.6 3.3 3.4

Japan

Norway 17.3 34.7 35.6

Switzerland 3.4 11.2 15.2 7.5 22.5

United Kingdom 0.9 0.9 1.5 1.2 1.6 1.6

Emerging Markets

Brazil

China

India n.a.

Korea 19.2 19.7

Malaysia

Mexico 3.7 17.5 18.5

Russia

Saudi Arabia

Singapore

Taiwan

Venezuela n.a. n.a. n.a.

Notes:  Adequacy Ranges: Imports‐‐2 to 4 months, M2‐‐5 to 20 percent, Short‐term debt‐‐

100 percent.  

Short‐term debt includes all debt with a remaining maturity of one‐year or less.

Numbers bolded in red are above the adequacy benchmark.