The Bank of Lithuania is responsible for managing foreign reserves in implementing the primary objective of the Bank of Lithuania and ensuring the reliability of the litas exchange rate system, requiring that Bank of Lithuania gold and foreign exchange reserves fully cover the litas in circulation. The foreign reserves of the Republic of Lithuania consist of the following: gold, foreign currency reserves, assets in foreign currency located abroad, Special Drawing Rights (SDRs) and reserve position in the IMF, other generally recognised foreign assets.
Principal Provisions of Bank of Lithuania Foreign Reserve Management
The Principal Provisions of Bank of Lithuania Foreign Reserve Management are aimed at presenting a public explanation of the goals of Bank of Lithuania foreign reserve management policy and its main principles.
The Provisions stipulate that foreign reserve management has to ensure a sufficient amount of liquid financial resources for undertaking interventions in the domestic foreign exchange market at any time to maintain the fixed exchange rate of the national currency against the anchor currency. To achieve this aim, foreign reserve management is primarily guided by liquidity and safety principles. Subject to meeting the requirements raised by the above principles, the profitability principle is followed next, i.e. investment is made with the goal of achieving a maximum return over a long period.
The Bank of Lithuania, like other central banks, inevitably faces foreign exchange rate risk, which is why foreign reserves are held in the currency with respect to which the national currency is pegged (the euro).
Bank of Lithuania foreign reserves are structured into two major parts: liquidity and investment portfolios that are subject to individual investment strategies.
Liquidity portfolio foreign reserves are primarily meant to ensure the urgent need of liquidity by the Bank of Lithuania, mostly determined by Bank of Lithuania operations in the domestic foreign exchange market. Therefore, the formation of the investment strategy for this portfolio is based on a short, one-month, investment period.
With respect to the investment portfolio management strategy, the profitability requirement is more significant. The investment strategy for this portfolio is based on a one-year investment period.
Given the fact that in cases of global economic and political shocks gold reserves serve as the ultimate reserve in the modern financial system for meeting the essential needs of a country, the Bank of Lithuania does not intend to change the amount of the available gold reserves, with the exception of the possible transfer of a part of foreign reserves to the European Central Bank.
The Bank of Lithuania invests its foreign reserves in transparent, regulated, large and liquid financial markets that facilitate smooth and effective management of foreign reserves (to see the whole document).
