The World Bank has evaluated the initiated foreign reserve management reform, urges to focus on a longer-term investment horizon
The World Bank experts, who performed the analysis of the Bank of Lithuania’s foreign reserve management function, gave a positive assessment of the foreign reserve management reform started with the establishment of the Banking Service; however, they recommend to lengthen the investment horizon and reduce the concentration on the short-term financial result of the Bank of Lithuania. According to the experts of the World Bank, without changing the foreign reserve investment direction, the possibilities to receive higher return on investment will be reduced.
“The main conclusion of the World Bank is very clear – the attempt to guarantee the short-term profit shown on the annual financial statements deprives of the possibility to earn much more. Therefore, it is proposed to increase the investment horizon to several years and avoid giving priority to the Bank’s financial performance result. Although the choice of such investment strategy may determine a negative return in some years, it would still be significantly higher in the long run. The average annual income of Lithuania from foreign reserve management could grow by 0.2–0.4 per cent of GDP”, said Mr. Darius Petrauskas, Deputy Chairman of the Board of the Bank of Lithuania.
The World Bank experts have also underlined that the Bank of Lithuania has highly qualified staff, good systems and appropriate infrastructure required for investment; however, at the same time, it is recommended to expand the range of financial instruments and to diversify investment more widely. This is the objective foreseen for the newly established Banking Service.
“In the environment of particularly low interest rates, the usual and very cautious foreign reserve management methods of central banks are increasingly less efficient. Currently, market participants even need to pay themselves for a possibility to invest in particularly safe debt securities. Therefore, in order to attain the desirable return on investment, we must inevitably search for new possibilities and tools to expand the investment risk tolerance limits”, said Mr. Mindaugas Vaičiulis, Director of the Banking Service of the Bank of Lithuania.
To ensure more effective foreign reserve management, the World Bank also encourages reviewing the distribution of functions related to foreign reserve management at the Bank of Lithuania. It is proposed for the Board of the Bank of Lithuania to take only the highest level strategic decisions, while the tactical implementation of strategic decisions would be entrusted to a higher extent to the Banking Service, which would also perform day-to-day market operations.
This would give investment management more flexibility and efficiency and increase the Banking Service’s responsibility when taking investment decisions.
The Bank of Lithuania will prepare new foreign reserve management guidelines according to the World Bank recommendations.