International reserves are external assets controlled by the country's monetary authority, the National Bank of the Republic of Moldova, and are available to cover the needs of financing the balance of payments, to honor the state's external commitments, to make foreign exchange interventions in order to mitigate excessive fluctuations of the official exchange rate. The external objectives include maintaining confidence in the national currency and the economy. The explanations were provided by the central bank, in partnership with the Independent Think Tank “Expert-Grup", within the National Financial Education Campaign, IPN reports.
"The international reserves can be considered an insurance fund or a safety net, which allows the economy to be protected from external shocks. For example, in the case of a spontaneous increase in prices on foreign markets of products we import (for example, rapid rise in the price of gas or fuel), the need to quickly pay large amounts in foreign currency can arise. The market cannot always cover this need with the currency available at that time, which can generate the sudden depreciation of the national currency. In order not to allow strong fluctuations, the central bank can intervene on the foreign exchange market and sell the necessary amount of currency from reserves and thus avoiding big jumps in the exchange rate," explained the National Bank of Moldova.
The panic in the forex market, caused by extreme events such as a war, is another example. For example, in February and March 2022, when the population of the Republic of Moldova stormed the exchange units of banks and exchange offices to convert their lei into dollars and euros, the NBM provided the necessary currency on the market, selling about US$370 million from international reserves. Thus, the sudden depreciation of the Moldovan leu and, implicitly, a galloping inflation, which would have been triggered if the NBM had not intervened, were avoided.
The international reserves can also be used to service the external public debt. The state collects its revenues in lei (from taxes and fees), but must repay foreign loans in foreign currency. Therefore, when the Ministry of Finance repays a foreign loan or pays interest on this loan, payments are made from the international reserves.
Also, the volume of international reserves has a major impact on the reputation of the state and its attractiveness to investors. When the country has sufficient international reserves, foreign investors have the certainty that, if they intend to withdraw their investments or repatriate their profits in foreign currency, they can do so at any time, without significant losses caused by exchange rate fluctuations. The state's incapacity to provide investors with this certainty, due to the insufficiency of international reserves, can lead to a reduction in new investments and the closure of foreign-owned enterprises.
The National Financial Education Campaign is carried out with the support of USAID MISRA (Moldova Institutional and Structural Reforms Activity).
