The Central Bank will make its traditional contribution to the budget in April. For 2013 it will be around 100 million levs. The exact amount will become clear in the day the report for 2012 is released by the Central Bank and because the contributions is a result of the annual revenue and expenditure of the Issue Department.
Much more important for the financial stability of the country, however, is not how much money the Central Bank contribute to the budget, but how and
where it invests the foreign exchange reserves of the country.
In one year it grew by 2.71 billion levs, or by 1.39 billion euros. In late March 2013 the overall amount was 27.07 billion levs, or 13.84 billion euros.
The majority – 1.7 billion levs of this growth come from the increase of funds kept by commercial banks in their accounts at the C-Bank. Another 600 million levs is due to higher receipts from various Bank depositors who are not budget structures – such as the Deposit Insurance Fund. The money in the Issue department derived from this growth the National Bank has invested in government and government-guaranteed securities with the lowest possible risk.
In fact, this is the asset side in the balance sheet of the Issue Department and this is the foreign exchange reserves of the country. The claims and liabilities of this department are the financial implications of what the Bulgarian society, politicians and economists call the Currency Board. The amount of foreign exchange reserves is directly dependent on the liabilities of the Issue Department. It comes to notes and coins in circulation, bank claims to the Central Bank, claims of the government (fiscal reserves) and the deposits of the Bank Control Department amounting to 5.96 billion levs. The total amount of these funds must be at least 100% covered by foreign exchange assets – cash and deposits, foreign securities and gold. The value of these assets is converted at the fixed rate – 1 euro for 1.95583 levs.
Foreign exchange reserves are invested under a very strict framework which is described in the Law on the National Bank in order to avoid
the risk of market losses
– for example an abrupt depreciation of the securities of a single country. The reserve can be invested into bank deposits and securities of countries whose credit rating is at least A plus.
The Law on the National Bank envisages a special mechanism that reduces the risk of exchange losses due to the change in the quotations of foreign currencies, such as ones of the U.S. dollar against the euro. It provides that the lev equivalent of reserves invested in currencies other than the euro must not exceed by more than 2% the Bank’s liabilities denominated in the respective currencies. In other words, if the Issue Department of theNational Bank has debts of 10 million dollars, its assets in U.S. dollars may not be more than 10.2 million U.S. dollars. Exception to this rule is only for the special drawing rights (the currency of the IMF), and for the monetary gold.
The revaluation differences of gold made by BNB, which occur due to the movement of the price of the metal, on international markets, does not include the formation of financial results, if there is no physical purchase or sale. They refer to the reserve funds of the Bank.
The operational management
of foreign exchange reserves is done under strict policy that is reviewed every three months by the investment committee of the bank. It sets limits for each of the financial instruments of the different countries that can be bought as investment of the Issue Department. For example, before the crisis, the Bank was buying government bonds of Germany, Spain, Italy, Portugal and other Eurozone countries, as well as municipal bonds from European countries covered by a government guarantee. Even before the end of 2009, however, the volumes for Spain, Italy, Portugal and other risk countries were greatly reduced, and some even canceled so that the Bank may not incur losses on their depreciation.
Underlying assets, which currently (as of end of March 2013) form the bulk of the country’s foreign exchange reserves are German and Dutch government bonds, with almost 100% of the reserves invested in euro. There is a small volume of deposits in dollars, whose total equivalent in Bulgarian levs is about 100 million. They are kept mainly due to the current payments Bulgarian government is carrying out in dollars, mainly to financial institutions of the World Bank group. This is to show, according to experts, that the foreign exchange reserves have a maximum protection against risks of default of certain countries or sharp depreciation of their securities.
Liquidity is guaranteed
through the policy to invest money primarily in instruments maturing for up to one year. Almost all deposits of the Issue Department – or a total 2.78 billion euros are due for payment within six months. The same applies to at least half – 4.73 billion – from the overall investment in foreign government securities. Of course, the Bank invested in the ten-year German bonds, but in most cases it does this when the maturity date is within one year. Clearly, such a policy leads to lower revenues for the Central Bank, because the yield on safe financial instruments in Europe is under half a percent a year. By contrast, however, the Bank may at any time provide cash if the population starts massively transferring Bulgarian levs in euros. It is this high liquidity that guarantees the stability of the currency board and the entire financial system in the country.
The BANKER
