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Working Paper 178 - Holding Excess Foreign Reserves Versus Infrastructure Finance: What should Africa do?
“The value of this analysis of the funding of the reserves is that it enables the authorities to ascertain the true cost of holding reserves. If the reserves are treated simply as an asset portfolio with no funding or corresponding liabilities, the income on the reserves looks like a net gain for the authorities. An approach which takes into account the true method of funding the reserves will show that in many cases the net financial outcome from holding reserves may even be a loss, especially in those cases where comparatively low-yielding foreign assets are financed with higher-yielding domestic borrowings. And even a positive return may not be optimal; the key question is whether higher returns, after allowance for risk, could be made elsewhere (e.g through investment in the country’s domestic infrastructure).”