AN ASSESSMENT OF RESERVE ADEQUACY IN THE REPUBLIC OF CROATIA

In 2017, international reserves of the Republic of Croatia amounted to approximately 19 billion US dollars, which was about 32% of Croatia's gross domestic product. The two main reasons for holding international reserves are maintaining foreign currency liquidity and an exchange rate level or volatility management. Maintaining foreign currency liquidity means to achieve availability and liquidity of international reserves for the potential balance of payments needs. In the case of financial crises, a country with adequate reserve holdings will suffer smaller gross domestic product decline. Likewise, the Republic of Croatia uses international reserves to maintain a managed floating exchange rate regime, that is, for intervening in the foreign exchange market in order to reduce exchange rate fluctuations. The goal of this paper is to assess international reserve adequacy of the Republic of Croatia in the period from 2013 to 2017. In the paper, for an assessment of reserve adequacy, both traditional and combination metrics are used. With respect to combination metrics, among several approaches, the following two are applied: the one proposed by the International Monetary Fund [IMF] (2011a, 2011b, 2013a, 2013b, 2015) and the other suggested by Mwase (2012). The research results indicate that the level of international reserves of the Republic of Croatia is adequate only in 2017 according to the metric proposed by the IMF (2011a, 2011b, 2013a, 2013b, 2015). However, according to the metric suggested by Mwase (2012), the level of international reserves is inadequate over the whole observed period.