UNCTAD Virtual Institute for Trade and Development
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Sovereign Asset and Liability Management: An E-Learning Training Course
I. The Accounting/Financial Balance Sheet
II. Sovereign Asset and Liability Management Framework: Approach I
III. Sovereign Asset and Liability Management Framework: Approach II
IV. Sovereign Asset and Liability Management Framework: Approach III
V. Contingent Liabilities
i. Explicit Liabilities: Guarantees
ii. Implicit Liabilities: Financial Sector Bailouts and Natural Disasters
iii. Managing and Mitigating Contingent Liabilities



Sovereign Asset and Liability Management Framework: Approach II

In addition to taxes and revenues, foreign reserves held by the Central Bank (“CB”)(1) represent a major financial asset of sovereigns.  Expanding upon the simplified balance sheet presented earlier, the CB’s foreign reserves could be included on the balance sheet in order to match the currency, interest rate, and maturity characteristics of these reserves with the holdings of the debt portfolio.  Foreign exchange reserve management in coordination with debt management can serve as the first step in implementing a coordinated SALM framework.  In and of itself, simply matching or closely matching, foreign exchange reserves and sovereign debt can mitigate systemic failures due to currency risk.

For more on the appropriate level of reserves, please see Module IV, Section I (i.) “Currency Matching”

Conceptual Balance Sheet





Present value of stream of taxes and other revenues

Present value of government outlays, net of debt servicing

Foreign exchange reserves held by CB

Market value of net government debt



“The government’s balance sheet risk would increase if the government invested its foreign currency reserves in dollar deposits and financed the investment with long-dated borrowing in a different currency.  The government would then have a currency and interest rate mismatch.  Market risk associated with the government’s foreign currency reserves could be minimized by matching the foreign currency and interest rate characteristics of the reserves with those of the foreign currency in the debt portfolio.  It may not be possible to achieve an exact match at all times between the currencies and interest rates of the foreign exchange reserves and of the debt used to finance these reserves.  This is because the government’s foreign exchange reserves will fluctuate depending on the nature of the exchange rate regime (that is, on whether the CB provides a ready market for buying and selling foreign exchange) and the size of intervention and sterilization operations.  Nevertheless, the main objective of reducing balance sheet risk can often be achieved by seeking to match-fund an average level of reserves, provided these are reasonably stable over time.  If the reserve levels are extremely volatile, matching reserves to foreign currency debt may not be possible” (Wheeler, 2004).

For more on currency and interest rate matching, please see Module IV.


(1)  The CB’s balance sheet is not part of the general balance sheet is not part of the general balance sheet according to the Government Finance Statistics Manual, 2001.  For example, government units–which are not part of the CB and are financially integrated with the government–issuing currencies, maintaining international reserves, managing government (foreign exchange) funds, or conducting transactions with the IMF, are recorded in the balance sheet of the general government...For the purposes of risk analysis, the GFSM balance sheet definition does not prohibit an integrated treatment of the general government and the Central Bank (or any other separate public sector entity). (Das et al., 2002)

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