International Reserves


The international reserves management in foreign accounts is carried out in accordance with the Central Bank of Montenegro Law, and in line with the provisions defined in the acts passed by the Council of the Central Bank: Policy for the Attainment of Objectives and the Exercising of Functions, Decision on International Reserves Management and Guidelines on Investment Strategy for International Reserves Management. 


The Central Bank manages international reserves in a manner consistent with the monetary policy. In performing these operations, the priority is given to the principle of investment safety, while ensuring liquidity in current foreign payments. Adhering to this determination, developments on the international financial market and risks related to the international reserve portfolio are continuously monitored and analyses are carried out with the aim of better adapting to the market conditions. 


For the purpose of ensuring integrity, limiting risks and more efficient control in the process of managing the international reserves, the following segregation of duties under the hierarchy organisational structure is established in the Central Bank:


  • The Council of the Central Bank - adopts the investment strategy for the international reserves management;
  • The Governor - provides detailed guidelines for undertaking certain activities in international reserves management within the established parameters;    
  • The Investment Committee appointed by the Governor, as an expert-advisory body that considers the investment strategy for international reserves management within the framework approved by the strategy and proposes a tactical framework for the international reserves management;
  • The employees from several organizational units, more specifically, the International Reserves Management Department (Front Office), the International Reserves Risk Management Department (Middle Office) and the International Payments and Correspondent Relations Department (Back Office) perform daily activities of managing international reserves.


International reserves on foreign accounts are divided into tranches, into liquid, investment and special tranche. The purpose of the liquid tranche is to provide a level of liquid funds sufficient to meet requirements for undisturbed fulfilment of Montenegro’s foreign obligations. Funds are deposited with central banks, as well as with commercial banks with an appropriate rating, and are invested in term deposits and government securities with original maturity of up to one year. The investment tranche is invested for a period exceeding one year. The total investment tranche consists of the available-for-sale investment portfolio, hold to maturity investment portfolio, and the operational portfolio. These funds are invested in government securities, securities of provinces, government agencies, supranational institutions, German covered bonds, as well as in financial sector corporate securities. The Special tranche consist of funds with the IMF, which relate to Montenegro's membership in this international financial institution, as well as the other funds that are not actively managed.


In the process of the international reserve portfolio management, the following is monitored: 


  • Interest rate risk as exposure to the possibility of loss due to changes in interest rates. Interest rate risk management is achieved by setting the optimum sensitivity in pricing of debt securities to changes in interest rates.
  • Credit risk as exposure to the possibility of loss due to the default of the issuer of securities, financial institution or country. Credit risk management is achieved by setting a minimum credit rating for securities that are invested in and for banks where the Central Bank invests funds, as well as other limitations on exposure to credit risk. Limits are set based on information from leading rating agencies, financial indicators, market indicators and other available information.
  • Liquidity risk as exposure to the risk of loss due to the impossibility to sell securities in a short period of time with minimal transaction costs for the sake of timely settlement of all due obligations. Liquidity risk management is achieved by selecting high-quality and liquid securities that are traded on a daily basis and on a large scale in the financial markets, thus reducing this risk to the lowest possible extent. 


In addition, the analyses used (ex post and ex ante) include absolute and relative risk measures (VaR, Tracking Error, Sharpe Ratio etc). In addition to these analyses, daily performance measurements of the portfolio are carried out against the selected benchmark. The selection of the appropriate benchmark is crucial in order to correctly evaluate the performance of the portfolio and make timely decisions regarding the portfolio and its structure. The benchmarks selected for this purpose are adequate indices from the ICE index provider.


The Central Bank publishes in its Annual Report and Annual Financial Statements with the Independent external Auditor’s Report, the detailed information on international reserves management in terms of the structure and trend of the level of reserves, generated income and performance of individual portfolios against the selected benchmarks, as well as on the risks monitored.