Reserve Adequacy in Georgia: How Much is Enough?

This paper extends the Jeanne-Ranciѐre (2011) framework to assess Georgia’s optimal level of international reserves by incorporating three additional channels particularly relevant to its economy: (i) sovereign risk and borrowing costs; (ii) private-sector dollarization; and (iii) foreign exchange volatility associated with market shallowness, building on Chen and others (2023). This integrated framework provides a more comprehensive measure of reserve adequacy than the baseline approach for partially dollarized emerging markets. Under these extensions, Georgia’s optimal reserve coverage is estimated at around 145-150 percent of the IMF’s ARA metric, compared to about 130 percent under the baseline framework. With current reserves at roughly 105 percent of ARA, the results point to scope for additional reserve accumulation to further strengthen resilience against external shocks and reach optimal levels.