Challenges and Opportunities in Managing Foreign Exchange Reserves
Foreign Exchange Reserves
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Transcript of Foreign Exchange Reserves
Definition:
Foreign exchange reserves are also called Forex or FX reserves and are the amount of foreign currency
deposits that a country’s central bank holds. A nation’s central bank will have these reserves in
different currencies.E.g. Dollar , Euro, Pound etc.
History :
In the past, during the Breton Woods system — an international monetary system formed after the second world war, foreign exchange reserves were used by countries through their central banks to maintain the external value
of their currencies at fixed rate.Subsequently, with the collapse of this system, the focus changed to foreign
exchange reserves.
Governments are able to keep their currencies stable by holding the currencies of other nations as
reserves; this also reduces the effect of economic problems. Once the gold standard declined, foreign
exchange reserves became popular.
Central Bank Impact on Foreign Exchange Reserves
1. More Issuance of Domestic Currency 2. Restriction on Import and Export of
Currencies. 3. Increase and decrease in value of Dollar or
local currency.4. It can transfer can transfer their reserves
around to different assets without affecting the value of its domestic currency.
5. If a central bank decides to appreciate its local currency, it doesn't' t need to sell its reserve
directly. E.g China
Currency Composition of Official Foreign Exchange Reserves (COFER)
U.S. dollarPound sterlingJapanese yenSwiss francs
Canadian dollarAustralian dollar, and
Euro
Importance of Foreign Exchange Reserves :
1.Confidence in the monetary and exchange rate policies of the government
2. During time of any crisis foreign exchange reserves come to the rescue of any country and to
get rid of these crisis.
3. Its help the central bank to enhance the capacity of controlling the foreign exchange market and
stabilize the foreign exchange rate.
4. Foreign exchange reserves are important indicators of ability to repay foreign debt and for currency
defense, and are used to determine credit ratings of nations.
5.Its increases the foreign investor confidence in the economy of having foreign exchange
reserves .
Top 6 Countries with Highest Foreign Exchange Reserves
1. China $3.31 Trillion2. Japan $1.25 Trillion
3.KSA $626.80 Billion4. Russia $527.70 Billion
5. Switzerland 522.18 Billion6. Taiwan 403.17 Billion
Foreign Exchange Reserves Held by SBP(State Bank of Pakistan) is $3.6 Billion
Foreign Exchange Reserves held by banks (Commercial Banks) other than SBP is $ 4.8 Billion
Dollars.
Currently Pakistan Held $8.4 Billion of Foreign Exchange Reserves