Why Foreign Exchange Reserves Are Important For A Country?

[Good-Guy]

Finance is a kind of thing that is required by all the people in the world. Finance has always remained one of the most widely studied subject in the history of mankind. One of the most important aspect of finance is the foreign exchange. In the field of macroeconomics, the finance usually involves monetary policy of a country and how the government runs the economical system in the country. Whenever a budget is announced by a country, the finance minister is the one who usually takes the charge of running and providing the finance to various different departments in the country.

When it comes to finance at the governmental level, the importance of foreign exchange could not be overlooked. When a country has a good amount of foreign exchange reserves, the economy of the country improves a lot. usually, the foreign exchange is improved when the balance of payment of a country improves and this could be achieved by increasing the exports of the country and decreasing imports. Obviously, imports could never be stopped at all, but a country must fight inflation by exporting more goods, as this will increase foreign exchange reserves. What are other reasons why foreign exchange is important for a country?

 

[Deleted member 28127]

Some countries prevent exchange for goods with the foreign company in another country means I provide you this product and in exchange, you provide me another product as they want only use foreign currencies to accomplish purchases and not products this leads to the foreign exchange becoming primordial for the state.

 

[Jasz]

What do we mean by reserves? Foreign exchange reserves are foreign currencies that central banks and monetary authorities hold in reserve. In other words, it is the extra amount of foreign currency that is kept with the central bank or currency board for dealing with short-term fluctuations of exchange rates, unexpected capital outflows, or other balance-of-payments difficulties. There are two main purposes of foreign exchange reserves. The first one is to ensure the convertibility of a currency at a known price and the second is for intervention in the event of a market failure and to protect country's balance of payments.

Foreign exchange reserves are an important part of a country's foreign exchange. Foreign exchange reserves provide short-term liquidity to the central bank and nation during times of financial stress, such as in the case of a sudden influx of imports, or a flight of foreign capital. If a nation does not have at least three months' worth of foreign exchange reserves in it, then this is grounds for economic crisis.



To understand the importance of foreign exchange reserves, consider what would happen if a country had no foreign exchange reserves at all. Suppose that a country borrowed money from other countries to spend on goods for its people. Now suppose that the borrowers failed to pay the government back – either because they went broke or because they decided not to pay. This would leave the government with no means of paying back foreigners at all. What happens when debts aren't paid back? In most cases, the people who lent do not give up. They seek ways to get their money back by force if necessary. If they can't find the original borrower, they go after a government instead, often by demanding that the government pay back loans itself.

 

[Kingsley]

Foreign reserves are the back bone of any economy of the world, this an amount of money kept specially as a backup just in case any economy faces a crisis that is beyond what the government can handle then they will fall back to the foreign reserves it is more like a last resort. It is just like the money will set aside for some unforeseen circumstances that may arise.

But unfortunately in this part of the world some of the government are not sensitive to the relevance of this special fund called foreign reserve. They deplete the foreign reserve and emblezzle funds from the foreign reserve when even the need for it has not really arise. They go all out to borrow from other countries and mostly from thr world bank and IMF all in the name of funding projects that has no physical evidence on ground and at the end the money gets to develop wings and fly away, mostly in this current administration we have had cases where public officers embezzled and siphoned public funds and they were covered up by the government because they are all collaborators. Currently our foreign reserve has been heavily depleted by this current administration and the debt profile is madly high

 

[Yusra3]

The foreign exchange reserves become significant for the nations as they protect economies from shocks and the volatility, boost confidence for the national currency, and help the nations to fully meet their foreign debt obligations and demand for import in time of crisis or considerable currency devaluation. Healthy reserves offer monetary policy a room to maneuver, enable borrowing in foreign currency, and ensure an exchange rate predictability - which in turn are very important for fostering cross-border business arrangements and movements of money. The final factor is that of the bullet proof forex reserve which is a signal of economic strength and stability.