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Funding a business
Why Foreign Exchange Reserves Are Important For A Country?
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[QUOTE="Jasz, post: 207736, member: 61772"] 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. [/QUOTE]
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