Davos, 10 August 2022 (TDI): The World Economic Forum (WEF), in a tweet, defined what the reserves of foreign currency are. Furthermore, it also explained how these reserves may be helpful in fighting the crisis of the global economy.
What are foreign currency reserves and can they help combat the global economic crisis? #Currency #Global https://t.co/PK6pty18th
— World Economic Forum (@wef) August 9, 2022
In this context, Sri Lanka’s governmental and financial crisis, which started in April 2022, has been featured on television all across the world, has been taken as a case study. The President had to resign due to widespread protests.
According to Visual Capitalist, the nation stopped making its debt payments in May and now owes its creditors $51 billion. Due to an increasing inability to pay for imported fuel, food, and medicine, inflation is currently at about 40%.
Likewise, it is estimated that the foreign exchange reserves have decreased by 99% from $7.6 billion in 2019 to about $50 million.
As per City Index; a provider of financial services, foreign currency, or exchange deposits, often known as forex reserves, are made up of cash or cash equivalents like gold which are kept by central financial firms like that of the International Monetary Fund (IMF).
There are seven reasons that the banks keep these reserves. China fixes the yuan’s exchange rate to the US dollar.
Stocking up dollars causes the dollar’s value to rise against the yuan, which boosts revenue by making Chinese exports less expensive than products created in the United States.
Japan, which has a fluctuating exchange rate system, actually buys the treasuries of the United States or the bonds and coupons.
This has been done in order to keep the yen at a lower ratio in value as compared to the dollar of the United States. Furthermore, this again helps to keep the country’s exports comparatively reasonably less costly.
Adding to that, the investors who are frightened by war or internal upheaval may try to relocate their money elsewhere. Having foreign exchange reserves can reassure consumers and provide them with a sense of security.
Also, the central bank can lessen the risk and lead to significant savings by having a variety of assets and currencies in reserve and can be protected if one transaction loses value.
However, during a volatile era for the global economy, the investors and the currency traders. These are often taken to convert holdings of cash money into the safes that serve for protecting the currencies.
Additionally, currencies like that of the Swiss franc as well as the Japanese yen. However, the US dollar is considered the safest for assets.
