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What's The Use Of Foreign Exchange Reserve? - Business - Nairaland

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What's The Use Of Foreign Exchange Reserve? by Standing5(m): 12:38am On Mar 31, 2017
What is foreign exchange reserve and what determines the optimum level of Forex reserve for a country?

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Re: What's The Use Of Foreign Exchange Reserve? by Blue3k(m): 4:46am On Mar 31, 2017
The optimum level is relative to the needs of the country based on it monetary policy.


Foreign exchange reserves are the foreign currencies held by a country's central bank and its member banks. They are also referred to as foreign currency reserves or foreign reserves.

How much are enough reserves? At a minimum, countries have enough to pay for three to six months of imports. That prevents food shortages, for example.

Another guideline is to have enough to cover the country's debt payments and current account deficits for the next 12 months. In 2015, Greece was not able to do this. It then used its reserves with the IMF to make a debt payment to the European Central Bank. For more, see Greece debt crisis.

Source:
https://www.thebalance.com/foreign-exchange-reserves-3306258

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Re: What's The Use Of Foreign Exchange Reserve? by veekid(m): 7:40am On Mar 31, 2017

I think it's to energise the politician's ambitions for stealing, cos it's not corruption

5 Likes 1 Share

Re: What's The Use Of Foreign Exchange Reserve? by LILGWANZ(m): 7:41am On Mar 31, 2017
lets ask buhari

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Re: What's The Use Of Foreign Exchange Reserve? by negz1(m): 7:42am On Mar 31, 2017
drops chair.. ready to learn

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Re: What's The Use Of Foreign Exchange Reserve? by abbeywasc(m): 7:42am On Mar 31, 2017
in layman's term, Forex reserve is like money in the bank, the more you got, the better people are comfortable doing business with you. You can get loans because people know you have money to pay(in the right currency) and people know that when they invest in your economy, it will be easy to repatriate their gains home. and off course, your ability to do business on credit expands.

What determines your optimal level depends on how dependent you are on foreign goods and services(oversimplification). if you are self-sufficient, you need zero reserve, if you are totally dependent, you need lots and lots of it.

**Edit
The irony of it is that, if you have it, you don,t need it and if you need it, you probably wont have it.
If you are export oriented, you get paid and but pay less in return for your few imports, hence your reserve goes up. if you import more than you export, your reserve spirals down and you continually need to borrow to meet up. thus you cough of vast amount of your currency to buy the reserve currency. your currency's value diminishes the more imbalance in your balance of trade(hence your BOP too), the more you have those bad economic indicators:
Runaway inflation
weak currency
unemployment etc

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Re: What's The Use Of Foreign Exchange Reserve? by bayocanny: 7:42am On Mar 31, 2017
Haaaa

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Re: What's The Use Of Foreign Exchange Reserve? by sakalisis(m): 7:43am On Mar 31, 2017

1 Like

Re: What's The Use Of Foreign Exchange Reserve? by yinkard4me(m): 7:43am On Mar 31, 2017
The question should be what is its importance to the common man?

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Re: What's The Use Of Foreign Exchange Reserve? by snezBaba: 7:44am On Mar 31, 2017
You won't see dem Afonja and Igbos e-warriors here but when they say the foreign reserve has dropped you see them spewing thrash like they know its meaning. SMH!
well, Foreign exchange reserves are used by an economy as money to facilitate trade around the globe; to buy things from countries where domestic currency is not valid. for instance a trade between Nigeria and Russia, naira is of no use to them while their currency is of no use to Nigeria so the US dollars has come to be accepted as the universal currency used in such trades. Other things can be used too like gold, SDR e.t.c sha....Google would EPP you more

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Re: What's The Use Of Foreign Exchange Reserve? by beautiesplace: 7:45am On Mar 31, 2017
Good question
Re: What's The Use Of Foreign Exchange Reserve? by Singapore1(m): 7:46am On Mar 31, 2017
Purpose
First, countries use their foreign exchange reserves to keep the value of their currencies at a fixed rate. A good example is China, which pegs the value of its currency, the yuan, to the dollar. When China stockpiles dollars, that raises its value when compared to the yuan.

That makes Chinese exports cheaper than American-made goods, increasing sales.

Those with a floating exchange rate system can still use reserves to keep their value of their currency lower than the dollar, for the same reasons. Even though Japan's currency, the yen, is a floating system, the Central Bank of Japan buys U.S. Treasuries to keep its value lower than the dollar.


Like China, this keeps Japan's exports relatively cheaper, boosting trade and economic growth. For more, see How Foreign Exchange Markets Work.

A third, and critical, function are to maintain liquidity in case of an economic crisis. For example, a flood or volcano might temporarily suspend local exporters' ability to produce goods. That cuts off their supply of foreign currency to pay for imports. In that case, the central bank can exchange its foreign currency for their local currency, allowing them to pay for and receive the imports.

Similarly, foreign investors will get spooked if a country has a war, military coup, or other blow to confidence. They withdraw their deposits from the country's banks, creating a severe shortage in foreign currency. This pushes down the value of the local currency since fewer people want it. That makes imports more expensive, creating inflation.

The central bank can supply foreign currency, to keep markets steady, and buy up the local currency, to support its value and prevent inflation. This reassures foreign investors, who return to the economy. (Source: Haukur C. Benediktsson and Sturla Palsson, "Central Bank Foreign Reserves," Monetary Bulletin, Central Bank of Iceland, 2005)


A fourth reason is to provide confidence and assure foreign investors that the central bank is ready to take action to protect their investments, and prevent a sudden flight to safety and loss of capital for the country. In that way, a strong position in foreign currency reserves can prevent economic crises caused when an event triggers a flight to safety.

Fifth, reserves are always needed to make sure a country will meet its external obligations. These include international payment obligations, including sovereign and commercial debts, financing of imports, and to absorb any unexpected capital movements.

Sixth, some countries use their reserves to fund sectors, such as infrastructure. China, for instance, has used part of its forex reserves for recapitalizing some of its state-owned banks.

Seventh, most central banks want to boost returns without compromising safety. That's why they'll often hold gold and other safe, interest-bearing investments, to diversify their portfolios. (Source: Why Do Countries Keep Foreign Exchange Reserves? The Economic Times, November 22, 2004.)

Guidelines
How much are enough reserves? At a minimum, countries have enough to pay for three to six months of imports. That prevents food shortages, for example.

Another guideline is to have enough to cover the country's debt payments and current account deficits for the next 12 months. In 2015, Greece was not able to do this. It then used its reserves with the IMF to make a debt payment to the European Central Bank. For more, see Greece debt crisis.

By Country
The countries with the largest trade surpluses are the ones with the largest foreign reserves. That's because they wind up stockpiling dollars because they export more than they import. They receive dollars in payment.

Here are the reserves for the top countries with $100 billion or more of reserves as of December 2014:

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Re: What's The Use Of Foreign Exchange Reserve? by Nwachukwu1986(m): 7:46am On Mar 31, 2017
I am here to see if I can learn
Re: What's The Use Of Foreign Exchange Reserve? by iDROID: 7:46am On Mar 31, 2017
.
Re: What's The Use Of Foreign Exchange Reserve? by jazinogold(m): 7:46am On Mar 31, 2017
j
Re: What's The Use Of Foreign Exchange Reserve? by researcherdotcom(m): 7:46am On Mar 31, 2017
m o d has done its part moving this topic to front page
economist pls do ur part asap
am ready to read comment
Re: What's The Use Of Foreign Exchange Reserve? by Amathylee(m): 7:46am On Mar 31, 2017
If u ask me....na who i go ask
Re: What's The Use Of Foreign Exchange Reserve? by Ppresh2017(f): 7:47am On Mar 31, 2017
Get more Bitcoin dollars with this genuine extra source of income. See my signature
Re: What's The Use Of Foreign Exchange Reserve? by Nobody: 7:47am On Mar 31, 2017
In layman's language, it's a testament to the strength of your economy and how well it can resist economic tremors and shocks.
It's also an allure to the external investors that their investment would be safe because your country is on a sound economic footing.
Again it can be used as collateral to international lenders, a guarantee that you have the capacity to repay the loan as agreed.

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Re: What's The Use Of Foreign Exchange Reserve? by Tmex(m): 7:47am On Mar 31, 2017
Foreign exchange reserve is the measure of how much international trade a country can afford, an import dependent country will have a lower foreign reserve compared to an export dependent country. In otherwords, foreign reserve is the balance or difference in the value of imports and the value of exports.

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Re: What's The Use Of Foreign Exchange Reserve? by obailala(m): 7:48am On Mar 31, 2017
Facilitates International Transactions
THe foreign reserve is like the wallet of a man (country) containing spendable cash. The man might run a payment system within his household where he and his children buy/sell things amongst themselves using cowries, but if any member of the family wants to buy something from the outside (international transaction), the real cash in the wallet would be needed.

Determines Value of Currency
Just as above, if a child of that family for instance wants to buy a pack of biscuits, he needs to give some cowries to the father, who in turn pays for the biscuits with real cash from the wallet. Now let's assume the man has $10 in the wallet, and let's assume the man exchanges the child's 1 cowrie for $1; if the amount in the wallet drops to $5 over time, the man may not be able to exchange 1 cowrie for $1, he might then have to double the price by taking 2 cowries for $1. Conversely, if the children are not too demanding of biscuits all the time and if the man has increased the wallet amount to $20, he can then afford to even exchange $2 for just 1 cowrie. In summary, the amount in the wallet and the demand of his children for biscuits determines the value of each cowrie compared to the dollars in the wallet.

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Re: What's The Use Of Foreign Exchange Reserve? by Jengem: 7:48am On Mar 31, 2017
For buhari health care

Witch doctors from west germany are costlier in the digital age

1 Like

Re: What's The Use Of Foreign Exchange Reserve? by Nobody: 7:49am On Mar 31, 2017
Ppresh2017:
Get more Bitcoin dollars with this genuine extra source of income. See my signature
Who is this one?
We are talking serious issues your bringing Pokemon go ish grin

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Re: What's The Use Of Foreign Exchange Reserve? by Icecomrade: 7:50am On Mar 31, 2017
Kool
Re: What's The Use Of Foreign Exchange Reserve? by make9jagr8: 7:50am On Mar 31, 2017
It seems nairaland has outlived it's usefulness, or this generation has nothing upstairs and can discuss intellectual topics.

1 Like

Re: What's The Use Of Foreign Exchange Reserve? by olujastro: 7:51am On Mar 31, 2017
I explained this extensively last month to my friends on Facebook as a way of educating them about the kind of economy we operate. Enjoy!

Check the second page for the last screenshots.

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Re: What's The Use Of Foreign Exchange Reserve? by olamilekside2: 7:52am On Mar 31, 2017
…………
Re: What's The Use Of Foreign Exchange Reserve? by BabaCommander: 7:56am On Mar 31, 2017
Serves as Buhari's private bank.
Re: What's The Use Of Foreign Exchange Reserve? by HarkymTheOracle(m): 7:57am On Mar 31, 2017
negz1:
drops chair.. ready to learn
Abeg shift for me make i sit.
Re: What's The Use Of Foreign Exchange Reserve? by tspun(m): 7:57am On Mar 31, 2017
Interesting, got nothing to add I think they have said it all.

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