The Major Purpose of Foreign Reserves

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 b

The Helpless State of the Common man in Nigeria

I for one knew this APC govt was going to win the 2015 election based on propaganda. To an average Nigerian, it's better you comfort him with lies instead of the truth. We certainly hate taking responsibilities for our mistakes but instead seek for who to put the blame on. Governance they say is continuous irrespective of who's in power or the party involved. seeing the current economic woes befalling our nation, we the citizens are readily wanting to put the blame on the previous government instead of ourselves forgetting the fact that when the whole world went into recession back then around 2009/2010 known as global economic meltdown no body knew and it didn't affect the daily running of the common man. In other words, we as a nation didn't feel the impact like other world nations. Yes, they may be corrupt (in politics, no body is a saint) but at least there was that enabling environment for people to strive irrespective of your background. Now things are hard and we blame the govt solely instead of the people to find ways to cope since we don't have the balls to face them to say ENOUGH. An average Nigerian wants to go to heavy without dying, they will be behind gingering you but once it's time for action they disappear into thin air forgetting that there's a price to pay for freedom... check the Arab uprising started with a boy of about 20yrs old or so. It took that singular act to topple the dictatorial regime of north africa. I won't talk bout the people now but bout the govt whose job is the make life at least worth living for her citizens. what brought this write up today is the plight faced by the common man especially those around abuja. Daily, residents troop out from the shanties and slums to irk out a living and make abuja what is it. How on earth would the govt ban tricycles popularly known as keke from plying the road without putting in measures to contain the actions. now take a look at those coming from gwagwa heading to Arab junction (which govt term as the last top for keke) which cost a measly #100 while in Lagos, that journey might cost #200 at most. and you ban them from coming close to airport junction which is almost half of the journey intimidating them with the Army, NDLEA, Prisons, VIO, FRSC, Police. abeg oo, we dey fight war? and they expect them to smile. when the land is plunged with unemployment and loss of jobs and they are hell-bent on worsening the situation. How will that father of 3 be able to contest with hundred of able bodied men in the hustle of #50 trip which the govt says is more than enough for an individual? ask any abuja citizen and they will tell you that they will be very happy to go back to the pre-APC era that at least they got their 3 square meals a day. In this case, the govt has been pushing us to our limit and knowing we Nigerian as all mouth and no action, they won't be worried. 2015 should have served as a caution to all public office holders that when the people get fed up, they will react through the polls since that's the only voice we got. we got 2yrs of suffering and smiling to go and I pray God sees us through.... Amen.. by Nwosu Harrison C.