The foreign exchange reserves is a part of a country’s assets or monies having in reserve by the central bank. It is a creditor’s right held by every country’s government in foreign currency, and also an asset held by a country’s monetary authority that can be exchanged for foreign currency at any time. Together with gold reserve, special drawing right and money that a country can utilize at any time in the International Monetary Fund (IMF), it constitutes the country’s reserve assets. In a narrow sense, foreign exchange reserve is a significant part of a country’s economic strength, which is utilized to balance the balance of payments, stabilize the exchange rate and repay foreign debts.
|Liquid Foreign Exchange Reserves* (Million US$)|
|End Period|| Net Reserves
| Net Reserves
| Total Liquid
Furthermore, in a broad sense, foreign exchange reserves refer to assets denominated in foreign exchange, counting foreign bank deposits, cash, foreign securities, etc. If we talk about developing countries like Pakistan, according to the State Bank of Pakistan (SBP) the foreign exchange reserves held by the central bank declined 0.95 percent on a weekly basis.
Statistics showed that on December 31, the foreign currency reserves held through SBP were registered at $17,686 million, down $169 million as against with $17,855.3 million on December 24. SBP gave no reason behind the decline in reserves.
Overall liquid foreign currency reserves held by the country, counting net reserves held through banks other than the SBP, reached at $24,018.8 million. Net reserves held by banks amounted to $6,332.8 million.
Earlier in the week ended on August 27, 2021 the foreign exchange reserves held by SBP soared to an all-time high of $20.15 billion after Pakistan received general allocation of Special Drawing Rights (SDRs) worth $2,751.8 million from IMF on August 24. On March 30, 2021, statistics also showed that Pakistan borrowed $2.5 billion by Eurobonds through offering lucrative interest rates to lenders aimed at building the foreign exchange reserves. It received the first loan tranche of $991.4 million from the IMF on July 9, 2019, which assisted bolster the reserves. In late December 2019, the IMF released the second loan tranche of approximately $454 million.
No doubt, developing countries need more foreign exchange to complete their developmental needs, but they have limited access to it. To earn foreign exchange, they get involved in international trade, work for better and stable investment opportunity and manage internal financial stability. Researchers identified that it is extensively accepted that at the initial stage of development, each developing country needs to import raw materials, construction materials and tools, heavy equipment, advanced technology and expert services that may be highly expensive. To fulfill this demand, they try to reserve more foreign currencies. Furthermore, in the least developed countries (LDCs), the imported capital goods are one of the determinants of capital accumulation.
They also identified that export is the oldest source of foreign exchange earnings. Foreign direct investment (FDI) is also a source of foreign exchange which may come along with external technology and knowledge. In addition, foreign assistance, tourism and remittance are other chief sources of foreign exchange earnings. These days, it is also identified that remittance is also identified as the growing source of foreign exchange earnings.
Developing countries need more foreign exchange reserve which could be utilized as capital to address development and welfare demands of the nation. Foreign exchange can be utilized as productive capital to enhance economic activities not only to assist earn foreign exchange but also to assist attain higher economic growth.