When there is a global crisis, it affects the markets all around the globe. Although we don’t directly feel the effects of these shortcomings, within days we get to see the impact that this instability causes, and as such, our lives are put on hold for several economically challenging problems. For a country to go through a financial crisis, this not only creates problems for the businesses, trades, markets but with rising prices, the poor suffer the most so it is important to maintain a country’s financial stability at all times. There are some ways through which a country can preserve its present financial status and work for a better future.
In this article below, we are going to learn about one such way in which a country can help keep its economy with the use of forex reserves. You will learn about the significance of forex reserves and why every business should consider being a part of them especially, after the COVID-19 pandemic.
What are Forex Reserves?
Forex reserves of foreign exchange reserves are assets or properties held on reserve by a central bank in foreign currencies. These reserves are used to help in liabilities and to influence monetary policy. Forex reserves can include any foreign money held by the central bank, such as the US Federal Reserve Bank. These can include foreign currencies, bonds, government securities, or treasury bills.
How Do Foreign Exchange Reserves Work?
As mentioned earlier, foreign exchange reserves can include currencies, deposits, banknotes, treasury bills, and other government securities. All these assets serve several purposes, but the most important reason for their existence here is to ensure that a central bank or a central government agency has a backup fund, if there comes a time when the national currency is rapidly devalued or becomes completely insolvent.
It is a very common practice for countries all over the world to hold a significant number of reserves in their foreign exchange assets. While most of these reserves are held in US dollars since it is the most traded currency in the globe, it is not very uncommon for the foreign exchange reserves to be made up of a significant amount of British pound (GBP), the Chinese yuan (CNY), the euro (EUR) or the Japanese yen (JPY) as well.
Why is a Forex Reserve Important For Business?
Since the COVID-19 pandemic, businesses all around the globe had been hit with many livelihoods being torn apart due to financial instability. This is why every business needs to have a forex reserve so that they can withstand such a global crisis and maintain their financial source.
Some of the reasons why people should consider forex reserves are as follows –
- Forex Reserves Help Secure The Position of Home Currency.
- Helps in Boosting Economic Growth.
- Helps in Maintaining Liquidity in an Economic Crisis.
- Attracts Foreign Investment.
- Helps to Meet External Obligations.
- Helps in Funding Infrastructural Development.
- Forex Reserves Help Boost Returns.
It is essential to note that, as far as the economists around the world are concerned, they believe that one of the most efficient ways to hold a foreign exchange reserve is in the form of currencies, which are not directly connected to the countries’ very own currency. This is to ensure order for a barrier if there is a sudden scenario where they are hit with a market shock. However, this particular practice has been difficult in these past years due to currencies becoming more intertwined as global trading has become way easier.
The world of the economy can never be predicted well. It is a place where increase and decrease of market amounts can happen anytime and these downfalls may affect huge losses to a person’s business, trade, or any other investments, so it is always better to have a backup source of income so that when situations such as the COVID-19 pandemic arises again, you are safe from economic disparity and able to withstand these bad times.