Foreign Exchange Reserves
Foreign exchange reserves are the foreign-currency assets a central bank holds and can use at short notice: deposits and government securities in major currencies, gold, Special Drawing Rights and the country's reserve position at the IMF.
Also called: FX reserves · international reserves · official reserves · foreign currency reserves
A country can create its own currency but cannot create anyone else's. Reserves are the stock of external money it has earned, borrowed or attracted, held by the central bank so that the country can pay for imports, service foreign debt, steady its exchange rate and supply foreign currency to its banks in a squeeze.
Most reserves are held in a small number of currencies, with the US dollar the largest share, followed by the euro. The IMF publishes the aggregate currency composition each quarter. A currency widely held this way is called a reserve currency.
For cross-border payments, reserves decide whether foreign currency is routinely available or rationed. Where they are thin, licences and bank accounts do not help much: the constraint is that there are not enough dollars or euros to go round. Import cover and reserve adequacy are the usual ways to judge whether the stock is enough.
In practice
Gross reserves and usable reserves are different numbers. Borrowed funds, swap proceeds, pledged gold and deposits owed back to domestic banks all sit inside the headline figure.
Commonly confused with
| Term | How it differs |
|---|---|
| Reserve requirement | A reserve requirement is the balance a commercial bank must hold at its central bank. Foreign exchange reserves are the central bank's own holdings of foreign assets. |
See also
- Import CoverImport cover is the number of months a country could keep paying for its imports out of its foreign exchange reserves if no new foreign currency came in. It is the simplest measure of how long a country can withstand an external shock.
- Reserve AdequacyReserve adequacy is the judgement of whether a country's foreign exchange reserves are large enough for the shocks it could plausibly face. It is assessed with several ratios together, because no single number captures every way reserves can drain.
- Reserve CurrencyA reserve currency is a currency that central banks hold in large amounts as part of their foreign exchange reserves and that is widely used to price trade, issue debt and settle international payments. The US dollar is the dominant one.
- Special Drawing RightThe Special Drawing Right (SDR) is an international reserve asset created by the IMF. It is not a currency and cannot be spent directly; it is a claim that a member country can exchange for US dollars, euros, yen, sterling or renminbi.
- Central BankA central bank is the public institution that issues a country's currency, sets monetary policy, holds its foreign exchange reserves and acts as banker to commercial banks and the government. Most also run the core payment system and lend in emergencies.