Presentation

Central Banking

Definition:

Foreign exchange reserves are also called Forex or FX reserves and are the amount of foreign currency

deposits that a country’s central bank holds. A nation’s central bank will have these reserves in

different currencies.E.g. Dollar , Euro, Pound etc.

History :

In the past, during the Breton Woods system — an international monetary system formed after the second world war, foreign exchange reserves were used by countries through their central banks to maintain the external value

of their currencies at fixed rate.Subsequently, with the collapse of this system, the focus changed to foreign

exchange reserves.

Governments are able to keep their currencies stable by holding the currencies of other nations as

reserves; this also reduces the effect of economic problems. Once the gold standard declined, foreign

exchange reserves became popular.

Central Bank Impact on Foreign Exchange Reserves

1. More Issuance of Domestic Currency 2. Restriction on Import and Export of

Currencies. 3. Increase and decrease in value of Dollar or

local currency.4. It can transfer can transfer their reserves

around to different assets without affecting the value of its domestic currency.

5. If a central bank decides to appreciate its local currency, it doesn't' t need to sell its reserve

directly. E.g China

Currency Composition of Official Foreign Exchange Reserves (COFER)

U.S. dollarPound sterlingJapanese yenSwiss francs

Canadian dollarAustralian dollar, and

Euro

Importance of Foreign Exchange Reserves :

1.Confidence in the monetary and exchange rate policies of the government

2. During time of any crisis foreign exchange reserves come to the rescue of any country and to

get rid of these crisis.

3. Its help the central bank to enhance the capacity of controlling the foreign exchange market and

stabilize the foreign exchange rate.

4. Foreign exchange reserves are important indicators of ability to repay foreign debt and for currency

defense, and are used to determine credit ratings of nations.

5.Its increases the foreign investor confidence in the economy of having foreign exchange

reserves .

Top 6 Countries with Highest Foreign Exchange Reserves

1. China $3.31 Trillion2. Japan $1.25 Trillion

3.KSA $626.80 Billion4. Russia $527.70 Billion

5. Switzerland 522.18 Billion6. Taiwan 403.17 Billion

Foreign Exchange Reserves Held by SBP(State Bank of Pakistan) is $3.6 Billion

Foreign Exchange Reserves held by banks (Commercial Banks) other than SBP is $ 4.8 Billion

Dollars.

Currently Pakistan Held $8.4 Billion of Foreign Exchange Reserves