Foreign Exchange Reserves

Foreign exchange reserves are highly liquid foreign assets held and controlled by the monetary authorities, which include central banks and governments of various countries.

The state uses foreign exchange reserves to finance the balance of payment deficits, maintain the exchange rate of the national currency against other currencies, cover external government debt, conduct settlement transactions with other countries, ensure trade operations, and maintain the required level of liquid assets in the economy.

In a number of countries of the world, foreign exchange reserves are reflected in the balance sheet of the central bank, being part of its assets. Examples of such countries are Switzerland, Russia, Denmark, Portugal, Greece, Hungary, and Germany.

In most countries, foreign exchange reserves are calculated monthly (for example, Australia, the USA, UK, Czech Republic, Sri Lanka, Saudi Arabia, Ukraine, and Moldova). Foreign exchange reserves are calculated quarterly in Algeria, Laos, and Costa Rica, annually - in Belize and Kuwait, weekly - in India, Turkey, and Russia (in Russia, data on reserves are also published on a monthly basis).

Foreign exchange reserves include:

1) Monetary gold – it is gold that is stored as a financial asset in the form of bars and coins. This metal is 995-1000 samples free of impurities. The state stores monetary gold to balance the volume of paper money in circulation. To replenish stocks, the state buys gold from banks and private companies.

2) Funds in foreign currency - it includes cash from other countries, account balances, short-term deposits for up to 1 year, and securities issued by non-residents. In China, for example, funds are invested mainly in US bonds. Switzerland, on the other hand, mainly invests in equities. The graph below shows the dynamics of foreign exchange of China and Switzerland for 2016-2021.



3) Special drawing rights (SDRs), which are understood as reserve assets, are issued by the International Monetary Fund (IMF) and are located on the country’s account in the fund. SDRs are priced daily based on the US dollar, euro, Chinese yuan, Japanese yen, and pounds sterling. SDRs do not play the role of currency and debt obligations but are used as a means of payment and reserve.

4) The reserve position of a country in the IMF is the funds that each participating country can have in its account with the IMF. In other words, it is the debt of the IMF to the country in the form of its savings in foreign currency, which are kept in a special account with the fund.

Among the current trends, one can note a significant decrease in the volume of Turkey’s foreign exchange reserves, which began as a result of the fall in the Turkish lira exchange rate in 2020. The Turkish central bank has used reserves to smooth out exchange rate fluctuations.