Top 7 Reasons Why Countries Keep Foreign Currency Reserves

To help keep the value of a domestic currency at a fixed rate. China pegs the value of the yuan to the US dollar. Stockpiling dollars raises the dollar value versus the yuan thereby increasing sales by making Chinese exports cheaper than American-made goods. This is why Kenya needs US Dollars too. Without the US Dollar, our manufacturers and businesses cannot import goods. How will they pay?

To keep a domestic currency lower than the dollar. Japan, which has a floating exchange rate system, buys US treasuries or bonds, to keep the yen lower than the dollar. This again helps keep its exports relatively cheaper.

To maintain liquidity in case of an economic crisis. A central bank can step in and exchange its foreign currency for the local currency ensuring companies can continue to import and export competitively. You have seen how companies have suffered in Kenya with the US Dollar shortage.

To meet a country’s international finance obligations. These could include paying debts, financing imports, and absorbing sudden capital movements. In Kenya, all our international debts are charged in dollar denomination. Without the US Dollar, we cannot be able pay.

To fund internal projects. Infrastructure or industry programs are sometimes financed this way. In Kenya, it is not even “sometimes”, but all the time.

To reassure foreign investors. Wars or internal unrest can spook investors who may look to move their money out of the country. Holding forex reserves can project an air of confidence and calm investors’ fears.

To diversify their portfolio. By holding different currencies and assets in reserve, a central bank can diversify its risk and provide protection should one investment decline.

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