Top 7 Reasons Why Countries Keep Foreign Currency Reserves

By Juma / Published March 30, 2023 | 9:22 am

KEY POINTS

The US Dollar is like the SI Unit of the global economy. Even China which is trying so hard to do away with the dollar pegs the value of the Yuan to the US Dollar.

KEY TAKEAWAYS

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.

As the Kenyan shilling continues to receive a beating from the US Dollar, some clueless jua kali economists have been saying; “Why can’t we do away with the US Dollar? Why can’t we print our own money and trade using our Kenyan shilling?”

What these jua kali economists are forgetting is that Kenya is far away from doing without the US Dollar. Without the US Dollar, our economy will literary collapse, and there are no two ways around it. Why should we depend on the US Dollar?

The US Dollar is like the SI Unit of the global economy. Even China which is trying so hard to do away with the dollar pegs the value of the Yuan to the US Dollar. Here are 7 reasons why countries around the world have UD Dollar reserves and guard it with their lives:

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.

About Juma

Juma is an enthusiastic journalist who believes that journalism has power to change the world either negatively or positively depending on how one uses it.(020) 528 0222 or Email: info@sokodirectory.com

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