Foreign exchange reserves are very important assets of a country which are affected by monetary policies, regulations and exchange rates in the global market. These reserves can be used to cope up with the external unrest that causes shortages to the economic environment of the state. The government may be forced to change the exchange rate and trade mechanisms in the absence of sufficient reserves. This shows how important it is for a country to have efficient foreign reserves in order to remain competitive in the global market. The importance of foreign reserves forces a country to think about agendas like what could help a country to raise its foreign reserves? What mechanisms could be used in order to have efficient foreign reserves for a country?
- The primary way of raising foreign reserves is through exports and through capital inflows.
- Foreign investment also raises the dollar foreign reserves when a foreign investor from the US invests in a country, let’s say Pakistan, he/she has to sell $US in the currency market which depreciates the value of $US and appreciates the domestic currency.
- Increasing remittances can also increase the number of foreign reserves in the market in a way that foreign capital flows into the country.
- By lowering the number of imports in comparison to exports can also have a positive impact on foreign reserves.