Foreign reserves are basically the foreign currency held by the central bank of a country. These foreign currencies have a crucial role in economic growth and stability as it helps the economy to perform effectively in global markets. These foreign reserves can be increased by boosting trade between countries on international levels. The major impacts of foreign reserves on economic growth are:
- Countries stockpile foreign currencies and use their foreign reserves in order to keep the value of their currency at fixed rates so that they can attract the world to buy their goods in cheaper rates as compared to other countries, eventually increasing their exports.
- One critical function of foreign reserves for a country is its liquidity. Countries use their foreign reserves to cut off their foreign currency supply for the imports whenever there is an economic crisis or a disaster such as a volcano or a flood.
- The supply of foreign currency from central banks to the markets is important in order to keep the markets steady.
- Foreign reserves also buy local currency to prevent inflation so that the country could reassure the foreign investors to invest.
- These reserves are also important to make sure that a country will meet its external payment obligations including commercial and sovereign debts.
- Foreign reserves also help the country to build infrastructure for economic growth.