international reserve assets

International reserve asset

1. Introduction

International reserve asset refers to the liquid assets held by monetary authorities of nations as a symbol of its international payment ability or to back its currency and liabilities. Usually, international reserve asset includes gold reserve, foreign exchange reserve, SDRs and IMFs special drawing rights. By drawing on its international reserve asset, a nation can promptly pay for its international obligations without resorting to costly and politically hazardous procedures of issuing further amount of domestic currency and liabilities.

2. Gold Reserves

Gold has played an important role in achieving international payment stability. The gold reserve is a gold asset a nation holds in its balance sheet mainly used as a source of risk management and external liquidity. Gold reserve can also be used as an international payment asset which makes possible for a nation to settle international transactions with other nations exploiting the relative price differentials in different kinds of foreign exchange.

3. Foreign Exchange Reserve

Foreign exchange reserves of a nation represent its right over the foreign financial claims. Foreign exchange reserve is a reserve asset held in the form of liquid foreign currencies and its deposits. Often, foreign exchange reserve is used to adjust international payment imbalances, foreign exchange rate policies, manage exchange rate volatility and strengthen the international financial stability. To maintain a nation’s exchange rate stability, a nation should build adequate foreign exchange reserve up to the desirable level.

4. Special Drawing Right (SDRs)

SDRs, also known as “paper gold” is a form of international reserve asset created by IMF to supplement the existing international reserve assets of members. The major purpose of SDRs is to achieve international payment stability and exchange rate stability. Each SDR unit represents a particular currency held in reserve by IMF which are called “basket of currencies”. The value of a SDR is based on a weighted average of the currency value in a basket of five major currencies including US dollar, Euro, British pound, Japanese yen and China Renminbi.

5. Role of International Reserve Assets

International reserve asset plays an important role in maintaining international payment and exchange rate stability. It can effectively help a nation avoiding destabilizing international payments and currency crises. Moreover, international reserve asset can also help a nation to remain competitive in global trade as it allows for more flexibility and liquidity in international trade operations.

Finally, international reserve asset is also an important form of risk management for a nation. By holding an adequate amount of international reserve asset, a nation can better manage foreign exchange risks, reduce foreign exchange rate volatility and ensure the payment safety.

International reserves are assets held by a nation’s central bank or other regulatory authority that can be used in international transactions and to support a currency. These assets are sometimes referred to as foreign exchange reserves, though they may include other assets such as gold or special drawing rights (SDRs).

International reserves provide a cushion against external shocks and serve as a buffer against market pressure, allowing a country to maintain its exchange rate or manage its rate of exchange in the foreign exchange markets. They may also be used to support a countrys currency during periods when its balance of payments is in deficit.

International reserves allow a country to avoid the use of drastic measures such as the imposition of capital controls, which limit the movement of money out of a country in order to support its domestic financial system. According to the International Monetary Fund (IMF), countries can adjust the composition and amount of their international reserves over time depending on their economic and financial objectives.

Most countries hold a portion of their reserves in the form of currency from other countries. This allows them to make payments in foreign currencies, which can be more advantageous than making payments in their own currency. Holding reserves also provides them with greater flexibility in responding to changes in the global economic environment. In 2019, China held the largest amount of international reserves, with over $3.1 trillion. Japan, Switzerland, and Saudi Arabia were also major holders of international reserves, with over $1 trillion each.