Foreign currency reserves are very important for nation's economic well-being.
Countries around the world use foreign currency reserves to keep a fixed rate value, maintain competitively priced exports, remain liquid in case of crisis, and provide confidence for investors.
Without adequate reserves, an economy can grind to a halt, and a country may be unable to pay for critical imports, such as crude oil, or service its external debt.
Here is a list of top 5 countries with the largest foreign currency reserve assets as of July-August 2020:
Top 5 Countries Timeline
In the top five countries with the largest foreign exchange reserves all have reserves at least 500 billion USD and higher and have maintained such an amount for at least a week.
At present there are only five countries whose reserves are at such a figure; this includes China, Japan, Russia, Switzerland and India. Saudi Arabia formerly included on the list until March 2020; its reserves were severely depleted by the low oil price during the economic fallout of from the global outbreak of coronavirus disease.
The foreign-exchange reserves of China are the greatest of all countries and been so for more than 14 years.
The main composition of Chinese forex reserves is approximately two-thirds USD and one-fifth Euros with the rest made up of Japanese Yen and the British Pound. China is also the only country that has ever had net reserves greater than $4 trillion.
Japanese foreign exchange reserves are the second biggest reserves in the world.
Japan was the first country to reach $500 billion in reserves and had the highest forex reserves in the world until they were surpassed by China in 2006. Since 2006 they have remained in second place with over $1 trillion, being only the second country to surpass such an amount.
Swiss forex reserves are the third biggest reserves in the world and reached $500 Billion in 2014 becoming fifth country to do so after Saudi Arabia.
Swiss reserves are compiled in Swiss franc. The high reserves are mainly because of their historic high net trade surplus.
Russian reserves are the world's fourth biggest; they were the third country to reach $500 billion.
The first fall in reserves was because of the 2008 financial crisis, the second fall in 2015 was due to sanctions imposed by the European Union following the Russian annexation of the Crimea.
The Foreign-exchange reserves of India became the fifth largest on 5th June 2020 after the Reserve Bank of India released its weekly bulletin.
On 12th June 2020 reserves exceeded $500 billion for the first time and they became the sixth country after Switzerland to do so. During the 1991 Indian economic crisis country only had $5 billion of reserves left which led to subsequent economic liberalisation. Since then the reserves had seen a 10,000% increase in under 30 years.
Asian nations dominate foreign currency reserves, accounting for four of the top five. Moreover, Bangladesh's foreign exchange reserves have crossed the $37-billion mark for the first time on July this year.
The single-month highest remittance was previously recorded at $1.83 billion in June this year.
In the 2019-20 fiscal year, $18.20 billion came into the country as remittance, which was 10.87 percent higher than inward remittance in FY2018-19. Bangladesh received $16.49 billion in remittances from migrant workers in the 2018-19 fiscal year.
Why Hold Foreign Currency Reserves? Here are seven reasons, as originally noted by The Balance:
- Forex reserves allow a country to maintain the value of their domestic currency at a fixed rate.
- Countries with floating exchange rates can buy up foreign currencies or financial instruments to reduce the value of their domestic currency.
- Forex reserves can help maintain liquidity during an economic crisis.
- Reserves can provide confidence to foreign investors, showing that the central bank has the ability to take action to protect their investments.
- Foreign currency reserves give a country extra insurance in meeting external payment obligations.
- Forex reserves can be used to fund certain sectors, like building infrastructure.
- They also provide a means of diversification, which allows central banks to reduce the risk of their overall portfolios.
Disclaimer: The article has been prepared by collecting different information of foreign reserves by countries.