International reserves are the foreign currency deposits held by the monetary authority of a country.
International reserves are the deposits that the monetary authority of a country has of foreign currencies . Typically, international reserves are made up of euros and dollars , whose administration depends on the central bank .
Among the multiple meanings of the term reserve , on this occasion we are interested in highlighting its meaning as that which is stored or preserved for some purpose. International , for its part, is an adjective that refers to countries other than one's own or to something linked to several countries at the same time.
Importance of international reserves
A country must have international reserves to import or pay for services in foreign currency. Because only the strongest currencies are usually accepted in international trade , it is essential that each nation has its own international reserves.
In general, international reserves also provide support for liabilities . That is why these reserves are considered an indicator of wealth and economic solidity.
International reserves are usually constituted with dollars or euros.
Other information of interest
In addition to everything stated above, it is worth knowing other interesting information about international reserves:
- As a general rule, countries usually manage and control these reserves based on criteria such as profitability , security and liquidity .
- It is considered that the fact that a nation has a good and powerful position in terms of reserves allows it to reduce its sovereign spending and strengthen its ability to face international payments.
- The fundamental uses given to international reserves are to guarantee payments for goods that are imported from other countries, achieve currency stabilization and pay debt service.
- Currently, it is considered that the euro is significantly increasing its use as an international reserve, to the detriment of the dollar , which, on the contrary, is significantly decreasing its use.
- Before those currencies mentioned, it was gold that was used in this regard, without forgetting that the pound, the yen and the Swiss franc were also used.
- According to data from recent years, China, Japan and Switzerland are the countries with the largest international reserves.
- Also in the top ten with the largest reserves are places such as Russia, Saudi Arabia, South Korea, Brazil, Singapore, India and Mexico.
The central bank and international reserves
The central bank , by having international reserves, can influence the value of the currency . When the exchange rate is not fixed, the relationship between the local currency and stronger currencies varies according to their supply and demand. If the central bank has a good level of international reserves, it can choose to buy or sell foreign currency to revalue or devalue the country's currency.
It should be noted that international reserves are the result of the payments the country makes abroad (for its debts, imports, etc.) and the income it receives from abroad (for exports or remittances received).