Just yesterday, President Yoweri Museveni of Uganda stressed that his government cannot afford to subsidise imports of essential foods and commodities, because doing so would be disastrous to his country's paltry $4.5 billion foreign reserves.
Other African countries have also taken steps to protect their foreign exchange reserves. In a previous article by Business Insider Africa, we cited examples of Kenya and Nigeria where banks are mandated to prioritise and ration dollar sales to manufacturers and importers.
Do note that excessive dollar demands tend to put immense pressure on foreign reserves, thus depleting them.
What are foreign exchange reserves?
According to Investopedia, foreign exchange reserves are typically dollar-denominated assets that are held on reserve by central banks.
The International Monetary Fund (IMF) further defines foreign exchange reserves as “official public sector foreign assets that are readily available to, and controlled by the monetary authorities, for direct financing of payments imbalances, and directly regulating the magnitude of such imbalances, through intervention in the foreign exchange markets to affect the currency exchange rate and/or for other purposes.”
The constitutions of different African countries require their central banks to maintain external assets in the following forms: bullion or gold coins, foreign short-term treasury bills, bonds, the IMF's special drawing rights, account balances in foreign banks, etc.
Each of these assets must possess a basic feature of liquidity and can easily be converted to either dollars, pound sterling, Euro or other similar hard currencies.
Importance of foreign exchange reserves
- Foreign exchange reserves are necessary for influencing the monetary policies of countries.
- Foreign exchange reserves serve as backup funds just in case a country's currency drastically devalues.
- It's a source of economic prestige, as countries with high foreign exchange reserves are respected for their strong economic standing.
- Countries with good foreign exchange reserves tend to attract viable foreign trade and investment opportunities.
Which African countries have the largest foreign exchange reserves?
- South Africa: This country's foreign exchange reserves is currently standing at an impressive $60.2 billion, according to the South African Reserve Bank.
- Algeria: Algeria has foreign exchange reserves of $43.5 billion, according to the Bank of Algeria.
- Nigeria: Latest data obtained from the Central Bank of Nigeria show that the country's foreign exchange reserves currently stand at $39.6 billion.
- Egypt: Next, we have Egypt with foreign exchange reserves of $37 billion according to the Central Bank of Egypt.
- Morocco: This country's foreign exchange reserves currently stand at $33.3 billion according to Bank Al-Maghrib, Morocco's central bank.
- Angola: Angola currently has foreign exchange reserves to the tune of $14.7 billion, according to the National Bank of Angola.
- Kenya: This East African country has foreign exchange reserves to the tune of $12.6 billion, according to the Central Bank of Kenya
- Democratic Republic of Congo: The DRC's foreign exchange reserves is $11.1 billion, according to information made available by Banque Centrale du Congo.
- Ghana: Ghana's foreign exchange reserves currently stand at $9.7 according to information from the Bank of Ghana.
- Tunisia: Tunisia has foreign exchange reserves of $8 billion, according to Reuters.
