Foreign Exchange Reserves Across India’s Immediate Neighbours Countries, Since 1960

Foreign Exchange Reserves Across India’s Immediate Neighbours Countries, Since 1960

KEY POINTS

Foreign exchange reserves are crucial for a country’s economic health and stability. These reserves usually, held by a nation’s central bank, consist of foreign currencies, gold, and other international assets.

● As of 2023, China ($3,449.5 billion) has the largest foreign exchange reserves among all the IIN countries, and this country has consistently maintained this position since 1980. India ($627.8 billion) currently holds the second largest foreign exchange reserves among all the IIN countries, but the value of the reserve is almost 5.5 times less than China.

Foreign exchange reserves are a critical aspect of economic stability for IIN countries. Addressing the challenges of reserve volatility, reliance on single sectors, political instability, and reserve depletion requires strategic solutions focused on economic diversification, governance improvement, effective policies, stronger trade relations, and robust crisis management. 

The stability and health of a nation’s economy depend heavily on its foreign exchange reserves, which are typically made up of gold, foreign currencies, and other foreign assets. Central banks typically hold these assets in a variety of currencies, such as euro, Japanese yen, and US dollar. Foreign exchange reserves are always a vital component of a country’s economic strategy as it offers stability, liquidity, and confidence in the face of international financial uncertainties. As the global economy continues to evolve, the role and management of these reserves will remain a critical area of focus for policymakers and economists. Foreign exchange reserves consist of several key components that help manage exchange rates and influence monetary policy. The most common component is foreign currencies, which play a crucial role in stabilizing exchange rates. Gold reserves, once a dominant reserve asset, have seen a decline in their proportion relative to foreign currencies. Special Drawing Rights (SDRs), created by the International Monetary Fund (IMF), act as an additional international reserve asset, supplementing member countries’ official reserves. Another important element is the IMF Reserve Position, which also represents the amount a country can access from the IMF under its financial arrangements.

Countries accumulate foreign exchange reserves for several important reasons. First, it helps stabilize the currency by allowing central banks to intervene in foreign exchange markets by buying or selling their currency to maintain economic stability. Additionally, reserves play a key role in managing inflation, as central banks can control the money supply through currency market interventions. Foreign exchange reserves also ensure liquidity and provide the necessary funds for international payment obligations like importing goods or repaying foreign debt. Moreover, high reserves boost investor confidence, which enhances a country’s creditworthiness and lowers borrowing costs. Finally, in times of economic crisis, reserves serve as a safeguard to support the domestic currency and finance essential imports.

Foreign exchange reserves play a crucial role in a nation’s economic policy and international standing as well. It contributes to economic stability and helps to mitigate the impact of economic shocks and currency volatility, thus promoting a stable economic environment. Large reserve holders are always better able to keep exchange rates steady, which promotes an atmosphere that is conducive to international investment and trade. Additionally, high reserves provide central banks with more tools and flexibility to implement effective monetary policies. On a global scale, nations with significant reserves, such as China, can exert considerable influence on global financial markets and shape economic policies. In recent years, the accumulation and management of foreign exchange reserves have changed significantly due to changing global dynamics. Countries are diversifying their reserves to reduce reliance on any single currency, enhancing stability. Developing nations increasingly accumulate reserves to safeguard against economic vulnerabilities and attract foreign investment. Political tensions and trade disputes also influence reserve management strategies, impacting global financial stability.

In this study, the World Bank data on foreign exchange reserves is used to compare and analyze the trend of forex reserves in India and its immediate neighbouring countries from 1960 to 2023. This analysis aims to identify patterns, growth trajectories, and potential factors influencing the reserves across these countries over the specified period. India’s immediate neighbours (IIN), such as Afghanistan, Bangladesh, Bhutan, China, Maldives, Myanmar, Nepal, Pakistan, and Sri Lanka, are included in the study. Since 1980, China has consistently held the top position in the list of IIN countries in terms of foreign exchange reserves, amounting to $3,449.5 billion in 2023. Despite having reserves worth almost 5.5 times less than China’s, India ranked second among the IIN nations with $627.8 billion.

Since 1990, China’s forex reserves have shown a consistent upward trend. In 1996, their reserves surpassed the $100 billion mark and then grew rapidly. Between 1996 and 2011, within 15 years, China’s reserves increased nearly 30 times, making it the only country to achieve net reserves exceeding $3 trillion. China’s forex reserves peaked in 2014 at $3,900 billion. However, a significant decline followed, likely due to a shift in economic strategy and the use of reserves to stabilize the yuan. By 2023, China’s reserves stood at $3,449.5 billion. Notably, China has maintained its position as the largest holder of foreign exchange reserves globally for decades. The rapid growth in its reserves reflects an export-oriented economic strategy and measures to manage its currency value. Until 1980, India’s foreign exchange reserves were higher than China’s. However, India was overtaken by China due to its slower growth rate. A notable increase in India’s reserves occurred after 1991, driven by economic liberalization policies. India reached the $100 billion mark in 2003 and took almost 17 years to cross $500 billion. By 2023, India’s reserves reached $627.8 billion.

Fig: 1

 

Bangladesh’s forex reserves experienced steady growth up to 2021 as it reached $46.2 billion within 50 years of its independence However, reserves declined drastically afterwards. In 2023, their reserve dropped to $21.9 billion due to economic challenges and excessive reserve utilization. On the other hand, Pakistan’s forex reserves have fluctuated over the last 60 years, reflecting economic instability and reliance on external financial support. Until 2007, reserves displayed an overall upward trend with short-term fluctuations but became highly volatile thereafter. As per the latest data of 2023, Pakistan’s reserves declined to $13.7 billion, highlighting ongoing economic and balance-of-payment challenges.

Nepal made significant progress in increasing its forex reserves until 2017. Despite reaching an all-time high of $12.5 billion in 2023, this country has seen increased volatility in recent years. Bhutan’s reserves followed an overall upward trend until 2010, after which fluctuations became prominent. In 2021, Bhutan’s reserves fell to $1.0 billion, following a peak of $1.4 billion in 2020. Myanmar’s forex reserves consistently increased until 2013 and reached an all-time high of $8.8 billion. However, a sharp decline occurred in 2014. After recovering steadily for six years, reserves stood at $7.7 billion in 2020. The Maldives has also experienced fluctuations in its reserves. In 2020, reserves peaked at $1 billion but dropped sharply to $0.6 billion in 2023.

Sri Lanka’s forex reserves have alternated between growth and sharp declines. They reached a peak of $8.2 billion in 2014 but saw severe declines thereafter. In 2021, their reserves had fallen to $3.1 billion due to a severe economic crisis and depletion of reserves to support the currency. Afghanistan’s forex reserves trajectory remains uncertain due to data gaps, especially during the 1990s political instability. Growth was recorded from 2008 to 2020, but data beyond 2020 is unavailable, likely due to political changes and uncertainty.

Foreign exchange reserves are crucial for maintaining economic stability and fostering investor confidence. However, the dynamics of these reserves across IIN countries reveal various challenges that need strategic solutions. Below, we explore the potential issues and propose strategic measures to address them. Several IIN countries, including Pakistan, Nepal, and Sri Lanka, have experienced significant fluctuations in their foreign exchange reserves. These fluctuations often reflect underlying economic instability, such as balance of payments issues, political turmoil, or dependence on external financial support. Countries like Bangladesh and Myanmar have shown substantial growth in their reserves, but they face risks due to their heavy reliance on single economic sectors (e.g., Bangladesh’s garment industry). This reliance makes them vulnerable to global market shifts and economic downturns in these sectors.

The above mentioned insights highlight the growing economic power of China and India, reflected by their massive forex reserves. Countries that implemented significant economic reforms (e.g., China’s opening up and India’s liberalization) showed accelerated reserve accumulation. The general trend of increasing reserves across the IIN countries reflects growing integration into the global economy and international trade. Fluctuations or declines in reserves for some countries around 2020-2023 reflect the impact of global events like the COVID-19 pandemic and subsequent economic pressures.

Afghanistan and Myanmar have seen significant reserve volatility due to political instability and governance issues. This unpredictability undermines economic confidence and hampers long-term economic planning. There have been notable drops in the reserves of nations such as the Maldives and Sri Lanka. This depletion often results from using reserves to support domestic currency or finance imports during economic crises, leading to a vicious cycle of reserve depletion and economic distress. India’s slower reserve growth compared to China highlights the challenges of economic diversification and sustainable growth. With adequate diversification, countries may be able to maintain reserve levels in the face of global economic changes.

Diversifying the economy is crucial for reducing reliance on single sectors and enhancing economic stability. Countries should invest in developing multiple sectors, such as technology, manufacturing, and services, to create a robust economic base. As an example, Bangladesh can expand its technology and service sectors to complement its garment industry. Improving governance and political stability is essential for sustainable economic growth and reserve accumulation. This involves implementing transparent policies, combating corruption, and ensuring political stability. For example, Afghanistan and Myanmar should strengthen their governance frameworks and ensure political stability to attract foreign investment and stabilize their reserves.

Effective monetary and fiscal policies can help manage inflation, stabilize the currency, and prevent reserve depletion. Central banks should adopt policies that balance growth with inflation control and reserve management. As an example, Pakistan can adopt more stringent monetary policies to control inflation and stabilize its currency, thereby preserving its foreign exchange reserves. Enhancing trade relations and entering new markets can boost exports and foreign exchange earnings. Partnerships and trade agreements can create new opportunities for reserve building and economic expansion. As an example, India can explore new trade agreements with emerging markets to boost its exports and enhance foreign exchange reserves. Countries should develop robust contingency plans to manage economic crises without depleting reserves. This includes building emergency funds, securing lines of credit, and developing strategies for quick economic recovery. As an example, Sri Lanka can establish an emergency economic fund and secure international lines of credit to mitigate the impact of economic crises. Overall, Foreign exchange reserves are a critical aspect of economic stability for IIN countries. Addressing the challenges of reserve volatility, reliance on single sectors, political instability, and reserve depletion requires strategic solutions focused on economic diversification, governance improvement, effective policies, stronger trade relations, and robust crisis management. IIN countries can enhance their economic resilience and ensure sustainable growth by implementing these strategies.

References

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About Author



 

Pankaj Chowdhury is a former Research Assistant at the International Economic Association. He holds a Master’s degree in Demography & Biostatistics from the International Institute for Population Sciences and a Bachelor’s degree in Statistics from Visva-Bharati University. His primary research interests focus on exploring new dimensions of in computational social science and digital demography.

Note: In this article, the total reserves comprise holdings of monetary gold, special drawing rights, reserves of IMF members held by the IMF, and holdings of foreign exchange under the control of monetary authorities. The gold component of these reserves is valued at year-end (December 31) London prices. Data are in current U.S. dollars.

Disclaimer: The views expressed in this article are those of the author and do not necessarily reflect the views of 360 Analytika.

Acknowledgement: The author extends his gratitude to the World Bank for providing data support.

This article is posted by Sahil Shekh, Editor at 360 Analytika.

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