Foreign Reserves Research Articles

The Asymmetric Effects of the Determinants of Real Exchange Rate in Jordan: The Role of Price Index Selection

This study examines the asymmetric effect of real exchange rate (RER) determinants on RER. Workers' remittances (REM), foreign reserves (RES), government expenditures (EXP) and terms of trade (TOT) were chosen as determinants of the RER, which was measured with four different price indices; (CPIU.S/CPIJOR, GDP Def. rU.S/GDP Def.JOR, IPIU.S/GDP Def. JOR , PPIU.S/GDP Def. JOR). Quarterly data were applied from Jordan for the period of (2004-2017) using nonlinear autoregressive distributed lag (NARDL) model. The results indicate that the choice of the price index affect significantly the symmetry/asymmetry patterns of the RER determinants, thus, the choice of the price index should be directly linked to the purpose of the study to gain accurate results. Moreover, expansive fiscal policy may increase TOT by causing a country’s currency to depreciate. However, TOT was the only determinant that resulted in symmetrical behavior regardless of the price index chosen as a basis for measuring a currency’s RER. Contrary to the study’s hypothesis, fluctuations in Jordanian imports and exports do not fluctuate with RER. With respect to the short-run symmetry, foreign reserves (RES), governmental expenditures (EXP) and TOT may influence RER asymmetrically leading to possibility to peg RER in the short-run. The expansionary economic policy may have a greater impact on RER than the contractionary policy, which may in turn increase TOT. Hence, overvaluation of RER may hamper economic growth. This may be particularly true for emerging economies, such as Jordan’s, this may be particularly true for emerging [or emerging-market] economies, such as Jordan’s, which are overseen by weak institutions and plagued by market failure.

Kenya

Kenya is navigating a turbulent global backdrop marked by volatile commodity prices, slowing growth in key trading partners, and constrained frontier market access to international capital markets. At home, a smooth transition following the August elections demonstrated Kenya’s increasing institutional strengths, while the multi-season drought has worsened food insecurity for vulnerable populations in arid and semi-arid regions and kept food prices elevated. Strong tax overperformance in FY2021/22 helped cushion some of these shocks, and the administration of President Ruto eliminated petrol subsidies in their first week in office. Inflation has breached the central bank (CBK) target band, and monetary policy has been tightened by 175 basis points this year. Foreign reserves are adequate, but lower than previously projected given shortfalls in FY2021/22 external public commercial and project financing, spending cuts in FY2022/23 also extending to externally-financed projects, and the prospects for continued challenging market conditions for frontier economies into 2023.

The Impact of Tourism Income on Foreign Reserves in Jordan during the Period 2005-2020

This study aimed to analyze the impact of tourism income on foreign reserves in Jordan during the period 2005-2020. The study used annual data related to three variables (foreign public debt, trade balance deficit, and workers’ remittances) during the study period; the data were collected from the annual reports issued by the Central Bank of Jordan and the Jordanian Ministry of Tourism and Antiquities. To achieve the aim of the study, the fully modified least squares (FMOLS) test was applied. Among the most important findings of the study according to the Johansen statistical test was the existence of a long-term equilibrium relationship between tourism income and foreign reserves and between the three variables between the variables (foreign public debt, trade balance deficit, and workers' remittances) and foreign reserves. The empirical results of the study also showed a positive and significant effect of tourism income on foreign currency reserves and a positive and significant impact of both foreign public debt and remittances of workers abroad on foreign reserves. This finding was obtained through the statistical FMOLS model. Among the most important recommendations of this study is the need for the Jordanian government to pay more attention to the issue of foreign reserves to keep them at high and comfortable levels. This can be achieved through the Jordanian government’s set of procedures and reviews of laws and policies related to the tourism sector, as it is one of the most important financing sources of foreign reserves. In this regard, the government must provide the necessary infrastructure to revitalize the tourism sector, in addition to reviewing the tax policies and fees imposed on the sector.

Foreign remittance inflow in Bangladesh: A statistical analysis

The major goal of this research is to assess Bangladesh's foreign remittance inflows. In recent years, remittance has risen to prominence as one of the most important economic variables, since it helps with the surplus balance of payments, foreign reserves, aggregate savings and money circulation. Bangladesh's foreign trade has begun to improve after overcoming the negative effects of the COVID-19 pandemic. In comparison to the previous fiscal year, total export earnings declined by 16.93% to US$ 33,674.09 million in FY2019–20. During the first half of fiscal year 2020–21, export earnings totalled US$ 35,180.81 million, up 13.64% over the same period of the previous fiscal year. Furthermore, remittance earnings are growing at a slower rate than emigration from Bangladesh, owing to a rising number of unskilled or semi-skilled labourers in overseas migration rather than professional. Remittances have a great impact on Bangladesh's economy. Keywords: Foreign remittance, money laundering, foreign exchange, foreign trade, migration, economy;

Debt Crisis and National Bankruptcy: Evidence from Sri Lanka

On May 19th this year, the central bank governor of Sri Lanka confirmed that the country could not repay its national debt due on April 18th in time (Jayasinghe & Pal, 2022). For the first time, Sri Lanka had defaulted on its sovereign debt since independence from Britain in 1948. It also announced its inability to continue paying for fuel (Jayasinghe & Pal, 2022). On July 6th, Sri Lanka declared national bankruptcy (Athas et al., 2022). This paper examined what led to Sri Lankan debt crisis and subsequent national bankruptcy and how the country could save itself from its situation. It analyzed secondary data from various published sources like news articles, journal articles, websites, and books. The study found that the country had high levels of external debt that outrun revenue. It also depends highly on imports to supply goods into the market. Its debt crisis was also influenced by economic shocks like the Russian-Ukraine war and the Covid-19 pandemic, which impaled production. Furthermore, the country's economic regulations were poor, making it unable to establish effective taxation, debt, and foreign reserve management systems. The company could improve its economic conditions by getting economic assistance from other countries and the IMF in the short term. Moreover, it also needs to restructure its foreign reserves and borrowings management systems.

أثر التحرير المالي على الاحتياطيات الأجنبية في الأردن

This study aimed to investigate the impact of financial liberalization on foreign reserves in Jordan over the period (1998-2018). Several diagnostic tests have been applied, such as Augmented Dickey- Fuller (ADF) and Phillips-Perron (PP) test for Stationarity.
 The results have shown that all of the time series are not stationary in their levels, where are their first differences are stationaryaccording to Dickey- Fuller test (ADF), but the results have shown that some of the time series are stationary in their levels and some of them are stationary in the first difference according to Phillips-Perron test. Cusum stability test was applied for checking the stability of the model parameters, and the autoregressive distributed lag (ARDL) bound testing approach was applied for the cointegration test. The results have shown the financial freedom (as a proxy variable for financial liberalization) has a positive statistically significant impact on foreign reserves. So this study recommends to extend financial liberalization in order to increase foreign reserves in Jordan.
 Keywords: Financial Liberalization, Foreign reserves, Autoregressive Distributed Lag (ARDL) model.

Determinants of Egypt’s Food Imports Based on Vector Error-Correction Model (VECM)

The issue of food and the provision of society's needs have a priority in the Egyptian economic policy. Therefore, the state tends to import large quantities of these commodities annually from the global market to bridge the gap between consumption and domestic production. This study focuses on determining the main factors that affect Egyptian food imports during the period 1990–2019, using a Vector Error-Correction Model (VECM) that will help policymakers use the appropriate monetary, fiscal, and trade tools to manage Egypt’s food imports and decrease the import cost. The empirical results revealed that the most important factors' effects on Egypt's food imports are population growth and inflation rate, but imported food prices and GDP per capita have an effect only in the long run. On the other hand, there are no significant effects of the foreign reserves, exchange rate, and agricultural production on food imports.

Naira to Dollar Exchange Rate Fluctuations and Nigeria’s Balance of Payment

The authors analyze how changes in the value of the naira affect the country’s overall trade surplus or deficit. The 2020 edition of the Central Bank of Nigeria Statistical Bulletin was consulted for data on the country’s balance of payments, exchange rate, trade openness, and inflation rates. Exchange rate, exchange rate fluctuation, trade openness, and inflation rate are the independent variables, and the balance of payments (BOPs) is the dependent variable. The model’s variables’ stationary was determined using the ADF unit root test method. The results of the tests show that after the first difference, the balance of payment and the inflation rate stabilized, while the actual exchange rate, exchange rate fluctuation, and the degree of trade openness all remained stable at their respective levels. The study’s dependent and independent variables” long-term relationship was estimated using an autoregressive distributed lag bounds test. There is a long run link between the study’s dependent and independent variables, as evidenced by the estimates’ F-statistics value of 4.85, which is larger than the lower and upper critical bounds of 3.23 and 4.35. Estimates also reveal that in the long run, the balance of payment in Nigeria is positively impacted by exchange rate fluctuations and the real exchange rate, while it is negatively impacted by inflation and trade openness. As a result, the study suggests that government should subsidize farmers who produce export goods in order to reduce the volatility of naira to dollar exchange rate. The national government should put aside more funds to increase the nation’s foreign reserve in order to reduce the volatility of the currency exchange rate. Rigid taxes on imported goods are one way to prevent heavy reliance on them.

Macroeconomic Aggregates and Oil Price Vagaries in Nigeria: An Impact Assessment

This study investigated the impact of negative oil price changes on macroeconomic aggregates in Nigeria from 1981 to 2020 using the autoregressive distributed lagged (ARDL) and the vector error correction models. Evidence from the findings showed that unemployment, foreign direct investment, and real gross domestic product are important determinants of oil price vagaries. In addition, there is empirical support for a positive relationship between oil price and unemployment on the one hand and a negative relationship between oil price and imports, foreign direct investment, and real gross domestic product on the other hand in both the short and long run. This implies that any decline in oil price is associated with a decrease in foreign direct investment and imports, and an increase in unemployment thereby resulting to the worsening of real gross domestic product in Nigeria during the period. In view of the findings, the study recommends a culture of uninterrupted savings of oil proceeds during episodes of oil price boom and by implication boosting of foreign reserves to provide sufficient cover for imports during periods of oil price decrease. In addition to this recommendation is the continuous clamour for a properly diversified economy away from oil dependence. In periods of negative oil price shocks which discourages investment, the government should encourage investors through various incentives such as tax holidays and havens, reduce cost of funds using the appropriate agency of government and ensure the provision of enabling environment and infrastructure (such as power, security, and roads) for investments to strive and improvement in the ease of doing business in the country. This will result in job creation; reduce unemployment and poverty, thereby improving the gross domestic product.

Exchange Rate Regimes, Import Prices and Foreign Reserve Holdings in Africa

In this study, we examined dynamic interaction between exchange rate regimes, import prices and foreign reserve holdings in developing countries. Monthly data for the study were obtained on five African countries from 1980M1 to 2020M12. Recognizing that our sample of nations may not be homogenous due to unobserved characteristics of the individual countries such as, economic size, or differences in financial strength, we modelled reserve holding following P-ARDL specifications of Pesaran, Shin & Smith (1995) which recognizes the MG and PMG modeling in error correction configurations. The Hausman test reveals that MG was more efficient compared to PMG. To check robustness of our MG estimates, we had an alternative GMM specification. The GMM estimation was also necessitated to overcome simultaneity biases and endogeneity problems that characterized OLS estimation of our P-ARDL model. Findings showed that exchange rate regime is a significant positive contributor to the volume of reserve holdings while import prices negatively influences reserve holdings. Relatively, study reveals negative contributions of cost of holding reserves, and inflation towards declining reserve holding in selected countries of Africa is highly significant in both SR and LR. Nevertheless, significant heterogeneity exists amongst countries as regards speed of adjustment following disturbances in SR reserve holding to LR convergence. Nigeria had the fastest speed of 61% compared to Angola, Kenya, South Africa, and Egypt with 49%, 20%, 50%, and 19% respectively. Differences in economic strength, economic size (GDP), government factor, political size, financial depth, etc. of countries could have accounted for the difference in adjustment speed. Our MG estimates were found robust to a GMM specification. The study concludes that there is a dynamics interaction between exchange rate regime, import prices and foreign exchange reserves holding. We so recommended that African countries should strategically implement policies to reduce their inflation rates, dependence on import, effectively manage exchange rate regime so that they can achieve higher volume of external reserve holdings that will lead to a reduction in their import prices.

Foreign Reserve Management and U.S. Money Market Liquidity: A Cost of Exorbitant Privilege

Foreign Reserve Management and U.S. Money Market Liquidity: A Cost of Exorbitant Privilege

Republic of Moldova

Moldova’s economy is projected to stagnate in 2022 amid spillovers from Russia’s invasion of Ukraine. The war in Ukraine continues to weigh heavily on Moldova, although some initial pressures have subsided. Bank deposit net withdrawals came to an end and are now steadily being replenished. The leu depreciated by about 8 percent so far while pressures on foreign reserves have eased. About 550,000 refugees fleeing the war (representing more than 20 percent of the Moldovan population) have transited through Moldova, with about a fifth remaining in the country. Driven by rising food and energy prices, inflation accelerated further above the target band.

COVID-19 PANDEMIC AND NIGERIA’S INTERNATIONAL LIQUIDITY: IMPACT ANALYSIS

Covid-19 pandemic woes have caught across almost every international activity in the world today, which makes many economies to be in a cross-road whether the COVID-19 pandemic is the cause of these woes or not. In this regard, this study investigated the effect of the COVID-19 pandemic on international liquidity in Nigeria. COVID-19 pandemic was proxied by COVID-19 new cases and new deaths of the pandemic in Nigeria and a dummy which represented the period of the pandemic, and as such, stood in as the explanatory variables in the study, while international liquidity was put as the dependent variable. Daily data sets were sourced from National Centre for Disease Control in Nigeria and the Central Bank of Nigeria statistical bulletin between February and October 2020, employing Auto-Regressive Distributed Lag (ARDL) technique. Findings of the study revealed that, in the short run, the COVID-19 pandemic period had a significant impact on Nigeria's international liquidity. However, the COVID-19 new cases and new deaths could not have any significant impact on the international liquidity. Moreover, none of the COVID-19 pandemic variables could have any long-run impact on the international liquidity in Nigeria. The study, therefore, suggests that Nigerians should know that the depletion of its foreign reserve is not due to policy deficiency but to the COVID-19 pandemic. Also, the government should try to improve quality exports that will be demanded by foreign countries irrespective of any pandemic.

International cooperation in foreign reserve policies in the presence of competitive hoarding

AbstractThis article analyzes the international reserve accumulation behavior of emerging and developing economies facing “keeping‐up‐with‐the‐Joneses” externalities. I first document empirical evidence for a significant Joneses effect, which has been particularly persistent in Asia and Latin America since the late 1990s. This peer‐pressure motive could encourage excess reserve hoarding, providing a rationale for cooperation. I then develop a theoretical model of the borrowing economy featuring the Joneses effect and the interdependence between reserves and domestic capital investment. Numerical results show that international cooperation can effectively internalize negative externalities associated with competitive reserve hoarding and induce welfare‐enhancing resource allocations.

Monetary policy autonomy and foreign reserves accumulation in Brazil: a compensation view

Abstract During the 2000s, Brazil accumulated a substantial amount of foreign reserves through foreign exchange market interventions undertaken by its Central Bank. Mainstream economics considers such interventions a restriction to monetary policy autonomy. This article analyses the relationship between monetary policy autonomy and exchange rate regimes theoretically and empirically for the Brazilian economy. We argue that the compensation principle, as a direct derivation of the endogenous money approach, is an alternative to both the trilemma and dilemma views in the mainstream perspective. Then, we provide empirical evidence in favour of the compensation principle in the Brazilian economy by verifying the exogeneity of the interest rate and estimating a vector error-correction model (VECM) that indicates that the foreign reserves do not have a long-term effect on the monetary base, while they present a significant and large effect on the repos account. In line with the compensation view, we conclude that in the 2000s, Brazil had more monetary policy autonomy than conventional approaches would have suggested.

Remittances flow to India and its impact on growth over three decades since 1991

In many developing countries, remittance payments from migrant workers are observed as an increasing magnitude and becoming a significant source of foreign reserve earnings. Remittances inflow is noted to be very useful in promoting household welfare, health, and education particularly in developing countries. Inflows of remittances to India have experienced a sharp rise in last three dictates. Remittances have also emerged as a more important and stable source of foreign exchange inflow compared to official development assistance, foreign direct investment or other types of capital flows in particular in developing countries.Among countries today, the top recipient countries are India with $79 billion, followed by China ($67 billion), Mexico ($36 billion), the Philippines ($34 billion), and Egypt ($29 billion) (World Bank 2019).Available evidences indicate that migrant labour flows from India since 1990s have not only registered impressive growth, in respect of the traditional destinations like United States of America (USA), United Kingdom (UK), Canada and the Gulf countries but also have diversified and expanded to newly emerging migrant destinations in continental Europe (Germany, France, Belgium), Australasia (Australia, New Zealand), East Asia (Japan) and South-East Asia (Singapore, Malaysia).In this study we have concentrated on the long-run relationship between remittances inflow and the economic growth of India considering annual data over the period 1975-2016,In this purpose we have used VAR (The vector auto regression) model for estimating the significance relationship and the direction of the relationship.

The democratic (dis)advantage: The conditional impact of democracy on credit risk and sovereign default

AbstractMany have argued that democracies are able to make credible commitments to repay their debts and consequently enjoy higher sovereign credit ratings. In contrast to this expectation, I argue that the advantage of democracies in credit ratings is conditional on the countries' level of financial vulnerability and adjustment needs. Because democracies have more diffuse decision‐making and are more accountable to the public, they encounter greater difficulty than autocracies in passing unpopular economic adjustment measures. Thus, I argue that democracies with high debt levels and low foreign reserve assets experience worse credit outcomes, whereas democracies with low vulnerability experience more positive outcomes. In a sample of up to 96 developing countries, I show that democracies have worse credit ratings and CDS Spreads and are more likely to default than their autocratic counterparts when foreign reserves are low relative to external debt. Notably, I also show that large debt burdens increase credit risk mainly in more democratic countries. I further test the causal pathway of the democratic advantage by constructing democracy scores of “market‐friendly” and “adjustment‐difficulty” democracy, finding that democracy worsens debt outcomes due to adjustment difficulty. These findings help to revise and clarify the causal logic surrounding the democratic advantage hypothesis.

Changes in Exchange Rate Regimes and Some Macro Factors: Their Impacts on the Valuation of Bangladeshi Taka

Bangladesh, an emerging economy in South Asia, has gone through several regimes of exchange rate systems in the course of its 50 years of independence. A broad-based study to determine the exchange rate of the Bangladeshi taka (BDT) is missing in the existing literature. Using the annual data from 1972–1973 to 2017–2018, the study has measured the changes in exchange rates of BDT during three regimes: a fixed exchange rate, a semi-fixed system and a purely floating system or managed floating system that Bangladesh has followed in successive order. It has also described the factors that need to be affected by any change in the exchange rate. By using a desk research method, this article has investigated the roles of several macroeconomic variables such as the currency denomination of foreign exchange rate reserve components, money supply components, return on financial instruments or interest rates, gross domestic product, trade policy, asset holding strategy and interbank intervention strategy in BDT’s exchange rate fluctuations during those regimes. Among others, we found that Bangladesh’s volume of US dollars (USD) as a foreign reserve significantly outruns the sum of all other currencies and assets combined. However, an extreme dependency on USD might expose BDT to ‘currency risk’, which may be avoided by adopting a better nominal anchor and including some other major currencies in its basket.

Reserve accumulation, growth and financial crises

We present a model that reproduces two salient facts characterizing the international monetary system: Fast growing emerging countries i) run current account surpluses, ii) accumulate international reserves and receive net private inflows. We study a two-sector, tradable and non-tradable, small open economy. There is a growth externality in the tradable sector and agents have imperfect access to international financial markets. By accumulating foreign reserves, the government induces a real exchange rate depreciation and a reallocation of production towards the tradable sector that boosts growth. Financial frictions generate imperfect substitutability between private and public debt flows so that private agents do not perfectly offset the government policy. The possibility of using reserves to provide liquidity during crises amplifies the positive impact of reserve accumulation on growth. The optimal reserve management entails a fast rate of reserve accumulation, as well as higher growth and larger current account surpluses compared to the economy with no policy intervention.

Estimating the Indirect Effects of Monetary Policy on Inflation, the Output Gap and Foreign Reserves in Jordan Using the New Keynesian Model

This research aims to estimate the indirect effects of Jordanian monetary policy (interest rates on the one-night deposit window) on the following economic variables: inflation, output gap, and foreign reserves. New Keynesian Theory). The model (based on the new Keynesian model) includes four basic equations that explain the changes in the following variables: inflation rates, the output gap, interest rates, and the effective real exchange rate. To estimate the model’s parameters, quarterly data for the Jordanian economy from 2000 to 2019 were used, especially for the mentioned variables. The simultaneous equations methodology and the general differences method (GMM) were used to obtain consistent and unbiased estimated values for the parameters. The study found that the monetary policy followed by the Central Bank of Jordan effectively influences inflation and the output gap, but in a limited way, and its impact on foreign reserves covering the most famous imports was significant.