Economist Dr. Lubinda Haabazoka has described foreign exchange reserves as a critical pillar of economic stability, saying they enable countries to meet international obligations, cushion their economies against shocks and maintain confidence among investors.
Dr. Haabazoka explained that foreign exchange reserves are funds and internationally accepted assets held by a country’s central bank, such as the Bank of Zambia, to support the economy during periods of financial uncertainty.
He said forex reserves were essentially “the savings a country keeps in foreign currencies and other internationally accepted assets,” likening them to a national emergency fund that governments can rely on in times of need.
Dr. Haabazoka said the reserves are made up of foreign currencies, government securities, gold, Special Drawing Rights (SDRs) and a country’s reserve position at the International Monetary Fund (IMF).
He noted that one of the most important functions of the reserves is financing imports of essential goods.
“Countries import fuel, medicines, machinery and food,” he said, adding that forex reserves provide the foreign currency required to pay for such imports.
Dr. Haabazoka further explained that the reserves play a crucial role in protecting the value of the local currency during periods of market volatility.
He said the central bank could intervene when necessary by using the reserves to ease pressure on the exchange rate.
“The Bank of Zambia can sell dollars from its reserves to reduce pressure on the currency,” he said.
The economist also said strong forex reserves enable governments to meet external debt obligations while enhancing investor confidence by demonstrating financial resilience.
He added that countries with healthy reserve levels were generally viewed as more stable, resulting in lower borrowing costs and improved credit ratings.
Dr. Haabazoka said adequate reserves also provide protection against global financial crises, commodity price shocks, droughts, pandemics and sudden capital outflows.
He noted that “a common rule” was for countries to maintain reserves sufficient to cover “at least three months of imports,” although stronger economies often held enough to finance six months or more.
Summing up their significance, Dr. Haabazoka said forex reserves help countries “pay for imports, service foreign debt, stabilize the exchange rate, and protect the economy during times of crisis.”