Question

Explain the following function of the Central Bank:

Custodian of foreign exchange reserves.

Answer 1

1. International Trade and Payments: Foreign exchange reserves are essential for facilitating global payments and trade. Even during periods of economic instability, they ensure that a nation can import the necessary commodities and services and fulfill its international commitments.
2. Emergency Situations: Foreign exchange reserves serve as a safety net for the economy during periods of economic distress or crisis. They give you a cushion that you can utilize to deal with problems with your balance of payments, your external debt, or other unexpected financial troubles.