What is foreign exchange reserves?
Foreign exchange reserves are foreign assets held by a central bank that it can use to pay for imports, repay external debt and support its own currency.
In Pakistan this means the foreign assets held by the State Bank of Pakistan (SBP). News reports about "forex reserves Pakistan" usually quote SBP figures.
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Formal definition
The IMF definition is close to this: reserve assets are external assets that are readily available to, and controlled by, the monetary authority. They are used to finance balance of payments needs, to intervene in the currency market and for related purposes.
Reserves usually include:
- foreign currency deposits and foreign government securities (bonds and bills)
- monetary gold
- Special Drawing Rights (SDRs), the IMF's reserve asset
- the country's reserve position at the IMF
Worked example: import cover
A common way to judge reserves is import cover. This is the number of months of imports that the reserves could pay for.
Import cover = reserves ÷ average monthly imports
Hypothetical case: a central bank holds reserves equal to the value of a few months of the country's imports. If imports rise while reserves stay flat, import cover falls, even though the reserve figure itself has not changed. News often reports this ratio instead of the raw amount for that reason.
Edge cases experienced readers should know
- Gross vs net reserves. Gross reserves count everything held. Net reserves subtract short-term foreign liabilities, such as swaps and forward commitments. A country can have large gross reserves and much smaller net reserves.
- Borrowed reserves. Deposits placed by other governments, or loan inflows, raise gross reserves. They also have to be repaid.
- Valuation effects. Reserves are reported in US dollars. A move in gold or in the euro, yen or yuan can change the total with no new inflow.
- SBP vs total liquid reserves. Pakistani reports often separate reserves held by the SBP from the net foreign assets of commercial banks. Headlines may quote either one, so check which figure is meant.
Where the term appears
- Economic calendars in trading platforms and news sites list reserve releases for major economies.
- SBP releases and IMF reports give reserve levels and their changes.
- News headlines such as "SBP reserves rise after loan inflow" or "reserves fall on debt repayment".
In fundamental analysis, reserves are one input among many for judging how much room a central bank has to support its currency. They do not predict a price move on their own.
Pakistani residents should note that the SBP restricts foreign exchange outflows for trading. Per the SBP, remitting foreign exchange to overseas forex/margin/CFD platforms is not allowed through any payment channel (FERA s.5(1)). Leveraged forex and CFD trading can also lose money fast. See Regulation and Safety for details.
Related terms
- Capital and financial account
- Currency depreciation and Devaluation and revaluation
- Crawling peg and Currency board
- Dollarization and Bretton Woods system
- Eurobond, Default and Debt-to-GDP ratio
- Emerging markets and Gold
- The full list is in the Trading glossary.
Frequently asked questions
What does foreign exchange reserves mean in simple words?
It is the stock of foreign money and assets, such as dollars, foreign bonds and gold, that a central bank holds for external payments.
What are SBP foreign reserves?
They are the reserve assets held by the State Bank of Pakistan. News often reports them separately from the foreign assets of commercial banks.
Why do reserves matter for the rupee?
Reserves show how much the central bank can pay abroad and how far it can supply foreign currency to the market. Low reserves are usually read as a sign of pressure on the currency.
Do borrowed funds count as reserves?
Yes, they count in gross reserves while the central bank holds and controls them. Net reserve measures subtract the related short-term liabilities.
Is gold part of foreign exchange reserves?
Monetary gold held by the central bank is counted, and its value changes with the gold price.