What does the governments do with these monies? How come individual companies in a country can’t just buy what they need to sell in the country? Like for example Sri Lanka. When the government ran out of money…they ran out of oil. Were not the companies selling oil..buying the oil?
In: 6
There’s a difference between the private industries in a country and the government.
If the government reserves run out of money, that’s not related to the private sector buying/selling things
The standard use of foreign currency reserves are the amount of foreign currency held in the central bank of a country. Private banks can also hold reserves of foreign currency but that is usually not referred to in this particular term.
Individual companies can import product, but to do so, they need to pay the sellers. Private sellers generally don’t accept foreign currencies. So the buyer typically has to find a way to exchange domestic currency for foreign currency in order to buy stuff. This is where the foreign currency reserves come into play.
The problem with Sri Lanka is that they are so indebted and out of reserves that private banks etc have little faith in the Sri Lankan Rupee. Therefore, these banks are unwilling to exchange other currencies for Rupees unless offered a very big discount. This pulls down the exchange rate of the Rupee. This is why foreign currency reserves are important – it allows the central bank to step in and (hopefully) stabilize the exchange rate by guaranteeing availability of that foreign currency.
It isn’t that there are no sellers of oil. It is that few sellers want to accept Rupees in exchange for oil or at least not enough sellers for Sri Lanka to purchase enough oil.
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