Shall We Celebrate Our Huge FOREX Reserve?

I was going to blog about this current item some days ago, but I was so busy then. It was a notable report about our economy about three days ago, where our foreign exchange reserve stood at record-high 41.3 Billion in U.S. dollars. Otherwise known as Gross International Reserve (GIR), forex exchange reserve is one good indicator on the health and vigor of the economy, simply stating how much dollars or foreign currency flows into the country at a certain point.

At this level, the Philippines maintain the 10th largest reserve in Asia according to the report and about 37th in the world.

It’s a bit of a downside however to learn that other countries in Asia like Thailand (US 125 B), Malaysia (US 91.4B) and Indonesia (US 57.4B) are so far ahead of us in this aspect. But knowing that we have gained great strides in this matter is already one reason to feel uplifted, somehow.

To clarify some point, the GIR does not ultimately reflect the real account or level of an economy of a nation and remains highly debated as to its significance is assessing a nation’s actual economic strength. Too much of it could actually be harmful to the dynamics of currencies as central banks could easily masked flailing currencies resulting to the hazards of misrepresented values of items and commodities, a situation that could easily lead to explosive inflation and sharp contraction in economy.

Consider that other notable rich countries like Australia (US 40.9B) and Spain (US 27.6B) are far lower than us but for certain, these countries’ economy are so much bigger than ours.

The highest level in GIR is held by China at $ 2.1 Trillion while America is merely 20th at $ 78 Billion. Now, at least we see the gigantic irony about foreign reserves.

But all in all, GIR level is greatly indicative of our nation’s health or any form of upswing on it, in the most basic sense. America and other rich countries could well afford to maintain reasonably lower amount of reserves since their liquidity issues are not as much a problem, and besides America’s dollar remains to be the currency of choice for almost all countries, meaning all those held in reserves in many central banks across the globe emanates or is directly connected to the U.S. economy, signifying its enormous strength as a financial hegemony (giant) in the global trade.

Other forms of reserves are in gold, that’s why central banks all over the world store bullion of gold somewhere underneath their premises.

What is most significant about our GIR level is the sharp increase it had gained from last year, almost $ 10 Billion all in all, from a mere $ 32 B in 2008.

Apparently, this strong inflow of forex exchange should be credited primarily to improving remittances from OFW’s abroad (showing how they are truly heroes of this country) and some from foreign direct investment and capital.

Some sectors says and ask, “What shall we do with these dollar reserves? Shall we just store it or make use of it?”

Some even suggested that we use half of it to pay our fast accumulating foreign debts. Some say we use some of it to build houses and roads.

Maybe we can we use some of it to “keynesially”upstart our economy, increasing government spending through salary increases to the government sector, embark on huge infrastructure projects like public housing, farm-to-market roads and bridges, allowing more access to farms and other potential areas.

But doing that might just harm our economy instead, decreasing credit confidence and would make our economy more likely to be fragile against currency crisis, like the Asian Financial Crisis of 1998.

That’s one of the most important purposes of stable and wide FOREX reserves, in order to shield us from currency fragility that often hounds the global economic system, attacks that are so debilitating that it could tear down an entire economy into bits in just a matter of days.