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2007 AEC -Reserves Accumulation in African Countries: Sources, Motivations, and Effects

30-Nov-2007

African countries have accumulated substantial foreign currency reserves in recent years, mostly from higher commodity exports as well as aid flows. In the context of macroeconomic stabilisation, which remains at the forefront of national economic policymaking and aid conditionality, African countries are induced to hold reserves to allow monetary authorities to intervene in markets to control the exchange rate and inflation. Adequate reserves also allow the country to borrow from abroad and to hedge against instability and uncertainty of external capital flows. However, reserve accumulation can have high economic and social costs, including a high opportunity cost emanating from low returns on reserve assets, losses due to reserve currency depreciation, and forgone gains from investment and social expenditures that could be financed by these reserves.

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