Just yesterday, Ugandan President Yoweri Museveni stressed that his government could not afford to subsidize imports of food and essentials because it would be disastrous for his country’s meager foreign exchange reserves, which are s amounted to $4.5 billion.

Other African countries have also taken steps to protect their foreign exchange reserves. In a previous Business Insider Africa article, we cited examples from Kenya and Nigeria where banks are mandated to prioritize and ration dollar sales to manufacturers and importers.

Note that excessive demands for dollars tend to exert immense pressure on foreign exchange reserves, thus depleting them.

What are foreign exchange reserves?

According to Investopedia, foreign exchange reserves are generally dollar-denominated assets that are held in reserve by central banks.

The International Monetary Fund (IMF) further defines foreign exchange reserves as “foreign assets of the official public sector which are readily available and controlled by the monetary authorities, for the direct financing of payments imbalances, and which directly regulate the size of these imbalances, through interventions in the foreign exchange markets to affect the exchange rate and/or for other purposes.

The constitutions of various African countries require their central banks to maintain external assets in the following forms: gold bars or coins, short-term foreign treasury bills, bonds, IMF special drawing rights, account balances in foreign banks, etc.

Each of these assets must possess a basic characteristic of liquidity and can easily be converted into dollars, pounds sterling, euros or other similar hard currencies.

Importance of foreign exchange reserves

Which African countries have the largest foreign exchange reserves?