The Landscape of International Reserve Accumulation for Precautionary Purposes: A Comparative Study of the African and Latin American Cases

• In Event: Finance, Taxation, and Development

Abstract

International reserve accumulation for precautionary purposes by countries in the Global South remains unabated. A majority of countries in Africa and Latin America hold significantly more reserves today than they did before both the East Asian and Global Financial Crises. Only in the last few years have reserves decreased in some of these countries, in large part due to the challenges posed by the COVID-19 Pandemic. While international reserves increase the policy space for these countries to deal with macroeconomic shocks originating from both domestic and global financial pressures, they come at a high opportunity cost.

As central banks around the world continue to grapple with responding to inflation, and as the supremacy of the U.S. Dollar as the world’s reserve currency continues to be challenged, it is a good time to take stock of international reserve management strategies that have worked (and not worked) for countries in the Global South. This paper provides a comparative assessment of recent strategies employed in African and Latin American countries to mitigate the costs associated with reserve accumulation while providing the precautionary protection to deal with the vagaries of global financial markets. Specifically, it considers the effectiveness of two South-South cooperation strategies: regional reserve pooling mechanisms like the Latin American Reserve Fund and the West African Economic and Monetary Union; and the increasing role of bilateral currency swap agreements among countries in the Global South, like those extended by China to Argentina and Nigeria.

Author

• Luis Rosero, Framingham State University