By: Mathias Hangala
The International Monetary Fund (IMF) says adequate foreign exchange reserves play a role in shielding economies from shocks and strengthening economic resilience.
In a report released through its social media platforms last week, the IMF noted that building foreign exchange reserves requires macroeconomic policies and sustained effort. However, global initiatives aimed at lowering the cost of holding reserves could support countries in strengthening these financial buffers.
“Doing so requires overcoming domestic resistance to reserve accumulation. Cooperative international solutions could help countries build buffers. Countries that are prone to financial crises tend to hold low levels of reserves. Much like households, nations need access to liquid resources that can be deployed to manage shocks. Countries with very low reserves are perceived as risky and have limited policy options when markets turn against them,” said the IMF.
The importance of reserves extends beyond the choice of exchange rate regime, for countries with fixed exchange rates require larger reserves to support their currencies. However, reserves are equally important for economies with flexible exchange rate systems, as they help contain currency volatility and reduce associated macroeconomic risks.
“For many other economies, particularly low-income countries, the various layers of the global financial safety net remain inadequate. These layers include access to IMF resources, bilateral or regional swap arrangements, and countries’ own reserves,” shared the IMF.
According to the IMF’s reserve adequacy metrics, higher reserve levels would help these countries strengthen their resilience against economic shocks.
Considering the benefits of reserves, which include financial security and lower borrowing costs, countries with low reserve levels struggle to implement policy adjustments. This reflects political-economy dynamics, where pressure to achieve political gains leads policymakers to delay reforms and draw down reserves.
The IMF noted that building reserves is a process and works best when done organically rather than through short-term foreign-exchange borrowing from private or official creditors. Stabilisation programs during the late 1980s and early 1990s, for example, demonstrated that there are no shortcuts; reserves must be accumulated steadily over time.
However, holding reserves also comes with costs, indicated the IMF, because safety and liquidity command a premium and reserve assets yield lower returns compared to alternative investments. This opportunity cost, the price of self-insurance, may discourage countries from accumulating reserves. Reserve accumulation may contribute to pressures if not properly sterilised.
While individual countries may pursue prudent policies, the IMF says there is also scope for global cooperation to reduce the cost of building reserve buffers. Expanding the range of investment options available to central banks could help lower the opportunity cost associated with reserve accumulation.
Locally, Namibia’s foreign exchange reserves increased to N$51.88 billion in January, up from N$51.58 billion in December 2025. Since 2003, the country’s reserves have averaged N$21.75 billion, reaching an all-time high of N$64.45 billion in February 2025 and a record low of N$1.78 billion in June 2004.
Foreign exchange reserves are foreign assets held or controlled by a country’s central bank. These reserves may consist of gold, foreign currencies, special drawing rights, and marketable securities denominated in foreign currencies, such as treasury bills, government bonds, corporate bonds, equities, and foreign currency loans.
