The term foreign exchange may already be familiar for a lot of people. The term foreign exchange often appears when discussing the country’s economy. And here we will discuss in full about foreign exchange, starting from the definition, functions, sources, and types of foreign exchange. Continue to read the following description.
Definition of Foreign Exchange?
Foreign exchange is a way or source that can be used for payments in an international market. Foreign exchange can be in the form of foreign currencies, i.e. a number of internationally recognized foreign currencies, for example Dollar (American), Yen (Japan), Euro (Europe), Pound Sterling (UK), Franc (Switzerland), and Deutsche Mark (Germany). Not only in the form of cash exchange reserves, foreign exchange can also be in the form of gold or securities that can be used as international payments.
All foreign currencies have different status
Although you already know about foreign currency, but not all foreign currencies can be referred to as foreign exchange. What can be said as foreign exchange is a currency that has been officially registered at the Central Bank, like some of the currencies that have been mentioned above.
What is foreign exchange reserve?
What is foreign exchange reserve? In foreign exchange context, the word foreign exchange reserve is also a known term. State foreign exchange reserves are foreign exchange reserves prepared by the central bank to finance payments and obligations abroad, for example, to pay installments on state debt, imports, and so forth. The higher a country’s foreign exchange reserves, the higher the country’s monetary and macroeconomic stability.
Foreign Exchange Reserve to boost up Economy
Therefore, foreign exchange is very important to strengthen the country’s economy. So that the term foreign exchange is important to discuss, especially those who provide foreign exchange income, for example these are migrant workers who work abroad. Some of you might still not understand how they donate foreign exchange to the state? These migrant workers generally get income or salary in the form of foreign currency. Then, when they want to send income to the country, they need to exchange the foreign currency for rupees so that it can be used domestically. Well, the foreign currencies they have exchanged can already be referred to as foreign exchange.
Foreign Exchange Functions
In general, there are three foreign exchange functions, which are as follows:
Payment of Overseas Goods and Services
The most important foreign exchange function is as a transfer function or international payment instrument, for example in the case of exports and imports. There are Pakistani traders who import goods from other foreign countries. Of course, the merchant must pay using American currency. Well, this is where foreign exchange works, the central bank as the holder of foreign exchange will facilitate these traders by exchanging rupees’ currency with US dollars.
Foreign Debt Payment Instruments
Apart from being a means of payment of goods and services, foreign exchange can also be used as a means of payment of foreign debt. Even so, it is not necessary that all foreign exchange reserves are used to pay debts. Foreign exchange must be managed wisely so that it can be utilized to the maximum extent possible to develop other sectors.
For example, a recent phenomenon where the state is borrowing heavily in debt to launch infrastructure work. On the one hand, infrastructure development can increase state debt. But on the other hand, infrastructure can improve the economy and increase the country’s foreign exchange.
Foreign exchange to repay debt
Well, this is where a country must try to keep a balance between income and expenditure. Foreign exchange must be managed in such a way as to be able to repay the country’s debt, but can also be allocated to other domestic work.
Payment Instrument in Establishing International Relations
Another function of foreign exchange is to build international relations, for example to finance official travel, diplomatic activities abroad, the use of embassy offices, and so forth.
So, the foreign exchange reserves should be given importance when we talk about a country’s progress.