In contemporary policy discourses on Africa’s development, there is a tendency to view improvements in international currency reserves as a positive indicator of macroeconomic performance and an outcome of policy interventions or reforms. Often, reserves are equated with socioeconomic resilience and are seen as signs of the well-being of nations. Such views, in the context of SSA, overlook the importance of sources and drivers of reserve accumulation, as well as how they are managed and invested. They also mask underlying structural impediments and systemic vulnerability to inclusive growth and unforeseen endogenous and exogenous shocks.
Available evidence reveals that reserve build-up, particularly in SSA, is often the result of international commodity price boom rather than deliberate policy actions. The lack of effective management, governance, and divestment of international reserves away from boosting productivity and productive capacities renders economies of SSA stagnant and persistently vulnerable. Contrary to SSA, international reserve build-up in East Asia and other emerging economies is the result of deeper structural transformation. Manufacturing-led export strategies, continuous improvements in GDP that generated employment, significantly reduced poverty, and led to the accumulation of capital played a crucial role. These factors, combined with conscientious efforts to hedge economies against unforeseen risks and uncertainties, particularly during shocks or crises, made international reserves vital policy tools in Asian economies. For instance, authoritative sources confirm that, while SSA’s economies have entrenched further commodity dependence over the years, in Asia, the share of manufacturing goods has risen from 12 percent of their exports in 1960 to 87 percent in 2024, accounting for more than half of the global merchandise exports in recent years. Moreover, whereas countries in the SSA heavily depend on external finance for their development, Asian economies have captured their international reserves to boost investment in infrastructure and maximize the employment intensity of growth. This means that reserves accumulation is not an end in itself, but it can be an important means to accelerate economic diversification, inclusive growth, and structural transformation if effectively managed and invested in sectors of comparative advantage.
Against this backdrop, the objective of this article is to dispel the myths and pitfalls surrounding international currency reserves that arise from viewing them as symptomatic development outcome, economic strength or societal well-being. The core arguments are (a) international reserve currencies are important for nations holding them but they are not measures of wealth or prosperity; (b) commodity-driven build-up of currency reserves can be as risky as commodity dependency itself, unless such reserves are prudently managed and strategically invested in boosting productive capacities; (c) the development objectives of SSA need to rebalance domestic priorities with international obligations in using international reserves; and (d) without independent central banks and robust institutions with capable, transparent and accountable management, international reserves may lead to corruption, mismanagement and capital flights. For SSA, the key is to diversify the sources and drivers of export revenues, prudent management, and strategic investment of their international reserves to build their socioeconomic resilience, transform their economies, and generate inclusive and sustainable growth, instead of viewing reserves as outcomes of policy interventions or signs of wealth accumulation. In short, when countries accumulate international reserves because of a commodity price boom, it is essential to have a clear strategy for why those reserves are being accumulated and how they will be used.
RELATED POSTS
Over the last eight decades, the World Bank and the International Monetary Fund (IMF), together with the Bank for International Settlements (BIS), remain custodians and pillars of the International Monetary System (IMS). The IMS, which is an integral part of the broader International Financial Architecture (IFA), consists of rules, regulations, conventions, agreements, and key institutions that oversee how nations
exchange currencies, engage in international trade and capital flows, manage external debts and international reserves, and deal with balance of payments problems. In the IMF nomenclature (not surprisingly), “creditor nations,” which command the lion’s share of international reserves, have quasi-exclusive power in managing, controlling, and influencing IMS when compared to “debtor nations”.
For decades, the IMS has been centered on the US dollar as a major reserve currency. However, it has been under intense pressure for reform due to the confluence of economic and geopolitical factors. These include the shifting global economic powers; massive capital flows, including portfolio investments; the emergence of developing economies as trade, finance, and manufacturing hubs of the global economy; recurring global political tensions; episodes of global and regional financial and economic crisis; and the mediating role of technology that influences international payment systems as well as the emergence of digital currencies.
Despite these monumental changes and consistent pressures, the IMS remains solid, viable, and stable, with the US dollar serving as a major reserve currency. Currently, the US dollar remains, by far, the largest reserve currency (60%), followed by the Euro (20%). An estimated 15% of international reserves are in the Japanese Yen, Pound Sterling, Chinese Renminbi, Swiss franc, Canadian dollar, and Australian dollar, with “other currency basket” accounting for about 5% of the total global reserve currencies. Despite ongoing debates on “de-dollarization” and the momentous rise of China as a powerhouse of global trade, foreign direct investment (FDI), and the largest holder of US dollar-denominated reserves, the share of renminbi in global reserve currencies is less than 3 %. According to IMF data, the share of the U.S. dollar in global reserve assets (60%) exceeds it share in the global economy, which currently stands at 25%. Several historical factors made the US dollar a leading global reserve currency. These were the US’s economic power, the dollar’s credibility as an unshakable store of value, and its demand by most countries for cross-border transactional and investment purposes. These factors still are valid despite the rise of China and other members of BRICS in the global economy. Africa and the rest of the developing world are lumped together in the “other currency basket” with marginal or no influence on the IMS or international reserves holding.
With recent commodity price improvements, several countries in SSA have improved their international reserves. From SSA (excluding South Africa), in early 2026, Nigeria leads with a total international reserve of USD 38.6 billion, followed by Angola (USD 14.2 billion), Ghana (USD 12 billion), Kenya (USD 10.1 billion), and Ivory Coast (USD 7.4 billion). During the same year, from the African region, Libya holds close to USD 92 billion in international reserves, followed by Algeria (USD 83.0 billion), South Africa (USD 65.4 billion), and Egypt (USD 44.9 billion). Except for South Africa and Egypt, the rest of African countries build their international currency reserves due to improvements in international prices for commodities (oil, natural gas, other minerals and precious stones, and agriculture-based products). Even Ethiopia, the country known for holding the lowest international reserves (in relation to its economic or demographic size), has recently improved its holdings from around a historic level of USD 3 billion to USD 5.8 billion in early 2026, thanks to improvements in international prices for coffee and gold as well as high turnover registered by Ethiopian Airlines. According to the IMF official statistics, globally, in 2025, China leads the global economy by holding a whopping USD 3.4 trillion (excluding gold), followed by Japan (USD 1.2 trillion), Switzerland (USD 932 billion), Taiwan (USD 602 billion), and India (USD 543 billion)-all in US dollars. Countries that are regarded as “latecomers” to the production transformation frontier and technological upgrading, such as Vietnam, recorded a peak of international reserves to the tune of USD 110 billion in 2022. Massive international reserve holdings of China and other economies of East Asia are the outcome of the countries’ economic power, higher productivity growth and export competitiveness, better productive capacities, consistent technological upgrading, and deeper structural transformation.
But what do international reserves holdings tell us?
For developing countries, large international reserves do not necessarily indicate their economic strength or the well-being of their citizens. Rather, they act as a buffer against economic instabilities and unforeseen shocks. They can also boost a nation’s credibility and financial liquidity and provide indirect indications about macroeconomic stability and the ability of governments to honour international repayment obligations, if carefully managed and utilized. Moreover, they can facilitate flows of international trade, FDI and portfolio investment. Therefore, they are “guarantee instruments” that provide liquidity, macroeconomic stability and confidence rather than indications of wealth or prosperity. Various studies also indicate that a country’s risk exposure and premium fall as reserves increase. In the context of commodity-dependent developing countries such as those in SSA, international reserve build-up tends to be cyclical as it is driven by transitory increases in global commodity prices. The priority for countries of SSA is to enact countercyclical policies, capture commodity rents in building socioeconomic resilience, production transformation, diversification and value addition.
Governments and central banks of SSA are often seen as being preoccupied with two fundamental economic policy problems: balance of payments deficits and related issues of international currency reserves. These concerns are legitimate because persistent deficits in balance of payments can adversely affect macroeconomic stability, international currency reserve positions, export competitiveness, and access to global markets and capital. They can also lead to capital flight, entrench external indebtedness, and distort exchange rate policies by the depreciation of the domestic currency vis-à vis major international currencies. However, balance of payments deficits and the declining international reserves are only symptoms of the broader structural development problems, such as weak productive capacities, lack of economic transformation, inefficiency in the allocation of productive resources, rent-seeking behaviours, recurrent budgetary deficits, lack of investible resources, weak institutions and problems related to governance. Addressing these structural and recurring challenges calls for holistic policy approaches discussed in the concluding section of this article. The objective should be to tap economy-wide comparative advantages through targeted interventions to relieve key binding constraints and the most egregious distortions in the economy.
International Reserves in the context of SSA
Countries of SSA are overwhelmingly dependent on exports of a few primary commodities, with a low and declining share of manufacturing value added in GDP. As such, their fiscal space and economic performance are often linked to the movement of international commodity prices. Generally, available evidence suggests that higher commodity prices lead to better economic performance and improved currency reserves, although such performances remain vulnerable and unsustainable, often characterised as “jobless growth” with little or no impact on poverty reduction and capital accumulation in SSA. The gap between economic growth on the one hand and the lack of meaningful impact on broader socioeconomic indicators widens during heightened uncertainties in the global economy, geopolitical tensions, and dampened global demand resulting from various unforeseen shocks such as the 2008-2009 global financial crisis, the COVID-19 pandemic, political instability, or impacts of climate change. Overall, a better international reserves position of a country can be an insurance against risks. It can also be seen as a sign of macroeconomic stability conducive to mitigating risks, attracting private capital, improving access to international capital markets, and enhancing the role of international trade in development.
However, SSA’s excessive reliance on the export of a few primary commodities leads to concomitant instability or volatility in its international reserves, leaving the region exceptionally vulnerable to the vagaries of international price fluctuations and unexpected global turbulences. Overall, while high commodity prices lead to reserve build-ups, this is short-lived and unsustainable due to a lack of export diversification and a precipitous decline in international reserves during times of downward swings of commodity prices. This, in turn, causes exchange rate volatility, exacerbates inflationary pressures (particularly during global supply shocks), elevates fiscal imbalances, and heightens liquidity crunches. These phenomena further broaden the gap between exports and imports, ballooning current account deficits, increasing dependence on foreign aid and entrenching external indebtedness. Commodity-dependent economies of SSA are also victims of the heavy concentration of their international reserves in a single or a few major currencies, which further compounds the challenges of fiscal and financial stability, undermining their role in the International Monetary System. High commodity prices may also lead to Dutch Disease, hardening the local currency in relation to the currency of international reserves, which in turn causes macroeconomic instability and undervalues the reserve currency itself.
A further problem faced by countries of SSA in accumulating international reserves is their high opportunity costs. This is due to the widening investment gaps in their economies, unmet societal needs, increased poverty, unemployment, and mounting external debts as well as foregone consumption and investment in the local economy due to international reserves build-up. Some of these countries hold large international reserves during commodity price booms that generate lower returns, while repaying external debts with much higher interest rates. The policy dilemma is whether to repay external debts to make them sustainable or maintain higher international reserves to mitigate unforeseen risks and uncertainties. The most recent study of the World Bank argues that “accumulation of international reserves and public debt in developing economies is puzzling because economies facing default risk pay high interest rates on their liabilities and receive low interest rates on their reserves”. The Bank also documents incidences of mismanagement of reserve currencies in countries where the central banks are not fully independent, which raises an uneasy relationship between governments that borrow and overspend on the one hand, and the central banks that hold and manage international reserves on the other hand.
Conclusions with policy implications
Countries hold foreign reserves to finance balance of payments needs, intervene in foreign exchange markets, provide foreign exchange liquidity to domestic economic agents, and for other related purposes, such as maintaining confidence in the domestic currency and facilitating foreign borrowing. As such, reserves are generally denominated in currencies widely used for international transactions, such as the US-dollar. The question is how commodity-dependent economies of SSA can maximize development gains from their commodity trade and minimize the adverse consequences of the international commodity price boom-bust cycle while participating meaningfully in the International Monetary System.
The focus of policy reforms and prescriptions often dictated to SSA has remained unchanged since the 1980s Structural Adjustment Programmes (SAPs). To date, the central objectives of economic reforms have been price stabilization and deregulation of foreign currencies, open trade and investment regimes, removing subsidies and safety net programmes, and curtailing investments in public sectors, including health and education, often in the name of balancing the budget. Although such “laissez-faire” market fundamentalism has dismally failed in Africa in the past, the preoccupation, to date, seems to be on “fixing prices right” rather than putting policies right. This is despite the recognition that challenges facing countries in SSA are complex and wide-ranging. As such, addressing them requires multipronged policy responses that go beyond the traditional focus on the free market mantra, balancing the budget, and hedging risks via the manipulation of international reserves.
Given that 89% of countries in SSA are classified as commodity-dependent for export revenue, poverty reduction, and employment generation, the commodities sector is not only the source of their excessive vulnerability to the commodity boom-bust cycle. But it is also crucial for their economic revival, inclusive growth, and sustained development if policies are right, institutions are robust, and the private sector is vibrant. At the policy level, governments of SSA should adopt countercyclical fiscal policy (i.e., contractionary during a commodities boom and expansionary during downward price swings). This also means boosting savings in good times by curtailing expenditures and investing such savings during bad times to moderate volatile business cycles, which oscillate with respect to cycles in international commodity prices. Such approaches are best known for managing scarce resources (foreign exchange) and for insulating economies from unintended consequences of international commodity price upswings and downswings. Regarding international reserves build-up, governments of SSA should carefully rebalance investing in their domestic economy versus holding large international reserves for hedging risks and meeting international repayment obligations. It is equally vital for countries of SSA to diversify their international reserve currency basket and ensure policy autonomy of their respective central banks to limit governments’ borrowing spree and improve management of international reserves.
The policy focus for economies of SSA should be capturing commodity rents in building their productive capacities, industrialization, and kick-starting structural transformation. This should include conscious efforts to develop domestic supply chains and strategically integrate into regional and global commodity value chains. It is equally vital for them to consider a macroeconomic policy approach that goes beyond the narrower goal of stabilization or deregulation but includes expanding the number of instruments and coordinating macroeconomic policies, including international reserves, with other sectoral policies to stimulate the development of productive capacities. In this context, fiscal policy should boost public investments in building infrastructure (soft and hard) and fostering human capital formation. Further policy efforts of SSA should be in creating a dynamic and competitive private sector that transforms natural capital into sophisticated, knowledge- and technology-intensive production of goods and services. The goal should be to maximize a virtuous circle between investments and inclusive economic growth that generates decent jobs with better incomes and reduces poverty. Such a virtuous circle is urgently needed to boost domestic demand and consumption, which, in turn, creates incentives for new or additional investment to meet the growing demand.
The views expressed are the author’s own and do not necessarily represent those of the magazine or the institutions with which the author is affiliated.
