Mon, Jan 07, 2008 - Page 8 News List

EDITORIAL: Accident or design?

By all accounts, the nation's accumulation of foreign exchange reserves has slowed in recent months. What is not clear is whether this is a deliberate result of the government's management, or simply a consequence of capital outflows.

Central bank statistics released last Friday show that the nation's foreign exchange reserves increased by just 1.56 percent last year -- the lowest since 2000.

Most people in Taiwan would be unaware of this, because our newspaper headlines are dominated by squabbling politicians and sensationalism.

With US$270.311 billion in gold and widely accepted foreign currencies -- such as the US dollar, the euro, the pound sterling and the yen -- as of last month, Taiwan is officially the world's fourth-largest holder of foreign exchange reserves. However, accurate comparisons are difficult as governments release their data in different forms.

No one would dispute that the top three holders of foreign exchange reserves are China with US$1.433 trillion as of September, Japan with US$970.2 billion as of November and Russia with US$354.6 billion, also as of November.

As data released by the Reserve Bank of India on Friday showed that India's foreign exchange reserves totaled US$275.56 billion as of Dec. 28, it is only a matter of time before India replaces Taiwan in the hierarchy.

Foreign exchange reserves and an expanding trade surplus have long been viewed by the government as signs of success and national prosperity. But are massive foreign exchange reserves really that desirable?

Taiwan's central bank said in July that the nation's foreign exchange reserves could pay for 15.7 months of imports, far exceeding the world average of 7.5 months of imports. At the time, a central bank official said the nation's foreign reserves were "adequate."

One view is that ample foreign reserves enable a monetary authority to protect the value of its own currency and also serve as a safety net in case of a financial crisis or market volatility.

This is particularly true for Taiwan, as the nation is not a member of either the IMF or the World Bank and cannot rely on these Washington-based organizations or their member countries for financial aid.

The opposing view is that stockpiles of foreign reserves generate mediocre interest and benefit the nation less than real investments such as infrastructure construction projects.

Critics also warn that huge foreign reserves pose an inflation risk. Their reasoning is that, in a bid to boost exports, a central bank may have bought foreign currencies to keep its own currency relatively weak. This naturally creates stockpiles of foreign reserves, but at the same time invites asset bubbles and builds price pressure.

The ideal level of foreign reserves is almost impossible to gauge. But, with the Bureau of Foreign Trade estimating that the nation's trade surplus reached a record US$25.21 billion last year, it would be a cause for concern if foreign reserves began to stagnate not as a result of government policy, but in spite of it.

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