Foreign Currency Reserves: Do They Contribute to GDP Growth and Employment Growth?

Do foreign currency reserves accumulation programmes contribute to GDP growth and employment growth? Yes, they do. Evidence shows that GDP growth and employment growth increase in response to positive shocks to foreign currency reserves (forex reserves) accumulation, whereas unemployment declines. The counterfactual historical contributions for the period 2004Q1 to 2007Q4 show that positive forex reserves accumulation shocks made consistent positive contributions to GDP growth and employment growth, leading to a consistent decline in the unemployment rate. We establish that the simultaneous occurrence of forex reserves accumulation and large-scale asset purchases (LSAPs) by the SARB reinforce each other’s effects on the unemployment rate, GDP growth and employment growth. In the absence of LSAPs, the impact of forex reserves accumulation on the unemployment rate, GDP and employment rate is much lower. Thus, these two monetary policy balance sheet tools complement each other. Furthermore, persistently rising shocks to forex reserves have cumulatively larger effects on GDP growth and employment growth, and the unemployment rate. The policy implications of these results is that a reserves accumulation programme that increases South Africa’s forex reserves by a minimum of 8 per cent will complement other policies aimed at enforcing a stable exchange rate, a moderate increase in government funding costs and macro-economic stability in the form of a lower unemployment rate, robust GDP growth and employment growth. Such a broad approach to reserves accumulation complements sound macro-economic and prudential policy frameworks that limit the country’s vulnerability to multiple shocks. This also addresses the much-needed policy co-ordination within the inflation-targeting framework, which includes the exchange rate stabilisation policy.