Seven years after the Asian crisis, the region’s central banks now hold more foreign exchange reserves than is necessary and should consider putting them to more productive use, the Asian Development Bank chief economist said.
The region is suffering significant carrying and opportunity costs in maintaining reserves at such high levels, Ifzal Ali told a news conference at the bank’s Manila headquarters.
The reserves have grown from a combined $497 billion as of end-1997 to more than $2.0 trillion as the region’s policy makers sought to make their countries immune from a second financial meltdown and less reliant on international agencies to meet their foreign exchange requirements.
Japan alone held some $827 billion in forex reserves at the end of August, with China holding another $430 billion and Taiwan $231 billion.
"Perhaps the time has now come that the level of reserves that are being held are far in excess of (what is) prudently needed to meet reasonable shocks," Ali said.
The large bulk of the central banks’ portfolios are in US Treasury bonds that pay lower interest compared to those offered by domestic holders of debt, Ali said.
"In that sense there is a very significant cost — not only in financial terms but there is also maybe an opportunity cost," he said, referring to the other potential ways this money could be used.
He urged Asian central banks to redeploy these resources "to make trade regimes more liberal, to make imports easier, to increase efficiency to lower the cost of investment."
Ali also said the US Federal Reserve’s decision to raise interest rates by 25 basis points to 1.75 percent on Tuesday should see Asian central banks following suit over the next 15 months.
