International Liquidity
The term ‘International Liquidity’ means all the financial resources and facilities that are available to the monetary authorities of individual countries for financing the deficits in their international balance of payments when all other sources of supply of foreign funds prove insufficient to ensure a balance in international payments.
The international liquidity may be distinguished from the domestic liquidity. While the latter includes, apart from money, the time deposits, postal savings, co-operative society deposits, treasury bills, short- term bonds, the former, refers to the various ways by which the different countries can raise their ready purchasing power over the goods of other countries without initially affecting their own trade balance.
Sources of international liquidity
The sources include gold mines in the country, export receipts, capital inflows and unilateral transfers. An excess of demand over supply causes depletion or shortage of international liquidity reserves.
Components of international liquidity
1 . Gold reserves with the national monetary authorities — central banks — and with the IMF.
2 . Dollar reserves of countries other than the USA.
3 . Sterling reserves of countries other than the UK.
It should be noted that items (2) and (3) are regarded as key currencies of the world and their reserves held by member countries constitute the respective liabilities of the USA and the UK. More recently, Swiss francs and German marks also have been regarded as ‘‘key currencies.”
4 . IMF tranche position which represents the “drawing potential” of the IMF members.
5 . Credit arrangements (bilateral and multi-lateral credit) between countries such as “swap agreements” and the “Ten” of the Paris Club.
Of all these components, however, gold and key currency like dollar today assumes greater significance in determining the international liquidity of the world.
The international liquidity, however, does not include a great deal of the financing of the international trade, viz., the vast complex of private foreign exchange holdings and bank and trade credits.
The credit supplied by the international institutions like the Export-Import Bank, the World Bank, International Finance Corporation and International Development Association for the specific purposes of trade too remain excluded from the international liquidity.
PRACTICE QUESTIONS
QUES . The problem of international liquidity is related to the non-availability of : UPSC 2015
(a) goods and services
(b) gold and silver
(c) dollars and other hard currencies
(d) exportable surplus
Answer (c) EXPLANATION: ֍ Goods and services – This refers to a country’s real physical resources and output in the economy. While vital for economic health and exports, the availability of goods and services domestically does not directly fulfill a country’s need for internationally accepted liquid global currencies. ֍ Gold and silver – While precious metals have historically been linked to definitions of money and liquidity, nowadays most international transactions and payments are denominated and settled in dollars, euros, yen etc. So the money supply of just gold and silver is too limited. ֍ Dollars and other hard currencies – This accurately reflects modern global understanding of monetary liquidity i.e. readily available supply of major stable globally accepted currencies like the dollar and euro that are constantly demanded for cross-border payments and investments. Shortage of convertible money leads to international illiquidity issues. ֍ Exportable surplus – This relates more to an excess in a country’s export capacity versus its imports. Having an export surplus supports balance of payments but does not automatically assure availability of internationally recognized currencies needed for payments.
