Foreign currency accounts a safeguard

THE VALUE of your investment income may rise or fall depending on changes in the exchange rate between foreign currencies and the local currency. Holding cash in different currencies through multi-currency accounts allows you to keep your investment and savings income from declining because they reduce exchange rate conversion costs and hedge against sudden shifts in currency values.

A multi-currency account, often known as a foreign currency account, is a type of demand deposit account that allows the account holder to manage many currencies in one location without the need to convert them. A country’s holdings of foreign currencies and other conveniently accessible assets under the supervision of the central bank can be compared to multi-currency accounts.

These accounts can hold multiple currencies at the same time and allow for deposits and withdrawals in different currencies. For example, say you conduct business with suppliers in Switzerland, China, Europe, and the United States (US). When consumers deposit monies in US dollars (USD), Swiss francs (CHF), euros (EUR), or Chinese yuan renminbi (CNY) into their normal bank account, they are first converted into the account’s base currency. Standard demand deposit account fees, taxes, and restrictions have a substantial impact on profit margins, savings, and investment returns.

These generally affect users of conventional demand deposits, but not with a multicurrency account.

Certain banks in Barbados provide foreign currency accounts. Residents can open foreign currency accounts with licensed institutions.

The Central Bank requires that funds in foreign currency accounts be used for international payments before accessing the domestic foreign exchange market. Multi-currency accounts supplied by financial institutions outside of Barbados offer a diverse range of alternatives. Consumers should investigate this possibility, but they should focus on accessing stronger currencies, which may function as a buffer if one currency depreciates significantly.

Barbadian residents must obtain permission from the Central Bank to open and maintain foreign currency bank accounts overseas.

In the absence of multi-currency account alternatives, clients can hold foreign currency reserves of up to US$10 000 to avoid risk. This sum should not be held for longer than three months.

The Exchange Control Act, Cap. 71, restricts the amount of foreign currency that residents can possess. Among other things, the Act mandates that citizens who are not authorised to sell or facilitate the sale of gold or foreign currency but hold bailees of such assets inform the Authority in writing that they are in possession of such. Only institutions licensed by the Exchange Control Authority are permitted to purchase and sell foreign currency.

In Barbados, exchange limitations are strategies rather than a set of rules. The government’s strategies include the goal of keeping or managing its overseas reserves.

International reserves as reserve assets or official reserves are the external assets held and controlled by a country’s monetary authority, that is, the Central Bank. They are primarily made up of foreign currencies, gold, and other reserve assets and serve a variety of purposes, including acting as a buffer against currency depreciation, ensuring longterm foreign exchange reserves, preventing excessive outflows, stabilising the exchange rate, and facilitating international transactions.

International reserves and multi-currency accounts both act as value stores that let individual consumers, companies, and the government hold onto foreign currencies for use in cross-border transactions. Multi-currency accounts allow users to convert currencies strategically and can potentially help in mitigating losses from currency fluctuations. Meanwhile, international reserves play a crucial role in enabling central banks to intervene in foreign exchange markets, thereby stabilising the value of their domestic currency and managing exchange rate volatility.

Having large reserves on hand gives the government fiscal flexibility. Nations with substantial reserve assets and individuals with multicurrency accounts and foreign reserves are better positioned to maintain consumption growth under market turmoil.

An over supply could mean that people are not investing or spending money wisely. Countries with fixed exchange rates must keep an adequate foreign exchange reserve. What is sufficient from a micro perspective (depending on the purpose of the reserve holding) is not the same as what is required from a macro perspective. From a micro perspective, an individual citizen, such as a retiree, should have cash savings equivalent to one to two years’ expenditure. Debt-free individuals should save a minimum reserve of $1 000, or the equivalent of six months’ expenses. To assess a nation’s foreign reserve sufficiency, consider its sensitivity to capital account crises and import coverage.

During the first half of 2025, Barbados’ reserves amounted to 37.4 weeks of import coverage, or 311.7 per cent of the mandated reserve holdings (Barbados implemented a reserve regulation mandating a 12-week supply of imports). Foreign exchange reserves climbed by $695.2 million, totalling $3.9 billion in the first half of 2025.

Although international reserves are large, the rise did not cause the currency value to increase. As a result, exports are not pricier, nor are imports cheaper. Since there is no increase in currency value, the increased reserves would not harm the competitiveness of domestic industries or cause trade imbalances.

The sensitivity of the capital account, that is, the account that tracks all economic activities between citizens and the rest of the world over a given period, can be viewed by monitoring its inflows and outflows. A high capital outflow indicates that the capital account is vulnerable to crisis. If there is evidence that investors are reallocating their investments to foreign countries, if a country’s debt is downgraded by credit rating agencies due to factors such as a high debt-to-GDP ratio or fiscal deficit, or if borrowing costs increase for both the government and businesses, then it indicates that capital flows are sensitive, and a crisis could potentially emerge. The reserves-to-M2 (country’s domestic money supply representing cash, checking deposits, and easily convertible money etc.) ratio would demonstrate the nation’s ability to withstand capital flight. If a significant portion of the country’s M2 leaves, it is possible that the country will not have enough resources to meet foreign currency demands.

To pay for its imports, a nation with an unbalanced current account requires a significant amount of foreign currency. A large current account imbalance increases the likelihood of a balance of payments crisis since it indicates that the government purchases more things from other nations than it sells to them. In the first quarter of 2025, Barbados’ current account deficit increased from $-203.6 million to $-269 million.

Foreign investments, meanwhile, have been substantial. When foreign currency is brought into the country to support investments, it increases the amount of foreign exchange in the economy, which boosts the country’s reserves. As a result, while the current account deficit is bigger than in prior years, significant investment would result in capital inflows, mitigating the impact of the current account deficit.

Sizable foreign currency reserves can provide the financial stability that governments, individuals and private businesses need. Reserves ensure currency value protection and minimise capital flight. Their impact is heavily influenced by the rationale for their accumulation and use. Private companies and individuals should focus on accumulating and using reserves to reduce currency risk exposure, boost international trade, and pave the way for economic growth and expansion. Multicurrency accounts provide such opportunities, like those offered by international reserves, as they facilitate international transactions, diversify foreign exchange risks, and safeguard against adverse currency movements.

Dr Ankie Scott-Joseph, a lecturer at the University of the West Indies, Cave Hill Campus, is an economist and public debt management specialist.

Email ankie.scott-joseph@cavehill.uwi.edu