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Problems of International Liquidity

Some of the problems connected with international liquidity are the following:

(i) Because international trade has grown faster than the growth in money reserves, some countries are unable to pay their import bills from the reserves. Sometimes, when a country is experiencing a serious and persistent balance of payments deficit, there will be a strong-downward pressure on the foreign exchange market. Such a country may be forced by the IMF to devalue its currency.

(ii) International liquidity may also pose a danger to countries holding large exchange reserves such as the dollar, pound and Franc. Apart from the dollar, most other international currencies like the pound are not stable, and their instability often adversely affects countries that have huge exchange reserves, which is why developing countries prefer holding their reserves in the dollar which is considered as relatively more stable than others.

(iii) Another problem is the creation of reserve by an expanded international liquidity fund. This expanded reserve makes international liquidity difficult. Developing countries have, thus, found it difficult to meet their international commitments except with the guidance of the capitalistic-oriented IMF.

(iv) Flexible exchange rate is another problem of international liquidity. If the foreign exchange market was free completely, prices would be determined by the forces of supply and demand. This tends to favour developed countries more than less developed countries, like Nigeria. For instance, the demand for foreign currencies are derived principally, from the demand for goods and services. The more Nigerians demand for more foreign goods, the higher the prices of foreign currencies relative to the Naira. This may result in foreign exchange problems for Nigeria and an eventual balance of payment difficulty.