Banking, Business, Commerce, Economics

EXCHANGE CONTROL

EXCHANGE CONTROL

INTRODUCTION: The government of any country, for achieving its specific economic objectives, does not permit the free movement of foreign exchange and the conversion of one country’s currency into the currency of another country. Hence, the government makes some rules and regulations to check the free movement and conversion of home/foreign currencies which are called “Exchange Control” policies. After the first world war, many countries became inflation stricken and their capital started shifting to other countries then the authorities of some countries used the methods of exchange control in order to keep the capital within the country.

DEFINITIONS:

1. Exchange control refers to the measures, which the Government of a count”‘ takes for influencing the foreign exchange rate or the steps of the government to check the free movement of foreign exchange.

2. The rationing of foreign currencies, bank drafts and other instruments for settling international financial obligations by countries and to overcome the balance of payment difficulties.

OBJECTIVES

Following are the main objectives of exchange control:

1. Sufficient Supply of Foreign Exchange: For purchasing necessary goods and repayments of debts and interest sufficient supply of foreign exchange must be maintained. This objective can be achieved through exchange control.

2. To Check the Flight of Capital: Exchange control policy is adopted also to check the export of capital from the country because there is always a danger of shifting of foreign exchange to abroad due to higher rate of interest or some other reasons.

3. Stability in Exchange Rates: After leaving the gold standard many countries realized the need of stability in exchange rate of their currencies, because foreign exchange dealings may lead to sharp fluctuation in the exchange rates and it is very risky for the economy. So, exchange control is employed to make the exchange rates stable.

4. To Appreciate Home Currency: Some countries appreciate the exchange value of their currency through exchange control. In this way imports become cheaper.

5. To Increase Foreign Exchange Reserves: Exchange control policy is adopted also for increasing the foreign exchange reserves to face the uncertain economic situation like war and other problems. If government keeps sufficient amount of foreign exchange reserves, people rely upon government and the currency in circulation.

6. To Promote Economic Growth: Developing countries adopt exchange. control policy to increase home production and foreign exchange is preferably used to import the capital goods and technology to promote the economic growth of the country.

7. To Protect Home Industry: To protect any industry from foreign competition, government can employ exchange control policy by not allocating any amount of foreign exchange for the import of such commodities, .which are produced inside the country and are to be protected.

8. Favorable Balance of Payment: Generally developing countries face unfavorable balance of payment, so they adopt the exchange control policy to make their balance of payment favorable.

9. To Reduce the Exchange Rate: Some countries to increase the volume of their exports under exchange devalue their currencies. In this way exports become cheaper and so encouraged, and the imports become more costly. In this way imports are discouraged which help to correct the balance of payment.

METHODS OF EXCHANGE CONTROL

The presence of central bank in any country is necessary for exchange control. The central bank frames different policies to control foreign exchange. Methods of exchange control can be divided into two classes:

1. Direct Methods: These include all those methods, which are adopted by the government to make the rate of exchange stable.     2. Indirect Methods: These cover all those steps, which are taken by the government to control the imports and exports.

DIRECT METHODS

The direct methods of exchange control are as follows:

(1) Exchange Restrictions: To improve the weak position of foreign exchange reserves necessary steps are taken to reduce the supply of home currency in the international exchange market. This situation is created due to excessive repayment of foreign debts, which reduces the volume of foreign exchange reserves.

(2) Rationing of Foreign Exchange: All the foreign exchange earned by the citizens is deposited under exchange control to the central bank of the country in exchange for home currency. Then central bank allocates the foreign exchange keeping in view the national economic preference’ and the demand of the importers.

(3) Government Intervention: Under this method. to stabilize the exchange rate of home currency government purchases it from international market against foreign currency.

(4) Clearing Agreements: Clearing agreement is an agreement between the two under which importers in both countries pay the purchase price of all goods imported into an account at their central banks. The exporters can receive the amount sold from their central banks in home cur-ency. The countries settle balances by transferring gold or foreign after a fixed time.

(5) Stand Still Agreement: Under this system, either the short-term debt is into long-term debt or provision is made for its repayment.

(6) Transfer Moratoria: Under this system, importers and others pay their foreign debts in their domestic currency to specified authority country. When the moratorium is concluded, these funds remitted abroad. A foreign creditor is sometimes allowed to use his funds in the country in a way specified by the government.

(7) Exchange ‘Pegging: This device was used during war in order to minimize fluctuation. It means to fix the exchange rate below the equilibrium exchange rate in a free market, to facilitate the foreign transactions. The main objective is to confidence in the currency and to exchange imports.

(8) Blocked Account: When the payment of foreign debts is made in domestic currency to the central bank but it is not allowed to remit abroad without the permission of the government, blocked account are said to arise. The foreign creditors are allowed to use their funds according to the manner prescribed by the government.

(9) Compensation Agreements: This method resembles with barter agreement. According to this method the two countries export the commodities of equivalent value. Imports thus compensate for exports, leaving no balance requiring settlement in foreign exchange.

(10) Multiple Exchange Rates: Sometimes two or more exchange rates are employed for transacting foreign exchange to encourage or discourage specific types of exports & imports.

INDIRECT METHODS

Following are the indirect methods of exchange control to regulate and control the import and export of goods:

(1) Import License: The government issues the license for different goods according to their importance to the importers to economies the use of foreign exchange.

(2) Changes in Interest Rate: By increasing rate of interest foreign investors are attracted in the country and transfer of capital to abroad is discouraged and foreign exchange receipts are increased.

(3) Import Duties: To discourage the use of foreign exchange for less important goods import duties are imposed: If the import of certain goods is to be more discouraged, heavy rate of duties is imposed.

(4) Export Promotion: Various steps are taken to promote the exports by making them cheaper in the international market. For this purpose, generally export duties are not imposed and subsidiary is paid on the export of some specific export items.

(5) Export Bonus Scheme: To encourage the exporters, a certain portion of foreign exchange of their exports is given to them to import the goods at their sweet will.

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