What Exactly Are Exchange Controls?
Exchange controls are restrictions placed by the government on the acquisition and/or sale of currencies. These limits enable governments to better manage their economies by controlling currency inflows and outflows, which can cause exchange rate volatility. The measures are not legal in every country; the 14th item of the International Monetary Fund’s Articles of Agreement enables only nations with so-called transitional economies to use currency controls.
Understanding Foreign Exchange Controls
In the years immediately following World War II, many Western European governments imposed currency controls. However, as the continent’s postwar economies rebounded, the limitations were gradually phased away; the United Kingdom, for example, lifted the last of its restrictions in October 1979. Foreign exchange controls are commonly used by countries with weak and/or developing economies to limit speculation against their currencies. They frequently implement capital controls at the same time, limiting the amount of foreign investment in the country. There are several typical methods for enforcing exchange regulations. A government may prohibit the use and possession of a certain foreign currency. Alternatively, countries can set fixed exchange rates to discourage speculation, limit all foreign exchange to government-approved exchangers, or limit the amount of cash that can be imported or exported from the country.
What are the primary goals of exchange control?
The primary goal of the government’s exchange control is to manage or prevent a negative balance of payments position on national accounts. It entails directing all or a portion of a country’s foreign exchange receipts into a common pool controlled by authorities, often the central bank.
What are the exchange control methods?
(1) Intervention (2) Exchange Clearing Agreements (3) Blocked Accounts (4) Payment Agreements (5) Gold Policy (6) Foreign Exchange Rationing are all important means of exchange regulation.
(7) A variety of exchange rates.
Why is an exchange control policy implemented?
The primary goal of exchange control is to restore balance-of-payments equilibrium by allowing imports only when they are necessary in the interests of the country and thereby limiting demand for foreign exchange to available resources.
