EXCHANGE CONTROL

By: Lennon John P. Alipio

International Trade and Agreements

 EXCHANGE CONTROL

Exchange control refers to the regulatory

measures imposed by a government on the
buying and selling of foreign currencies.

International Trade and Agreements

 EXCHANGE CONTROL

In the words of Haberler, "Exchange control is

the state regulation excluding the free play of
economic forces from the free play of foreign
exchange market".

International Trade and Agreements

WHY DO GOVERNMENTS IMPLEMENT EXCHANGE CONTROL?

Governments implement exchange control to stabilize

their currency, control inflation, manage their balance
of payments, and protect their economies from sudden
capital movements that can lead to financial instability.

International Trade and Agreements

HOW DOES EXCHANGE CONTROL AFFECT INTERNATIONAL TRADE?

Exchange control can impact international trade by

limiting the amount of currency available for
importers and exporters. This may lead to challenges
in global trading activities and affect a country's trade
balance.

International Trade and Agreements

 ARTICLE 14

The International Monetary Fund has a provision

called Article 14, which only allows countries
with transitional economies to employ foreign
exchange controls.

International Trade and Agreements

International Trade and Agreements
International Trade and Agreements
 OBJECTIVES
• Protection of Balance of Payments
• Reducing Burden of Foreign Debt
• Stabilizing Exchange Rate
• Conservation of Foreign Exchange
• Prevention of Flight of Capital Abroad
• Useful for Economic Planning
• Encouragement of Certain Economic Activities
 PROTECTION OF BALANCE OF PAYMENTS

Exchange control is an important tool used to maintain balance of

payments. When a country's deficit becomes chronic and cannot be
automatically corrected, active measures are required. Typically, a
decline in currency value boosts exports and restores equilibrium.
However, there are cases where currency depreciation does not
affect exports. In such situations, measures are taken to stabilize
the currency at a higher level than what would be possible under
certain conditions.
 REDUCING BURDEN OF FOREIGN DEBT

Maintaining a higher exchange value can reduce foreign debts,

increase export earnings, and stimulate domestic industries.
However, a fixed and overvalued exchange rate can lead to
long-term loss of competitiveness for exports, distort the
economy, and discourage foreign investment. Policymakers
must carefully weigh the potential drawbacks before
implementing such a strategy.
 STABILIZING EXCHANGE RATE

Governments may implement exchange controls to

maintain a stable exchange rate and prevent
economic imbalances. To instill confidence and
stability in the economy, the government may
establish an official exchange rate at a
predetermined level.
 CONSERVATION OF FOREIGN EXCHANGE

Exchange control may be introduced by the monetary authority

to conserve the gold, bullion, foreign exchange currencies, etc.,
i.e., foreign Exchange control may be introduced by the
monetary authority to exchange resources, of the country. It
may be necessary to ensure the availability of sufficient
amount of foreign exchange needed to buy essential foreign
goods.
 PREVENTION OF FLIGHTOF CAPITAL ABROAD

Exchange control is a crucial tool for managing capital

flows and ensuring economic stability in countries
experiencing heavy outflows due to loss of confidence,
currency depreciation, or higher interest rates. It allows
the government to impose restrictions on capital
outflows, stabilizing the economy and protecting
financial stability.
 USEFUL FOR ECONOMIC PLANNING

Exchange control is an important part of economic policy

in any planned economy. Planning involves a very careful
use of foreign exchange resources of the country. By
implementing exchange control measures, the government
can regulate the flow of foreign currency, ensuring it is
utilized efficiently for the overall economic development of
the nation.
ENCOURAGEMENTOF CERTAIN ECONOMICACTIVITIES

One of the objectives of exchange regulations is to

encourage certain economic activities in the country.
Certain industries can be developed by reducing the
imports of commodities produced by them and
restricting the availability of foreign exchange to pay
for them.
Methods or Devices of
Exchange Control
 There are large numbers of methods or
devices of exchange control. Broadly, these
methods are grouped under two main heads:
(A) Unilateral Methods
(B) Bilateral or Multilateral Methods.
 (A) Unilateral Methods
Unilateral methods are those methods of exchange
control which are adopted by the government of a
country without any consultation or understanding
with any other country. The main methods under this
head are as follows:
 1. EXCHANGE PEGGING

Exchange pegging means the act of fixing the

exchange value of the currency to some chosen rate.
When the exchange rate is fixed higher than the
market rate (overvaluation), it is called pegging up.
When the exchange rate is fixed lower than the market
rate, it is called pegging down (undervaluation).
2. EXCHANGE EQUALIZATION ACCOUNT

Exchange equalization account is the device

adopted for smoothing out temporary or short-
term fluctuation in the rate of exchange as a
result of any abnormal movement of capital.
 3. Clearing Agreement

Clearing agreement may be defined as an

undertaking between two or more nations to
buy and sell goods and services among
themselves according to specified rate of
exchange. The payments are to be made by
buyers in the buyer's home currency.
 4. STANDSTILL AGREEMENT
Standstill agreement aims at maintaining status quo
(existing condition or state of affairs) in the
relationship between two countries in terms of capital
movement. If a country is under debt to another
country, payments of short-term debts may be
suspended for a given period by entering into an
agreement called the standstill agreement.
 5. COMPENSATION AGREEMENT

The two countries import and export commodities from each

other of equivalent value and so leave no balance requiring
settlement in foreign exchange. Since no payment is made to
foreign exchange, problem of foreign exchange does not
arise. This mutually beneficial trade relationship helps to
stabilize the currencies of both countries and strengthens their
economic ties.
 6. BLOCKED ACCOUNTS

Blocked accounts refer to a method by which the

foreigners are restricted to transfer funds to their
home countries. The extreme step of freezing the
bank accounts of the foreigners is taken when the
government faces the acute shortage of foreign
exchange.
 7. PAYMENT AGREEMENT

The payment agreements are made between a debtor and a

creditor country. This method of exchange control facilities
is where the debtor country - to make more and more
exports to the creditor country and to import less and less
quantity from it. Under this system, the international
transactions in foreign exchange are settled and cleared.
 8. RATIONING OF FOREIGN EXCHANGE

Under this system, the government monopolizes the

foreign exchange reserves. The exporters are required
to surrender foreign exchange earnings at the fixed
exchange rate to the central bank of the country. The
importers are allotted foreign exchange at the fixed
rate and in fixed amount.
 9. MULTIPLE EXCHANGERATES

Under this system, different exchange rates are

fixed for import and export of different
commodities and for different countries. This
system of exchange is adopted for earning
maximum possible foreign exchange by increasing
exports and reducing imports.
 (A) Bilateral or Multilateral Methods
When two or more than two countries decide to
adopt certain measures for stabilizing the rates of
exchange between them, these are called bilateral
or multilateral methods. The main methods are:
 1. CLEARING AGREEMENTS

Under this system, the governments of the two countries agree

to clear the accounts in home currencies through their
respective central banks. This system aims to simplify
international trade between the two countries by eliminating
the need for foreign exchange transactions. By clearing the
accounts in their home currencies, businesses can avoid
potential currency fluctuations and associated risks.
 2. TRANSFER MORATORIA

Under this system, the payments for the imported goods

or the interest on foreign capital are not made
immediately but are suspended for a predetermined
period called as period of moratorium. A country adopts
this method of exchange control for temporary solving
its payments problems.
 3. INTERNATIONAL LIQUIDITY

For solving the availability of

internationally acceptable means of
payments i.e., Special Drawing Rights
(SDR's) Scheme, among others, of the IMF.
Thank You !
Presented by : Lennon John P. Alipio