Tuesday, 3 January 2017

Exchange Control

Exchange Control

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.

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

Following are the main objectives of exchange control:

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 divided through exchange control.

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 to interest or some other reasons.

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.

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

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.

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.

To Protect Home Industry:
To project and industry form 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.

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

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.