15
UNIT 2
Meaning of Exchange Control:
Exchange control means the interference by the state, central bank or any
other agency with the free play of market forces that determine foreign exchange
rate. Exchange rates, under exchange control system, are fixed arbitrarily by the
government and are not determined freely by the forces of demand and supply. In
other words, exchange control system represents government domination of the
foreign exchange market.
Each international transaction requiring payment in foreign currencies is
sanctioned by the government and all foreign exchange receipts from international
transactions are surrendered to the government. The main object of exchange
control is to secure stability of fixed exchange rate and to ensure balance of
payments equilibrium.
According to Haberler, exchange control is the state regulation excluding the
free play of economic forces from the free play of foreign exchange market. In the
words of G.N. Halm, “By exchange control we refer to measures which replace
part of the equilibrating function of foreign exchange market by regulations alien
to the pricing process.”
According to Ellsworth, “Exchange control means dealing with the balance
of payments difficulties, disregards market forces and substitutes for them the
arbitrary decisions of government officials”. According to G.D.H. Cole. “The
essence of exchange control is that the possessor of the controlled currency has no
right, without special leave to convert it into foreign currency.”
Exchange control maybe complete or partial. Exchange control is complete
when the government has full control over the exchange market. In fact, under
complete exchange control, there exists no exchange market and disequilibrium in
the balance of payments is impossibility.
The exchange control applies to all types of international transactions and
the government restricts the sale and purchase of all currencies. Exchange control
is partial when the government partially controls the exchange market. The
exchange control applies only to certain types of international transactions and the
government restricts the sale and purchase of some selected currencies.
, 16
Exchange control is a method of influencing international trade and
investment as well as the payments mechanism. As such, it has the advantages and
disadvantages of other means of protection. It is adopted by and is specially suited
to those nations which seek to achieve economic goals by manipulating the market
behaviour. It is not an appropriate measure for the free-market economies. For this
reason, the system of exchange control is commonly used in the less developed
countries and the communist countries. Exchange control is the most drastic means
of balance of payments adjustment.
It may be compared with other trade restrictions in respect of its impact
and administration:
(a) Exchange control is more certain than tariffs in its impact on a country’s
balance of payments,
(b) Exchange control has the advantage of controlling visible trade and invisible
transactions and capital movements,
(c) Whereas the trade controls are generally operated by the ministry of trade
through customs department, the exchange controls are usually operated by the
central bank through commercial banks.
(d) There may be some degree of discretion given to the individual banks in case of
exchange control. But, no such discretion exists in case of trade controls.
Features of Exchange Control:
The system of exchange control possesses the following broad features:
(i) The government monopolises the foreign exchange business and exercises full
control over the foreign exchange market.
(ii) The rate of exchange is fixed officially by the government and the market
forces of demand and supply have no effect on its determination.
(iii) The government centralises all foreign exchange operations in the hands of the
central tank which administers various foreign exchange regulations.
ADVERTISEMENTS:
(iv) The exporters have to deposit their all foreign exchange earnings with the
central banks.
(v) Imports of the country are regulated and the importers are allocated foreign
exchange at the official rates to enable them to make payments for the goods
imported.
(vi) The government or the central bank determines the priorities in the allocation
of scarce foreign currencies.
UNIT 2
Meaning of Exchange Control:
Exchange control means the interference by the state, central bank or any
other agency with the free play of market forces that determine foreign exchange
rate. Exchange rates, under exchange control system, are fixed arbitrarily by the
government and are not determined freely by the forces of demand and supply. In
other words, exchange control system represents government domination of the
foreign exchange market.
Each international transaction requiring payment in foreign currencies is
sanctioned by the government and all foreign exchange receipts from international
transactions are surrendered to the government. The main object of exchange
control is to secure stability of fixed exchange rate and to ensure balance of
payments equilibrium.
According to Haberler, exchange control is the state regulation excluding the
free play of economic forces from the free play of foreign exchange market. In the
words of G.N. Halm, “By exchange control we refer to measures which replace
part of the equilibrating function of foreign exchange market by regulations alien
to the pricing process.”
According to Ellsworth, “Exchange control means dealing with the balance
of payments difficulties, disregards market forces and substitutes for them the
arbitrary decisions of government officials”. According to G.D.H. Cole. “The
essence of exchange control is that the possessor of the controlled currency has no
right, without special leave to convert it into foreign currency.”
Exchange control maybe complete or partial. Exchange control is complete
when the government has full control over the exchange market. In fact, under
complete exchange control, there exists no exchange market and disequilibrium in
the balance of payments is impossibility.
The exchange control applies to all types of international transactions and
the government restricts the sale and purchase of all currencies. Exchange control
is partial when the government partially controls the exchange market. The
exchange control applies only to certain types of international transactions and the
government restricts the sale and purchase of some selected currencies.
, 16
Exchange control is a method of influencing international trade and
investment as well as the payments mechanism. As such, it has the advantages and
disadvantages of other means of protection. It is adopted by and is specially suited
to those nations which seek to achieve economic goals by manipulating the market
behaviour. It is not an appropriate measure for the free-market economies. For this
reason, the system of exchange control is commonly used in the less developed
countries and the communist countries. Exchange control is the most drastic means
of balance of payments adjustment.
It may be compared with other trade restrictions in respect of its impact
and administration:
(a) Exchange control is more certain than tariffs in its impact on a country’s
balance of payments,
(b) Exchange control has the advantage of controlling visible trade and invisible
transactions and capital movements,
(c) Whereas the trade controls are generally operated by the ministry of trade
through customs department, the exchange controls are usually operated by the
central bank through commercial banks.
(d) There may be some degree of discretion given to the individual banks in case of
exchange control. But, no such discretion exists in case of trade controls.
Features of Exchange Control:
The system of exchange control possesses the following broad features:
(i) The government monopolises the foreign exchange business and exercises full
control over the foreign exchange market.
(ii) The rate of exchange is fixed officially by the government and the market
forces of demand and supply have no effect on its determination.
(iii) The government centralises all foreign exchange operations in the hands of the
central tank which administers various foreign exchange regulations.
ADVERTISEMENTS:
(iv) The exporters have to deposit their all foreign exchange earnings with the
central banks.
(v) Imports of the country are regulated and the importers are allocated foreign
exchange at the official rates to enable them to make payments for the goods
imported.
(vi) The government or the central bank determines the priorities in the allocation
of scarce foreign currencies.
