EXCHANGE

CONTROLS
a complete or partial regulation by the
government covering payments from
one monetary area into all others
and/or the disposition of foreign
exchange receipts and incomes of
residents of the monetary area
concerned.

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• known during the lifetime of the International Monetary Fund,
commenced in the 1930's especially in Germany, in Japan and in
Latin America.
• in the operation of exchange control, the government requires it
citizens and inhabitants who have earnings abroad to surrender
them to the government.
• it subjects all international transactions of the country to
licensing, both visible and invisible items includes:commodity
imports, interest and dividend payments, travels abroad, freight
,
expenditures capital movements and others.

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Need for Exchange Control

• Exchange restrictions are official measures adopted by

the government designed purposely to conserve the
foreign exchange resources of the country as well as
to control exchange rates through limitation of the
freedom of monopolization, of foreign exchange
transaction.

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Nature and Scope
• it enjoys the advantage of covering not only
merchandise transactions as already stated but
likewise the invisible items of the balance of
payments.
 The demand for foreign exchange comes from
importers and others who must remit payments
for their merchandise imports as well as of those
who wish to travel abroad, etc.

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Objective of exchange
control
• To maintain the exchange rate and avoid the flight of capital

• To assure imports of items considered essential to the country’s well

being

• To stimulate or discourage the production of certain goods deemed

vital to the economy.

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• To maintain the exchange rate and avoid the flight of capital
Individuals were not permitted
to transfer funds abroad
without the permission of
government obviously
intended to prevent the flight
of capital
Flight of capital- outflow of capital
from a country due to negative
monetary policy.

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• To assure imports of items considered essential to
the country’s well being

• The goods which are considered highly essential either from the point of the countries
development or the consumers well being are classified as essential items.

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• To stimulate or discourage the production of certain
goods deemed vital to the economy.

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Mechanisms of Exchange Control
mechanisms may be noted, such as:

Compensation Payments Unilateral and

clearing agreements Non-
discriminator
agreements y exchange
control

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 • While the adoption of system of
exchange control is not actually
intended for purposes of
generating income to the
government, however, in its actual
operation it brings certain gains or
profits, that is the difference
between the selling rate and the
buying rate. it purchases foreign
As a Source of exchange at a lower rate and sells
at a higher rate and then the
Revenue difference will naturally generate
revenue.
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Mechanisms of Exchange Control
mechanisms may be noted, such as:

Compensation Payments Unilateral and

clearing agreements Non-
discriminator
agreements y exchange
control

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 consists of matching
deals between parties in
two different countries
Compensation with equivalent value
being involved on both
agreements sides.
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 described simply as
agreement between two
countries by which
definite trade transaction
of its citizens are offset
against each country’s
Clearing account, without the
necessity of passing any
agreement foreign exchange.
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 have been arranged most
commonly between a
free-exchange and a
controlled-exchange
country.
- under this agreement, the
Payments controlled-exchange country agrees
to allocate the foreign exchange
agreements derived from its exports to the other
country in certain specified ways.
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 The government rations
foreign exchange without
formal discrimination as
between countries with
the end in view of
insuring the importation
Unilateral and Non- of most essential goods
discriminatory type of and services.
exchange control
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 Effect
This types helps provide protection
to domestic firms producing goods
competitive with less essential
imports.
Reasons:
Because of its non-discriminatory
character insofar as exporting
countries are concerned, it
eliminates irritations and discontent
Unilateral and Non- since the discrimination exists only
discriminatory type of with respect to commodities and
services without regard to countries
exchange control of origin.
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Other measures of
exchange control in
particular are:
• Worth nothing
• Namely
• Prescription of currency
• Obligatory surrender of
exchange proceeds

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Trade and Other Control Measures
Exchange control measures are seldom applied without being accompanied or strengthened
by trade and other control measures.
Measures to control trade consist mainly in quantitative restrictions, although cost
restrictions are also applied to an important extent.

Quantitative Import cost of

restrictions restrictions

are usually applied are applied through

through import import duties, taxes,
licensing in surcharges, and other
advance
various forms. requirements.
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Effects of Exchange Control
First, exchange control contributes to a reduction of merchandise imports.
Second, which is corollary to the first is that exchange control usually has the effect of
altering a country’s terms of trade.
Third, with the establishment of new industries protected by exchange control, there is
generated increasing employment opportunities for members of the country’s labor force.
This in turn contributes to multiplier effect.
Fourth, on the negative side, the industries favored with the grant of lavish amounts of
foreign exchange allocations with which to import the things they need in their operation are
insured of greater business success and consequently of handsome profits.
Fifth, when foreign exchange could no longer be obtained with ease as it used to be when
restrictions were totally absent, not infrequently, the salting of foreign exchange through
smuggling as well as undervaluation of exports and overvaluation of imports become an
observed phenomenon.

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Thank You
ROBLE
ROSALES
LUMONGGO