Foreign Exchange

Presented by: Upendra Raj Dulal

 Foreign Exchange
• International economic relation and trade are
occurred in different currency system.
• The currency of one country may not be
tendered in another country. So, the natural
person or organization requires buying the
currency of target country.
• In fact it is the process of converting one
currency into another currency, which makes
globalization and international trade possible.
 Foreign Exchange
• Foreign exchange is the trading of different
national currencies or units of account.
• Foreign Exchange is a means of exchanging
two currencies of two different countries at a
rate determined by market forces.
• Foreign exchange is also called forex in short.
 Example?
• When a Nepalese Company is trading with the Company
based in United States (US), both NPR and USD are
involved.
• If Nepal is importing from the United States, it needs to pay
in dollars. When the US is importing from Nepal it would
need to pay in Nepalese Rupees.
• Here, Foreign exchange made it possible to pay both in NPR
and USD as per the demand of the Situation.
• Likewise, If the US is investing in Nepal, it has to invest in
Nepalese rupees.
• Such transactions create a demand for foreign exchange.
 Foreign Exchange (Regulation) Act 2019:
(Section 2(d) )
• “foreign exchange” means a foreign currency,
deposits, credits and balances of all types
which are paid or received in a foreign
currency, foreign securities and cheques,
drafts, travelers cheques, electronic fund
transfers, credit cards, letters of credit, bills of
exchange and promissory notes which are in
international circulation and are or can be
paid in a foreign currency.
 In INDIA?
• The Foreign Exchange Management Act, 1999 (Section 2)
• (m) foreign currency means any currency other than Indian
currency;
(n) foreign exchange means foreign currency and includes,--
(i) deposits, credits and balances payable in any foreign
currency,
(ii) drafts, travellers cheques, letters of credit or bills of
exchange, expressed or drawn in Indian currency but payable
in any foreign currency,
(iii) drafts, travellers cheques, letters of credit or bills of
exchange drawn by banks, institutions or persons outside
India, but payable in Indian currency;
 Importance of Foreign Exchange in
International Trade
• Foreign exchange plays a pivotal role in international trade, holding immense
importance for various aspects of global commerce:
• Facilitates Trade: Foreign exchange enables transactions between countries with
different currencies. It allows businesses to buy and sell goods and services
internationally, fostering trade relationships across borders.
• Currency Conversion: It allows for the conversion of one currency into another,
facilitating smooth transactions between buyers and sellers operating in different
monetary systems.
• Price Determination: Exchange rates affect the prices of imported and exported goods.
Fluctuations in exchange rates impact the competitiveness of goods in international
markets, influencing demand and supply dynamics.
• Risk Management: Businesses engage in foreign exchange markets to hedge against
currency risks. Hedging tools like futures, options, and forward contracts help mitigate
the impact of exchange rate fluctuations on their finances.
• International Investment: Foreign exchange is crucial for investors participating in global
markets. It enables investment diversification, allowing investors to allocate assets
across different currencies and markets.
 Importance of Foreign Exchange in
International Trade
• Economic Stability: Stable exchange rates contribute to economic stability.
Governments and central banks manage their currencies to maintain stability, aiming
to reduce volatility that could disrupt trade and investment.
• Capital Flows: Foreign exchange facilitates the movement of capital across borders. It
influences the flow of investments, loans, and aid between countries, impacting
economic growth and development.
• Balance of Payments: Exchange rates influence a country's balance of payments.
Favorable exchange rates can lead to trade surpluses, while unfavorable rates might
result in deficits, impacting a nation's overall economic health.
• Globalization: Foreign exchange is a cornerstone of globalization, enabling the
integration of economies worldwide. It fosters interconnectedness, allowing
businesses to expand internationally and access broader markets.
• Understanding the significance of foreign exchange in international trade is crucial
for businesses, policymakers, investors, and individuals participating in the global
economy. It influences various facets of economic activity, shaping trade
relationships and impacting economic outcomes on a global scale.
 Importance of Foreign Exchange in
International Trade
• It determines the value of foreign investment.
• It helps to transfer the funds or the foreign
currencies from one country to another for
settling their payments. The market basically
converts one’s currency to another.
• It provides short-term credit to the importers
in order to facilitate the smooth flow of goods
and services from various countries.
• It allows the investors to invest in the market freely.
• Foreign exchange market facilitates import and
export, and supports expansion of international
trade.
• International payment on the predetermined and
mutually accepted rates possible with foreign
exchange.
• Facilitates demand for goods and services in
international trade.
• Surplus foreign exchange indicate favourable
balance of payment.
• Foreign investment can be realised with the support
of foreign exchange.
Objectives of Foreign Exchange Regulation Act 2019 (1962)

• To regulate foreign exchange related transactions.

• To maintain the economic interest of the general public.
• To promote the use of foreign exchange for the payment
and receive of foreign trade.
• To promote foreign investment and technology transfer,
• To promote the use of foreign currency in loan
exchange.
• To maintain the balance of payment (BoP) in the nation.
 Important Instruments
• Foreign bills of exchange
• Letter of Credit
• Bank Draft
• Telegraphic Transfer
 Scopes of Foreign Exchange??
• In investment and technology transfer.
• buying & selling of foreign currencies.
• Payment/receive of foreign trade.
• In loan exchange (transaction) with foreign
entities.
• Regulations of foreign-related transactions.
 Main Provisions of the Foreign Exchange
Regulations
• Foreign Exchange (Regulation) Act, 2019 (1962)
• Enacted to further regulate the foreign exchange
related transaction in order to maintain the
economic interests of the general public (Preamble)
• “currency” means any kind of currency notes, postal
orders, postal notes, money orders, cheques, drafts,
travelers cheques, letters of credit, bills of exchange,
promissory notes and credit cards, and similar other
monetary instruments as may be prescribed by the
NRB; (Section 2 (a))
• “foreign currency” means any currency other than
the Nepalese currency, and this term also includes
special rights to draw funds (Special Drawing
Rights) from the International Monetary Fund, the
Asian Currency Unit, the European Currency Unit
and such other instruments as may be prescribed
by the Bank, by publishing and broadcasting a
public notice; (Section 2(b))
• “convertible foreign currencies” means any foreign
currencies as may be designated as convertible
foreign currencies by the Bank by publishing and
broadcasting a public notice ; (Section 2 (c1))
• “foreign exchange” means a foreign currency, deposits, credits and balances of
all types which are paid or received in a foreign currency, foreign securities and
cheques, drafts, travelers cheques, electronic fund transfers, credit cards, letters
of credit, bills of exchange and promissory notes which are ininternational
circulation and are or can be paid in a foreign currency, and this term also
includes any other such monetary instruments as may be prescribed by the Bank
by publishing and broadcasting a public notice; (Section 2 (d))

• "foreign exchange transaction" means the purchase, sale, lending and

borrowing the foreign exchange or receiving or giving of the foreign exchange in
any other manner, and this term also includes the act of giving permission by
the Bank to convert the foreign exchange; (Section 2(d1))

• Section 2(j) of Nepal Rastra Bank Act 2058 defines Foreign Exchange as ‘’foreign
currency, all types of deposits, credits, stocks, foreign securities payable in
foreign currencies and the cheques, drafts, traveler's cheques, electronic fund
transfer, credit cards, letters of credit, bills of exchange, promissory notes in
international circulation payable in foreign currencies; and this expression also
includes other types of monetary instrument as prescribed by the Bank.’’
 Foreign Exchange Restriction/Control

• Exchange control refers to actions directly regulating or

affecting the influx and outflow of capital across national
borders. These regulate exchanges and limit the buying
and selling of foreign money.
• It is used to allocate available foreign currency to suit
the country’s interests as a whole and to control local
demand for foreign currency to safeguard the nation’s
foreign exchange reserves.
• Preserving capital, protecting domestic industries, and
maintaining the rate of exchange and balance of
payments are some of the objectives of placing these
control measures.
Balance of Payments (BOP)
• Negative balances of payments can pull down the economic growth of a nation. Depending on the
circumstances, countries may restrict or remove import restrictions. Specific exchange control
authority may also devalue its currencies to increase exports and bring about a steady BOP by the
exchange control act or other regulations.

Protection of domestic industries

• Curbs on the exchange can induce domestic industries to produce and export more, and governments can
thus protect domestic trade from international competition.

Rate of exchange
• The government resorts to exchange control regulations to bring the exchange rate to the desired level.
The countries can sell their currency from the separate account maintained for the same purpose, such as
the exchange equalization fund, in the open market to reduce the currency rate. Thus, by increasing or
decreasing supply, governments can overvalue or undervalue their currency depending on the situation.

Preserve capital
• Governments impose exchange control regulations to prevent capital from flowing out of the country and
may limit exports.
• These regulations can also help the government earn revenue through the difference in buying and selling
rates, stabilize the exchange rate, and even pay off foreign liabilities. In addition, control measures aim to
promote exchange stability by reducing exchange rates and volatility caused by currency transfers across
borders.
• Applying foreign exchange regulations can frequently obstruct international investors who want to transfer
their money to other nations. In an ideal scenario, these measures would be helpful to stop the capital
flight from a nation with a weaker currency. However, a country’s exchange control act or other regulations
make decisions on the above matters, which in turn decide the degree of impact.
• Common foreign exchange controls include:
a. banning the use of foreign currency within the
country;
b. banning locals from possessing foreign currency;
c. restricting currency exchange to government-
approved exchangers;
d. fixed exchange rates
e. restricting the amount of currency that may be
imported or exported;
Methods of Exchange Restrictions
1. Blocked Account:

• Government imposes restrictions on banking account of foreigners who are not

allowed to withdraw money from them. However, this method is adopted only in
war time or in extra-ordinary circumstances.

2. Multiple Exchange Rate:

• In this method, the government imposes different rates for import and export for
different countries For. egLow exchange rate- For essential products, high exchange
rate- For luxury goods or harmful products.

3. Allocation of foreign exchange according to priority:

• A country puts an end to free sale/purchase of foreign currencies. All foreign

exchange earnings are to be surrendered at a fixed rate and all requirement of
foreign exchange are rationed and allocated on a priority basis. For. eg- import of
essential items (food, raw materials, defence products, technology) higher priority
than luxury products.
• International Legal Framework
• Although the IMF encourages global monetary cooperation and exchange rate
stability, its Article 14 allows exchange control for transitional economies.
These Article 14 countries are generally poorer nations with weaker
economies.

• Article VI (3) of the IMF’s Article of Agreement allows members to exercise

such controls as are necessary to regulate international capital movements but
no member may exercise these controls in a manner which will restrict
payments for current transactions

• Article VIII (2) prohibits members from imposing restrictions on the making of
payments and transfers for current international transactions without the
approval of the IMF.

• The IMF will only approve restrictions if it is satisfied that they are necessary
for BOP purposes, and that their use will be temporary, and that they are not
discriminatory, while the member is seeking to eliminate the need for them.
 Who can perform foreign Exchange
Transactions?
• A person, firm, company or body who has
obtained license from Nepal Rastra Bank
(NRB) can carry on the foreign exchange
transaction.
 Procedure to carryout foreign Exchange
Transaction?
• License to obtain- Permission to obtain from NRB bank to carry on the
foreign exchange transaction with any person other than the licensee.
• Carryout transactions at the exchange rate specified by the Bank.
• If any person obtains the foreign exchange for any specific purpose or
on any terms, that person shall not use such a foreign currency for any
other purpose or violate such terms.
• If the foreign currency so obtained cannot be used in the concerned
purpose or the terms cannot be met, that person shall sell such a
foreign exchange to the licensee person or bank at the rate specified by
the Bank, within Thirty days after the date of knowledge of that matter.
• If any person obtains the foreign exchange to import any goods into
Nepal and does not import such goods within the reasonable period of
time or the goods of the value equal to that of the foreign exchange so
obtained, that person shall be deemed to have failed to use the foreign
exchange so obtained in that purpose or to fulfill such terms.
 Payment for Sale of goods or Services to
foreigner
• for the sale of any goods or provision of any
services to any foreign person, firm, company
or body, such a payment shall be taken in a
convertible foreign currency except as
otherwise provided by the Bank by publishing
and broadcasting a public notice.
 Restrictions
• On Export or Import of certain currency and bullion
• The Government of Nepal may issue an order by a Notification in the
Nepal Gazette, thereby restricting the importing of or sending any
certain type of Nepalese currency or foreign currency by any person,
firm, company or body into or to the whole or any certain area of
Nepal, without obtaining the license from the Bank.
• In issuing such an order, the Government of Nepal may specify in the
order that such a restriction is not application to any person, firm,
company or body or to any certain type of Nepalese currency or foreign
currency
• No person, firm, company or body shall, without obtaining the license
from the Bank, carry or send any foreign exchange, except the Nepalese
currency or any foreign exchange obtained from the licensee, outside
any area of Nepal.
• No person who has the right to obtain any
foreign exchange outside Nepal or obtain
payment in the Nepalese currency shall,
without obtaining permission of the Bank, do
any act impeding payment of or delaying
payment of such a foreign exchange or
Nepalese currency.
 Importer’s Duty?
• In importing any goods by any person, firm, company or
body on payment in a foreign exchange by opening a
letter of credit in Nepal or otherwise, such a person,
firm, company or body shall import such goods within
the time specified by the Bank and submit to the Bank
such documents as specified by the Bank.
• Except with the prior approval of the Bank, the
importer shall make import of the goods declared in
the letter of credit in consonance with the price and
quantity set forth in the same letter of credit. (Section
8)
• 9 (a) The exporter shall have to declare before the
Customs Officer that he or she shall bring the payment
of declared value within the period in the approved
foreign exchange as prescribed by the Bank by filling up
the said details in the export declaration form as
prescribed by the Bank.
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 Restrictions on Exporter (Section 9B)

1) To receive payment for the exported goods

through other mode except as prescribed,
2) To arrange the payment for the exported
goods delayed than the period as prescribed,
3) To do any act in order not to receive payment
for total value of the exported goods,
4) To do any act defying real invoicing or any
other act pertaining to such an act.
Restriction on making or receiving payment
(Section 9C)
• no person residing in Nepal shall do or cause to be done
any of the following acts directly or indirectly:
1) To make payment of any kind in any manner to any
person residing outside Nepal,
2) To draw, accept or negotiate any negotiable instrument
or promissory notes or accept any loans in such a
manner as to create or transfer the right to receive
payment in favor of any person residing outside Nepal,
3) To make payment of any kind to any person by the
order or on behalf of any person residing outside
Nepal.
 Restriction on export and transmission of
securities: (Section 10)
• No person shall do any of the following acts:
1. To export any securities to any place outside
Nepal,
2. To transmit any securities to any person
residing outside Nepal,
3. To give any securities to any person residing
outside Nepal for earning, use or control by
that person or for other purpose.
Restriction on Investment (Section 10A)
In making investment by a person in a foreign
country or in Nepal by a foreign investor in
accordance with the prevailing law, such a person
or investor shall make so as specified by the Bank
by publishing and broadcasting a public notice.
– Provided that, nothing contained in this Section shall
be deemed to affect the investment made by a citizen
of Nepal, residing in Nepal, in a foreign country from
his or her earnings made during his or her stay abroad
Restriction on lending and borrowing loan in
Foreign Exchange 9Section 10 B)
• No person shall lend or borrow a loan in a
foreign exchange, except in accordance with
the provisions of the prevailing law and the
provisions specified by the Bank by publishing
and broadcasting a public notice
 Punishments??
• For any act in contravention of this Act or Rules framed
thereunder or order or direction or circulation or Notification
or any procedure as prescribed by the Bank,
the foreign exchange related with the offence shall be
forfeited and such a person shall be fined additionally from
the amount in question to three fold of such amount in
question.
• If the foreign exchange- related with such offence could not
be forfeited, the amount in question for foreign exchange
related with such offence shall be fixed and fined additionally
from the amount in question to three fold of such amount in
question
• if the amount in question cannot be set out or
cause to be set out, a fine of up to Two
Hundred Thousand Rupees, shall be imposed,
as per the gravity of the offence
• If an employee appointed to inspect and
investigate the matters violates the Act, such
employee shall be liable to punishment of a
fine of up to One Hundred Thousand Rupees
in view of the gravity of the offence.
• If the offence is committed by any firm, company or
body – the person responsible such as director,
employee or agent shall be liable.
• If an importer imports by violating the said procedures
of the Act – he shall be punished with a fine ranging
from the sum equal to the amount in question of the
concerned import to additional fine that is Three fold
of the amount in question.
• For exporter violating the terms - shall be punished
with a fine ranging from the sum equal to the amount
in question of the concerned export to additional fine
that is Two fold of the amount in question.
• Accomplice or aids in the commission of offence- shall
be liable to half the punishment
 Other provisions
• The foreign exchange regulation department (Investigation Officer) shall
search a person, vehicle, or entire building and premises or place of the
transaction if there are adequate reasons and ground to doubt that any
person has any foreign exchange or conducted currency trafficking.

• The investigation officer shall arrest a suspicious person ay any place if

there are adequate read and ground to doubt that any person has done
any act related to a foreign exchange transaction.

• The government of Nepal has the power to give a specific directive to

Nepal Rastra Bank from time to time and the bank shall abide by such
directives for the performance of activities.

• Any citizen of Nepal residing in Nepal or any company or firm registered in

Nepal shall obtain permission from Nepal Rastra Bank to open an account
with a bank in a foreign country. (Section 16(1)
• 1. Foreign Exchange Management Regulations, 2019: These regulations
provide detailed guidelines for the management of foreign exchange
transactions in Nepal. They cover areas such as foreign investment,
remittance of funds, and foreign exchange transactions for trade and
business.
• 2. Foreign Direct Investment and Technology Transfer Regulations, 2019:
These regulations provide guidelines for foreign direct investment in
Nepal, including the registration process and repatriation of profits and
dividends.
• 3. Nepalese Currency (Realization, Repatriation and Conversion)
Regulations, 2019: These regulations provide guidelines for the realization,
repatriation, and conversion of Nepalese currency by foreign nationals.
• 4. Money Laundering and Terrorist Financing Prevention Directive, 2019:
This directive requires all authorized dealers to implement measures to
prevent money laundering and terrorist financing in their foreign exchange
transactions.
• 5. Foreign Employment Directive, 2019: This directive regulates the
foreign employment of Nepalese citizens, including the remittance of
funds earned by them.