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Exchange Controls

All about Exchange Controls

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Exchange Controls

  1. 1. Exchange Controls Chapter 11
  2. 2. • Restrictions are not applied to goods but to the possibility of obtaining foreign currency to pay for them.
  3. 3. Need for Exchange Control • -adopted by govt to conserve the foreign exchange resources of the country as well as to control exchange rates through limitation of the freedom or monopolization, of foreign exchange transactions.
  4. 4. Exchange Control • -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.
  5. 5. Nature and Scope • Advantage of covering not only merchandise transactions as already stated above but likewise the invisible items of the balance of payments.
  6. 6. Objectives of the ExCon 1. To maintain the exchange rate and avoid the flight of capital 2. To assure imports of items considered essential to the country’s well-being. 3. To stimulate the productin of certain goods deemed vital to the economy 4. To discourage the productin of certain goods.
  7. 7. Maintain Exchage Rate and Avoid Flight of Capital • Individuals were not permitted to transfer funds abroad without the permission of the govt obviously intended to prevent the flight of capital.- occasioned by the demand for foreign currency, that is converting domestic currency into foreign currency which is considered relatively stable.
  8. 8. To Assure imports of Essential Items •Policy •Essential Producer’s goods •Essential Consumer’s goods
  9. 9. To stimulate or discourage the Production of certain goods. Adoption of multiple exchange rates
  10. 10. As Source of Revenue •Difference bet selling rate and buying rate
  11. 11. MECHANISMS OF EXCHANGE CONTROL • Compensation clearing agreement • Payment agreement , • Unilateral and non-discriminatory exchange control.
  12. 12. Trade and other Control Measures • Quantitative Restrictions • Import Cost Restriction or Licensing • Contract bet. residents and non-residents • Complicated exchange and trade control formalities and procedures
  13. 13. Effects of Exchange Control 1. Contributes to the a reduction of merchandise imports. 2. It usually has the effect of altering a country’s terms of trade. 3. There is generated increasing employment opportunities for members of the country’s labor force. 4. 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. 5. When forex could no longer be obtained with ease as it used to be when restrictions were totally absent, the salting of foreign exchange through smuggling as well as undervaluation of exports and overvaluation of imports become an observed phenomenon.