Foreign Exchange Controls

Foreign exchange controls are the different forms of controls basically imposed by a government on the buying and the selling of foreign currencies by residents or it can on the purchasing and selling of local currency by nonresidents. In other words, it is the restriction by the government on the private transaction in foreign currency. Residents are required to sell foreign currency to a central bank or specialized government agency at exchange rate set by the government. The main function of foreign exchange controls is to maintain a favorable balance of payment. The following article covers some foreign exchange controls information.

Generally foreign exchange controls basically includes banning of the use of foreign currency within the country as well as ban locals from possessing foreign currency. These controls also restrict currency exchange to governmental- approved exchangers. They have fixed exchange rates at the same time have restrictions on the amount of currency that may be imported or exported. However, those countries with weaker economies typically employ these foreign exchange controls. These controls enable the countries to have better degree of economic stability by confining the amount of exchange rate unpredictability due to currency inflows and outflows.

The countries who employ foreign exchange controls are known as ‘Article 14 countries’, after the provision of the International Monetary Fund. According to the provision of International Monetary Fund, foreign exchange controls can only be employed by the countries with weaker economies. Such controls are used to be common in most countries, particularly poorer ones, until the 1990s when free trade and globalization begun a trend towards economic liberalization. Today, countries which still employ foreign exchange controls are the exception rather than the rule.

The above article about foreign exchange controls will surely have expanded your knowledge on the subject.