Methods Of Exchange Control
Meaning of exchange control.
Broadly speaking, exchange control refers to a government’s inter in the foreign exchange market. In other words, it means legal restrictions on the business involving foreign exchange and its sale and purchase in the national market. It is government domination in the foreign exchange market. In the words of Haberler, “Exchange control is the state regulation excluding the free play of economic forces from the free play of foreign exchange market” Summing up, exchange control is a, method of influencing international trade, investment and the payments mechanism.
Methods or Devices of Exchange Control.
There are large numbers of methods or devices of exchange control. Broadly, these methods are grouped under two main heads. (1) Unilateral Methods and (2) Bilateral or Multilateral Methods.
(A) Unilateral Methods.
Unilateral methods are those methods of exchange control which are adopted by the government of a country without any consultation or understanding with any other country. The main methods under this head are as follows:
1. Exchange pegging. Exchange pegging means the act of fixing the exchange value of the currency to some chosen rate. When the exchange rate is fixed higher than the market rate (overvaluation), it is called pegging up. When the exchange rate is fixed lower than the market rate, it is called pegging down (undervaluation). The exchange pegging is a temporary measure to remove fluctuations in the foreign exchange rate.
2. Exchange Equalization Account. Exchange equalization account is the device adopted for smoothing out temporary or short term fluctuation in the rate of exchange as a result of any abnormal movement of capital. This type of exchange control was first adopted by England in 1932. France and U.S.A. followed suit and set up Exchange Equalization Account in 1936. This fund, i.e., Exchange Equalization Account is utilized for offsetting inward or outward movements of hot money or refugee capital. it is never intended that the resources of the Exchange Equalization Account should be utilized for affecting the normal rate of exchange. The object of the fund is to iron out the abnormal fluctuation in the rates of exchange by buying and selling of foreign currencies.
3. Clearing Agreement. Clearing agreement may be defined as an undertaking between two or more nations to buy and sell goods and services among themselves according to specified rate of exchange. The payments are to be made by buyers in the buyer’s home currency. The balance, if any, is settled among the central banks of the nations at the end of stipulated periods either by exporting gold or of an acceptable third currency, or they are allowed to for another period in which the creditor country works off the balance by additional purchases from the debtor country. The main objectives for entering into clearing agreement are to liquidate the blocked accounts, to ensure equilibrium in the balance of payments and to check the fluctuating exchange rates.
4. Stand still Agreement. Stand still agreement aims at maintaining status quo in the relationship between two countries in terms of capital movement. If a country is under debt to another country, payments of short term debts may be suspended for a given period by entering into an agreement called the standstill agreement. The creditor country allows the debtor country to repay the debts in easy installments or convert the short terms debts into long terms debts.
5. Compensation Agreement. Compensation agreement resembles the old fashioned deal. The two countries import and export commodities from each other of equivalent value and so leave no balance requiring settlement in foreign exchange. Since no payment is made to foreign exchange, problem of foreign exchange does not arise.
6. Blocked Accounts. Blocked accounts refer to a method by which the foreigners are restricted to transfer funds to their home countries. The extreme step of freezing the bank accounts of the foreigners is taken when the government faces the acute shortage of foreign exchange say in wartime.
7. Payment Agreements. The payment agreements are made between a debtor and a creditor country. This method of exchange control facilities the debtor country to make more and more exports to the creditor country and import less and less quantity from it. Under this system, the international transactions in foreign exchange are settled and cleared.
8. Rationing of Foreign exchange. Under this system, the government monopolizes the foreign exchange reserves. The exporters are required to surrender foreign exchange earnings at the fixed exchange rate to the central bank of the country. The importers are allotted foreign exchange at the fixed rate and in fixed amount.
9. Multiple Exchange Rates. Under this system, different exchange rates are fixed for import and export of different commodities and for different countries. This system of exchange is adopted for earning maximum possible foreign exchange by increasing exports and reducing imports.
(B) Bilateral or Multilateral Methods.
When two or more than two countries decide to adopt certain measures for stabilizing the rates of exchange between them, these are called bilateral or multilateral methods. The main methods are:-
(1) Clearing Agreements. Under this system, the governments of the two countries agree to clear the accounts in home currencies through their respective central banks.
(2) Transfer Moratoria. Under this system, the payments for the imported goods or the interest on foreign capital are not made immediately but are suspended for a predetermined period called as period of moratorium. A country adopts this method of exchange control for temporary solving its payments problems.
(3) International Liquidity. For solving the availability of internationally acceptable means of payments, International Monetary Fund, Special Drawing Rights (SDR’s) Scheme etc. (IMF) have been established.
Linking rupees with a basket of currencies
At present Pakistani rupee is linked with a small group of chosen currencies known as basket of currencies. The currencies selected inclusions in the basket are the currencies of those countries which are our major trading partners. The day to day r e of exchange varies within a small margin with the basket of currencies. Pakistan, now, is following neither a rigidly fixed rate nor a freely fluctuating rate, but a floating rate within certain limits.