EXCHANGE CONTROL MEANING Exchange control implies governmental intervention

EXCHANGE CONTROL

MEANING. Exchange control implies governmental intervention in the matter of foreign exchange and exchange rates. According to Heberler, exchange controls are “state regulation excluding the free play of economic forces from the foreign exchange market. ’’

MEANING. Under the exchange control, the whole foreign exchange resources of the nation, including those currently occurring to it, are usually brought directly under the control of the exchange control authority (the Central Bank, treasury or a specially constituted agency).

MEANING. . Dealings and transactions in foreign exchange are regulated by the exchange control authority.

MEANING. . Exporters have to surrender the foreign exchange earnings in exchange for home currency and the permission of the exchange control authority have to be obtained for making payments in foreign exchange. It is generally necessary to implement the overall regulations with a host of detailed provisions designed to eliminate evasion.

MEANING. . Though the exchange control is administered by a central authority like the central bank, the day-to-day business of buying and selling foreign exchange will ordinarily handled by private exchange dealers, largely the exchange departments, commercial banks. For example, in India there authorised dealers and money changers, entitled to conduct foreign exchange business.

Objectives. Exchange control is one of the important means of achieving certain national objectives like an improvement in the balance of payments position, restriction of inessential imports and conspicuous consumption, facilitation of import of priority items, control of outflow of capital and maintenance of the external value of the currency.

Objectives. The important purposes of exchange control are outlined below. 1. To Conserve Foreign Exchange The main objective of foreign exchange regulation in India, as laid dawn in the Foreign Exchange Regulation Act (FERA), 1973, is the conservation of the foreign exchange resources of the country and the proper utilisation thereof in the interest. of the national development. This is one of the important objectives of foreign exchange regulation of many other countries too.

Objectives. 2. To Check Capital Flight. Exchange control may be employed to prevent flight of capital from the country and to regulate the normal day-to-day capital movements. As Krause remarks, if adequately implemented and enforced, exchange control tends to be highly effective in curbing erratic outflows of capital. When exchange control authorities refuse to sell foreign exchange far this purpose, they close the only legal avenue through which capital may leave a country.

Objectives. 3. To Improve Balance of Payments Exchange control is one of the measures available to improve the balance of payments position. This can be achieved by restricting imports by means of exchange control.

Objectives. 4. To Curb Conspicuous Consumption In the developing countries especially, there is a craze far the consumption of imported articles, which are regarded as inessential 'luxury' goods. Exchange control may be used to prevent their import and, thereby, their consumption.

Objectives. 5. To make Possible Essential Imports. Due to the non-availability or scarcity within the country, the developing countries generally have to import capital goods, knowhow and certain essential inputs and consumer goods. By giving priority to such imports in the allocation of foreign exchange, exchange control may ensure availability of foreign exchange for these imparts.

Objectives. 6. To Protect Domestic Industries. Exchange control may also be employed as a measure to protect domestic industries from foreign competition.

Objectives. 7. To Check Recession-induced Exports into the Country. If foreign economies are undergoing recession when the domestic economy is free from it, the decline in prices of foreign goods, due to the recession, may encourage their exports into the country not yet affected by recession. Exchange control may be employed to check such recession-induced exports into the country.

Objectives. 8. To regulate foreign companies. Exchange Control may also seek to regulate the business of foreign companies in the country. For instance, the FERA provided that non-residents, foreign national resident in India, companies (other than banking companies) incorporated abroad and having more than 40 per cent non-resident interest could not carry on in India, or establish a branch/office or other place of business in the country for carrying on any activity of a trading, commercial or industrial revenue, without the permission of the Reserve Bank of India.

Objectives. 9. To regulate Export and Transfer of Securities. Exchange control may be employed also for the purpose of controlling the import and transfer of securities form the country. The FERA for instance, prohibited the sending or transferring of securities from the country to any place outside India, without the permission of the Reserve Bank of India.

Objectives. 10. Facilitate Discrimination and Commercial Bargaining Exchange control offers scope for discrimination between different countries. It would be used to accord exchange concessions, on a reciprocal basis, between different countries.

Objectives. 11. Enable the Government to Repay Foreign Loans. The system of exchange control empowers the government to acquire foreign exchange from the residents of the country, it becomes easy for the government to repay foreign loans.

Objectives. 12. To Lower the Price of National Securities held Abroad It may be possible to reduce the price of national securities held abroad by preventing nationals from buying them. This would enable the government to purchase such securities at a lower price.

Objectives. 13. To Freeze Foreign Investments and Prevent Repatriation of Funds Exchange control may be used to freeze investments, including bank deposits, foreigners in the home country and to prevent the repatriation of funds out of the country. This is sometimes done by hostile countries.

Objectives. 14. To Obtain Revenue Governments may use exchange control to obtain some revenue. The government/government agency can make profit out of the foreign exchange business by keeping certain margin between the average purchase price and the average selling price of the foreign exchange.