Foreign Exchange Controls, What Are They and Why Are They Still Imposed?
The mass inflow or outflow of foreign currency has the power to derail a country’s economy and cause issues regarding its financial stability. For a number of years, financial controls were ubiquitous and many of the largest economies around the world would rely on a variety of controls which were in place to manage the flow of foreign currency. In the modern age there are less countries than ever before which rely on these controls, however, although heavyweight nations like India and China are examples where this is still a fiscal policy which is relied on, let’s take a look at why.
Types of Controls
These are just some of the examples of foreign exchange controls which we have seen utilized around the world:
- Total ban on the use of a foreign currency within a country
- A ban on locals being able to possess foreign currency
- The restriction of a currency exchange to government approved exchanges
- Fixed exchange rates
- Restriction on volume of currency which can be imported or exported
The most common control which is still in place around the world is the fixing of exchange rates. We often see this in place with money transfer apps such as the Ria Money Transfer app for international transfers, which provides low fees but can ultimately be dictated to by these types of controls.
Why Controls Were Removed
Most of the western world once relied upon these controls to help manage the stability of the economy. This was something which we saw widespread use of after the second World War, as nations sought to stabilize their economies after years of uncertainty. The introduction of globalization coupled with steadfast economies around the world, saw the removal of many of these foreign exchange controls. Additionally this contributed greatly to the introduction of free trade around the world.
Why Controls Are Still Used
There are a number of counties around the world which still rely on foreign exchange controls to keep their economy stable. These are commonly known as ‘Article 14 Countries’ following the provision in the IMF’s Articles of Agreement. This article allows for exchange controls for those countries which are classed as ‘transitional’. India and China are two of the biggest economies which are still implementing these controls, as despite the size of their economies they are continued to be classed as transitional.
In China for example there is a $50,000 per year cap on Chinese citizens moving their money out of the yuan. In terms of financial managers and funds, these controls are subject to quotas. To support international trading there is a stock link program with Hong Kong which offers additional flexibility.
India is in the process of loosening its controls in order to encourage further foreign investment in the country. Foreigners may be able to buy and sell stocks without limits, but there is a tight cap on how much they are able to invest in rupee bonds. The recent easing of restrictions on foreign direct investments seeks to encourage worldwide corporations like Apple and Amazon to invest more money in the Indian economy.
Any more questions which you have about foreign controls, feel free to drop us a comment in the section below this post.
Tricia Lee is a contributing writer at Sparkwebs, a Digital Marketing Agency. When she’s not writing, she loves to travel, dance, and read non-fiction.