Exchange control refers to the control of transactions involving foreign exchange by the government or a centralised agency. The origin of exchange control can be traced back to nineteen thirties. After the post-World War I period many countries of Europe found themselves with depleted gold reserves and foreign exchange and imposed payment restrictions to prevent massive capital withdraw-als and instil stability in the domestic economy. Since then exchange control has been adopted by a large number of countries and for different purposes.
Objectives of Exchange Control.
The purposes for which exchange control may be imposed are many but the important among them are:
1. Stability of exchange rates. A constantly changing exchange rate may not be conducive to the economy and government may therefore adopt exchange control methods to stabilise the exchange rate of the currency instead of leaving it to be determined by market forces.
2. Balance of Payments Deficits. In a situation of worsening balance of payments, the governments may like to conserve the foreign exchange through pay-ment restrictions or otherwise. Exchange restrictions may be to prevent large-scale flight of capital from the country. The erratic and uncontrolled movement of capital will not only affect the balance of payments position but also be disturbing to the domestic economy.
3. Encourage local industries. The government may desire to protect the local industries from competition from abroad. Imports may be restricted so that the local industries are allowed to grow. This paves the way for better utilisation of the resources of the country and also conserves its foreign exchange reserves.
4. Overvaluation of currency. The exchange control may aim at keeping the currency overvalued. When the currency is overvalued, imports become cheaper. Therefore, overvaluation may be resorted to encourage import of essential commodities into the country. The other reason for overvaluation may be to repay the external debt cheaply in terms of home currency.
5. Undervaluation of currency. The exchange control may be with a view to keep the currency undervalued. When the currency is undervalued, exports are cheaper and imports become costlier. Thus, undervaluation of the currency leads to increase in exports and reduction in imports and ultimately results in the improvement of balance of payments of the country.
6. Reserve foreign exchange for essentials. Exchange control may be imposed to acquire foreign exchange to be utilised for importing certain essential com-modities from abroad. In times of war the government may reserve foreign exchange to import essentials of war.
7. Freeze foreign national assets. During war times, exchange control may be imposed to prevent utilisation of the purchasing power in the country held by the residents of the enemy country or a neutral country so that they may not be able to use the assets to help the enemy country.
8. Economic planning. For a proper execution of the economic plans, ex-change control helps to a great extent by controlling the foreign exchange market, encouraging exports and restricting imports to essentials and making available the resources for the development of the economy through inflow of capital from abroad.
Methods of Exchange Control
Exchange control may take any of the fol-lowing forms: 1. Exchange intervention. 2. Exchange restriction: (a) Blocked accounts, and (b) Multiple exchange rates. 3. Exchange clearing arrangement. 4. Indirect methods: (a) Import restrictions and tariffs, (b) Export subsidy, and (c) Interest rate changes.