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The Use of Foreign Exchange Controls to Promote Economical Stability

Foreign exchange market controls are different types of restrictions imposed by the government on the sale and purchase of local currency against other currencies. These restrictions are usually imposed either on individuals residing in the country imposing such restrictions or even on non-residents within the country. Foreign exchange market controls are usually used by countries with weak currencies where there is a large demand for foreign exchange among their citizens. [I] Such controls often hinder the ability of investors wishing to transfer their funds to other countries. These controls are mainly aimed at stabilizing the ProfitBall Software foreign exchange market by minimizing exchange rate fluctuations as a result of foreign exchange inflows. Where these controls are used theoretically to stop the flight of foreign capital from the country against the background of weak currency.

Article XIV of the IMF Agreement allows countries to enact laws and to control foreign exchange operations in certain special cases. [Ii] The IMF allows these arrangements, provided that the country tries to move towards creating trade and financial arrangements that facilitate international payments and, at the end, To create a stable exchange market for foreign exchange. However, research by the International Monetary Fund has shown that undervalued controls on exchange markets may have a negative impact on the flow of foreign trade.

Controls on foreign exchange exchanges usually create so-called black exchange markets where weak currency exchange is usually conducted in foreign currencies, which are usually stronger. This situation leads to the exchange rate becoming much higher than the exchange rate set by the government, which creates a parallel market to facilitate the process of exchanges at rates closer to reality. It may therefore be argued that the ability of governments to enact effective controls to tighten controls on foreign exchange markets is questionable.

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II. Control of capital flight

Countries that impose foreign exchange controls seek to limit the flight of capital abroad. Capital flight refers to a situation in which cross-border financial movements are strong enough to influence the local economy. [3] This phenomenon is usually increased in situations where local exchange markets are highly volatile. The weaker local currency holders are always willing to trade in a more stable foreign currency and less vulnerable to unanticipated changes in value. The phenomenon of capital flight may emerge on a larger scale when capital outflows increase significantly on the back of a sharp decline in the returns of assets held in the country or as a result of the increased risk of holding these assets. Leaders of countries experiencing capital flight are often concerned about the negative impact of external financial flows on domestic economic conditions, which are often in dire need of investment in their infrastructure. However, foreign exchange controls are often ineffective in preventing capital flight, as such controls usually lead to more demand for more stable foreign currencies. Moreover, such tight controls lead to poor confidence in the local currency.

III. Different methods of controlling the foreign exchange market

There are several different types of controls being imposed on foreign exchange markets and include:

Foreign currency rationing. Control the amount of foreign exchange available for exchange, governments can influence the supply and demand forces, and then keep the exchange rate at a higher rate than the ProfitBall Software free market.

Currency exchange rate. Some governments may resort to pegging the local currency exchange rate against other foreign currencies, both above and below the market price. This situation ostensibly helps to prevent fluctuations in exchange rates by controlling the local currency supply.

Freezing accounts. Some governments may introduce laws to prevent foreigners from withdrawing their money from local bank accounts. They may also oblige their citizens to deposit the funds they receive in foreign currencies into certain accounts. In this way government authorities can control the flow of capital and prevent hard currency from leaving the country.

Multiple exchange rates: Governments may use fixed but different exchange rates for capital and external account transactions. [V] By this type of system, governments tend to adopt more than one local currency exchange rate, which makes these multiple prices as implicit tariffs on imports Some commodities to the country by imposing high exchange rates on those wishing to import such unwanted goods.

IV. Foreign exchange certificates as agent of the local currency

Foreign exchange certificates are a form of currency, usually used as an alternative to foreign exchange in countries that impose controls on exchange markets. The fixed exchange rate of these certificates may be higher or lower the free market price. Countries such as the former Soviet Union, China and East Germany have all used the system of foreign exchange certificates in the past. Burma, for its part, recently decided to terminate the work of foreign exchange certificates.

V. China’s use of foreign exchange certificates

The People’s Bank of China imposed the use of foreign exchange certificates between 1980 and 1990 before it was abolished in 1995. During this period, foreigners were not allowed to use the local Chinese currency. In addition, the use of foreign exchange certificates was restricted to certain shops and restaurants. [Viii] As a result, foreign visitors had few available places to go.

These laws created a currency system aimed at preventing any special dealings or speculations in these certificates. However, as expected, the illegal black market emerged as a result of the desire of the local population to obtain these certificates to purchase some luxury goods that were Are sold in state-authorized stores, such as American cigarettes and wines, and foreign visitors on the other side always wanted to buy from local shops and restaurants that were not allowed to use foreign exchange certificates. The spread of the black market phenomenon of the currency, combined with the growing presence of imported foreign goods to China eventually led to the dismantling of the foreign exchange certificates system.

VI. South Africa and the RAND double exchange rate regime

South Africa has a long history of exchange control, starting to impose such controls as a result of the massive capital flight that began in 1960. [x] Recently, South Africa has adopted a system whereby two types of currencies are created. There were two periods for using the Financial Rand and the Rand Trading. The first period was between 1979 and 1973, while the second period began in September 1985 to March 1995. The second period was a controversial period in the history of South Africa, where the value of the RAND was significantly reduced as a result of economic sanctions imposed by the United Nations on South Africa because of the regime Apartheid in the country.

In 1985 the Government of South Africa failed to repay a large part of its international debt. At the same time, the government imposed more controls on foreign exchange markets, where foreign investors in South Africa were not allowed to sell their investments except in the financial Rand. The government imposed restrictions on the exchange of rand money against foreign currencies. There was a dual exchange rate system where the RAND rate was determined by current account transactions. While the RAND rate was determined by the capital account transactions, both currencies were determined by the floating exchange rate system. The Rand Financial was trading on a discount against the Rand Trading. The dual-exchange system was abolished in March 1995.

VII. CADIVI Commission in Venezuela

Venezuela has also imposed many kinds of controls on foreign exchange markets. The Exchange Markets Regulatory Authority (CADIVI) is a government organization that supervises foreign exchange markets in Venezuela. [Xi] CADIVI enacted currency controls in February 2003 against the backdrop of widespread protests over the past two months in an effort to bring down Government of President Hugo Chavez. The state-run oil industry was the most affected by the unrest, with GDP shrinking by 37% in the first months of 2003. [xii] Some estimates put the cost to the oil sector on the back of the unrest at $ 13 billion .

According to the rules approved by the Venezuelan government, the Venezuelan National Oil Company (PDVSA) has to sell its revenues from foreign currencies to the Central Bank directly. As the Venezuelan oil company was one of the country’s top exporters, it is expected to transfer about $ 41.5 billion to the central bank in 2013. However, controls on exchange markets proved to be unsatisfactory, with nearly $ 33 billion of Capital out of Venezuela in 2011 despite strict censorship laws. [Xiii]

In 2008, the Chavez government announced a new ProfitBall System currency called Bolivar Fuerte, linking the currency rate to a higher exchange rate against the US dollar than market value. This action has caused the scarcity of foreign currency as confidence in the Bolivar has declined as demand for foreign currency, especially the US dollar, has increased. Control of foreign exchange markets has contributed to the creation of a large black market, which prompted the Venezuelan government recently to tender in US currency to importers in order to reduce the devaluation of the Bolivar on the black market. [Xiv] Official exchange rate of these auctions amounted to 6.3 Bolivar against the US dollar , While some estimates indicated that the black market price was 23.5 billion against the dollar. The currency auctions contributed to the Bolivar losses as it fell by about 32% which caused severe losses to foreign companies operating in Venezuela such as Pfizer and BlackBerry. [Xv]

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