Q.26. How does a country controls its
foreign exchange?
METHODS OF
EXCHANGE CONTROL
Paul Einzig is his book exchange
controls has mentioned as many as 41 different methods of exchange control.
They can be categorized as
1. Direct Method
2. Indirect Method
They are discussed here as under.
1. DIRECT
METHOD
The direct method are further
classified as:
Intervention
For an effective control of foreign
exchange rates and the foreign exchange market the government usually have a
central authority i.e. the Central Bank that has the complete power to control
and regulate the foreign exchange market. Under this method any body who either
wants to purchase or sell foreign exchange he has to deal with the central bank.
All the selling and purchasing transactions of foreign exchange is controlled
by the central bank which helps it to adjust demand and supply of foreign
exchange according to the need of the country.
Restriction
Exchange restriction is another
powerful weapon of exchange control. It refers to the policy by which the
government restricts the supply of its currencies coming into the exchange
market. It is achieved either by one of the following methods.
i. By centralizing all trading in
foreign exchange with central bank of the country.
ii. To prevent the exchange of
national currency against foreign currency with the permission of the
government.
iii. By making all foreign exchange
transactions through the agency of the government.
Exchange
Clearing Agreement
Under this method the countries
engaged in trade pay to their respective central bank the amounts payable to
their respective foreign creditors. The central banks they use the money in off
setting the corresponding claims after fixing the value of the foreign
currencies by common agreement. The basic principle is to offset international
payments so that they have not to be settled through the medium of the foreign
exchange market.
2. INDIRECT
METHODS
The most commonly used direct method
or tool of exchange control is the use of tariff duties and quotes and other
quantative restrictions on the volume of international trade. By imposing
tariff and quotes the demand for the foreign currency falls down in the case of
restricting the imports.
Rate of Interest
Another method of indirect exchange
is the rate interest. The rate of exchange is the result of demand and supply
of each other currencies arising out of trade and capital movement. A high rate
of interest in a country attracts short term capital from other countries that
leads to a exchange rate for the currency in terms of other currencies goes up.
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