Problem

Foreign exchange restrictions

Other Names:
Counterproductive exchange control restrictions
Currency restrictions
Refusal to issue foreign currency for use abroad
Blocked currency
Nature:

Currency conversion may be subject to various kinds of national restrictions, the most severe form being one in which special permission is required for every single transaction on the foreign-exchange markets. General permission may, however, be given for certain types of transactions. Such restrictions may differentiate between residents and non-residents of a country in the relative freedom granted each group to carry out foreign exchange transactions. For every exchange control measure there is some alternative which would produce equivalent economic effects which may be more desirable for other reasons. For example, in dealing with a balance of payments problem created by internal inflation, the results expected from exchange controls could be obtained by anti-inflationary monetary, fiscal and wage policies. At the same time, some of the shortcomings of exchange control would be avoided and the problem would receive a more fundamental solution. Particular shortcomings are: a degree of flexibility which permits detailed policy changes to escape necessary public scrutiny; doubts on the soundness of the currency and the financial policies of the country, thus discouraging foreign investment; disturbing elements for the country's foreign trade (particularly when control takes the form of quantitative restrictions and the country lacks efficient and corruption-free administrative machinery); difficulty of reaching rational administrative decisions and the inherent temptation to corruption with the consequent reduction of productivity.

The governmental practice of limiting the holding and purchasing of foreign currency within a country's borders (a common way of supporting the value of the country's currency) has become more prevalent and more strictly enforced, particularly in developing countries. It has led to a substantial increase in the amount of funds being "blocked". Such blocked funds prevent international companies from deploying their capital where it would earn the highest returns. Some companies are forced to either sell the blocked assets at a loss; or wait until they are freed, with the risk that even greater losses will then be inevitable.

Incidence:

Airlines are among the most severely affected because they are legally required to accept payment for services in local currency. In 1984 it was estimated that airline companies alone had $850 million blocked in various countries, compared to $600 million in 1983.

 

Counter Claim:

Exchange control may be used as an instrument to foster economic development: as a balance of payments corrective; as a means of protecting domestic economic activities; as a means of reshaping import expenditures; to encourage domestic and foreign investment; as a source of fiscal revenue; and as a means of enlarging and protecting a regional market.

Problem Type:
F: Fuzzy exceptional problems
Date of last update
03.11.2017 – 17:06 CET