Foreign exchange restrictions

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.

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.

[Developing countries] Unless there is a complete absence of exchange control, with freedom to buy and sell foreign exchange at will, companies investing in major natural resource projects or making other investments based wholly, or in part, on export potential invariably require a commitment from Government to permit them to retain offshore the proceeds in foreign exchange from the sale of mine products or petroleum. The commitment is, of course always subject to a requirement that the foreign investor will bring in foreign exchange to meet tax and other local obligations as they arise in the host country.