What Are The Objectives Of Exchange Control?

Question

What Are The Objectives Of Exchange Control?

2 Answers

Answer Question

Answer 1

There are different objectives of the foreign exchange control. One is to correct the adverse balance of payments. One of the main objectives of the exchange control to be followed by a country is to correct its adverse balance of payments. This objective is achieved by restricting the volume of import to essential items and according to availability of its reserves. The second thing is to conserve a foreign exchange. A country may introduce exchange control for conserving its hard earned foreign exchange. These reserves are restricted for payment of external debt, import of essential goods and purchase of defence material. It can be used for to protect home industry.

Exchange control is also employed with the object of protecting home industry. If certain domestic industries are facing stiff competition from abroad and the government desires to protect them from foreign competition. It will not sanction foreign exchange for the import of these commodities. It can be used to stabilize exchange rate. A government may introduce exchange control for keeping exchange rate stable. The fluctuations in exchange rate cause disequilibrium in the economy. In order to create confidence and stability in the economic life of the country the government officially fixes the exchange rate at a predetermined level.

Answer 2

Under the system of free market in foreign exchange, the citizens of country are at full liberty to buy and sell foreign currencies to any extent. Under a controlled economy the free movements in foreign exchange are restricted ad control is imposed on the purchases ad sale of foreign exchange by the state or the central bank of the country. Foreign exchange control thus means interference by the state or central bank in the free play of market forces that determine foreign exchange rate. The government or central bank monopolizes the foreign exchange business and exercises full control over foreign exchange marketing the country. Exchange control is the state regulation excluding the free play of economic forces from the free play of foreign exchange market.

Exchange control means dealing with the balance of payments difficulties disregarding market forces and substituting for them the arbitrary decisions of the government officials. The exchange control usually takes the following three forms. The monetary authority or the government of a country manages the foreign exchange rate and buys and sells foreign currency at the rate fixed by it. All foreign exchange earned by the exporters are surrendered to the central bank which pays the money in local currency.