Foreign Exchange Restrictions

Although the direct intervention methods referred to have influenced many exchange rates, they do not fully serve the needs of countries with a continuous shortage of foreign exchange. To supplement the direct measures many countries adopted a number of foreign exchange restrictions. Most countries have employed foreign exchange restrictions from time to time. Developing countries especially have found restrictions necessary to secure compliance with their development plans.

An exchange restriction plan implies that the government restricts the uses to which the available supply of exchange shall be put. Foreign exchange may be allocated specially for the payment of import bills, interest on foreign loans, and on other specific purposes. Sometimes the restrictions prevent the use of exchange for trade with a given (unfriendly) country. In the latter case the purpose may be political, but the basic reason for most foreign exchange restrictions is the shortage of foreign exchange sufficient to meet freely all of the requirements of international marketing and finance. More specifically, foreign exchange restrictions are de­signed:

  1. To provide the exchange necessary for the financing of essential imports and to discourage specific imports that are considered to be luxuries or that may be available from local producers.
  2. To allocate or limit exchange for the servicing of external debts and investments.
  3. To prevent the flight of capital.
  4. To limit speculation.
  5. To encourage lagging exports.
  6. To encourage tourist travel.

In addition to these objectives, all of which are primarily related to a shortage of exchange, exchange restrictions also contribute to influencing or determining of foreign exchange rates. When a government limits and prescribes the uses of all or most of the available exchange, it fixes the nation’s official exchange rates. The exchange rates fixing power of some government’s further enhanced by import quotas, licensing plans, and other foreign trade control measures. This ability of a government to manipulate the rate of its exchange can thus become an important instrument in the foreign commercial and even political, policy of a country.

Administration of Foreign Exchange Restrictions

In India exchange restrictions are administered through Reserve Bank of India. Export­ers are required to receive payments in foreign currency and turn over to the RBI all or such portion of their exchange as the current regulations require at an official buying rate. Importers and others requiring foreign exchange then purchase it, so far as the restrictions permit, at an official selling rate.

In some countries there is also a free exchange market in which exchange derived from certain exports or from other authorized services may be obtained, usually at higher cost to the buyer. Thus, in a single country, there may be one or more pegged exchange rates for official exchange and also a free market rate. This is known as a system of multiple exchange rates. Multiple exchange rates are most likely to be used by developing countries when a nation faces a shortage of foreign exchange.

Marketers are interested in these rates because the rate affects the price of, their products. Multiple rates are established to inhibit the importation of specific products. The least favorable rates are set for luxury goods such as automobiles, especially if these are also produced locally. As the economy develops, the items might be shifted from one category to another.

Other types of exchange restriction systems of interest to marketers include those in which a country requires that a license be obtained in order to import certain products. These import licenses are allocated by the exchange control authority in accordance with priorities set by the government. Countries also have levied import surcharges and have provided export subsidies to local producers. They have required that importers pay an advance deposit for desired exchange, thereby tying up the importer’s capital and increasing the cost of importing. In addition, various measures have been used to affect capital movements.

Effects of Foreign Exchange Restrictions

Exchange restrictions, although intended to accomplish the internal objectives of the country enforcing them, have necessarily affected the international trading of the other trading nations throughout the entire world. As they are imposed primarily because certain countries are faced with a shortage of foreign exchange, international trading as a whole has not always been curtailed. But it is clear that exchange restrictions have:

  1. affected the importation of some classes of goods more adversely than others, the essential character of imports being considered in the allocation of exchange;
  2. affected the trade of some exporting countries more seriously than that of others;
  3. tended, particularly in connection with certain international agreements, to channelize trade bilaterally;
  4. been used by some countries for bargaining purposes;
  5. been utilized by some countries for the purpose of subsidizing particular exports;
  6. influenced domestic prices in some countries so as to handicap exports; and
  7. Complicated the routine work of importers and exporters.

Exchange restriction measures, however, also have certain desirable features under conditions of serious and more than seasonal or strictly temporary exchange shortages. Exchange restrictions have:

  1. stabilized exchange rates for both importers and exporters;
  2. aided various needy countries in obtaining a larger supply of the commodities considered most necessary by their governments; and
  3. enable debtor nations to safeguard their currency, control ex­change rates in the national interest, protect their economy to some extent against unfavorable commodity price changes, regulate interest and other financial payments, and otherwise protect themselves against threatening disturbances.

In general it is clear that marketing opportunities and efforts for specific firms have been altered as a result of governmental Intervention in the exchange process. No marketing programme is complete until it has taken into account the potential effect of anticipated changes in governmen­tal policies and rates of exchange.

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