“Currency controls”

definition

Currency controls, foreign exchange controls or currency exchange controls are a set of restrictions applied by some governments to ban or limit the sale or purchase of foreign currencies by nationals and the sale or purchase of local currency by foreigners.

Until the 1980s, all currencies were subject to some form of control, which started to be gradually removed in the major economies with the advent of free trade and globalisation during the 1990s.

Countries with smaller and more fragile economies, however, maintained their control over the foreign exchange market, aiming to avoid speculation with their currencies that might create imbalances in their balance of payments and capital flows with potentially devastating consequences.

These are the most common foreign exchange controls:

  • Banning or limiting purchases of foreign currency within the country
  • Banning or restricting the use of foreign currency within the country
  • Setting exchange rates (instead of letting the value of the currency fluctuate according to market forces )
  • Restricting currency exchange to retailers approved by the government
  • Limiting the amount of money that may be imported or exported

In these countries, shadow currency markets often emerge providing a parallel exchange rate to the official one, which is usually closer to what the free market exchange rate would be according to supply and demand.

These currency controls often pose additional challenges to companies working at an international level, either by hindering cash transactions or by making it impossible to use financial instruments such as currency options or forward contracts to hedge FX risk.

 


 

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