Methods of Exchange Control: The various methods of exchange control may be broadly classified into:
(1) Unilateral methods and
(2) Bilateral/multilateral methods.
1. Unilateral Methods
Unilateral measures refer to those methods which may be adopted by a country unilaterally i.e. without any reference to or understanding with other countries. The important unilateral methods are outlined below.
• Regulation of Bank Rate: A change in the bank rate is usually followed by
changes in all other rates of interest and this may affect the flow of foreign
capital. For example, when the internal rates of interest rise, foreign capital is attracted to the country. This causes an increase in the supply of foreign currency and the demand for domestic currency in the foreign exchange market and results
in the appreciation of the external value of the currency. A lowering of the bank rate is expected to produce the opposite results.
• Regulation of Foreign Trade: The rate of exchange may be controlled by
regulating the foreign trade of the country. For example, by encouraging exports and discouraging imports, a country can increase the demand for, in relation to supply, its currency in the foreign exchange market and thus bring about an increase in the rate of exchange of the country’s currency.
• Rationing of Foreign Exchange: By rationing the limited foreign exchange resources, a country may restrict the influence of the free play of market forces of demand and supply and thus maintain the exchange rate at a higher level.
• Exchange Pegging: Exchange pegging refers to the policy of the government of fixing the exchange rate arbitrarily either below or above the normal market rate. When it is fixed above the free market rate, it is known as pegging up and when it
is fixed below the free market rate, it is known as pegging down. Exchange
pegging is resorted to, generally, during war times to prevent violent fluctuations in the exchange rate.
• Multiple Exchange Rates: Multiple exchange rates refer to the system of the fixing, by a country, of the different rates of exchange for the trade or different commodities and/or for transactions with different countries. The main object of
the system is to maximize the foreign exchange earning of country by increasing exports und reducing imports. The entire structure of the exchange rate is devised in a manner that makes imports cheaper and exports more expensive. The
multiple exchange rate system has been severely condemned by the IMF.
• Exchange Equalization Fund: The main object of the Exchange Equalization Fund, also known as the Exchange Stabilization Account, is to stabilize the exchange rate of the national currency through the sale and purchase of foreign currencies. When the demand for domestic currency exceeds its supply, the fund
starts purchasing foreign currency with the help of its own resources. This results in an increase in the demand for foreign currency and increases the supply of the
national currency. The tendency of the rate of exchange of the national currency to rise can thus be checked. When the supply of the national currency exceeds demand and the exchange rate tends to fall, the Fund sells the foreign currencies
and this increases the supply of foreign currencies and arrests the tendency of the exchange rate of the domestic currency to fall. This sort of an operation may be resorted to eliminate short term fluctuations.
• Blocked Accounts: In the case of blocked accounts, foreigners are prevented from withdrawing money from their deposits with banks, for the purpose of remitting abroad. This measure makes the foreign exchange position of the country more comfortable. This is generally regarded as a wartime measure.
Under this method, domestic debtors may be required to deposit their dues to foreign creditors into specifically designated bank accounts.
2. Bilateral/Multilateral Methods
The important bilateral/multilateral methods are the following:
• Private Compensation Agreement: Under this method, which closely resembles barter, a firm in one country is required to equalize its exports to the other country
with its imports from that country so that there will be neither a surplus nor a deficit.
• Clearing Agreement: Normally, importers have to make payments in foreign currency and while exporters are paid in foreign currency. Under the clearing agreement, however, importers make payments in domestic currency to the clearing account and exporters obtain payments in domestic currency from the clearing fund. Thus, under the clearing agreement, the importer does not directly pay the exporter and hence, the need fore foreign exchange does not arise, except for settling the net balance between the two countries.
• Standstill Agreement: The standstill agreement seeks to provide debtor country some time to adjust her position by preventing the movement of capital out of the
county through a moratorium on the outstanding short-term foreign debts.
• Payments Agreement: Under the payments agreement, concluded between a debtor country and a creditor country, provision is made for the repayment of the principal and interest by the debtor country to the creditor country. The creditor
country refrains from imposing restrictions on the imports from the debtor country in order to enable the debtor to increase its exports to the creditor. On the other hand, the debtor country takes necessary measures to encourage exports to
and discourage imports from the creditor country.