Exchange control:
Is a system through which the rate of different foreign currencies is determined.
Methods of exchange control:
In order to achieve objective of the exchange control. Some methods are applied which are defined as:
“UNILATERAL AND BILATERAL METHODS”
In unilateral; method the government apply exchange control without consultation with the other governments. But in bilateral method a government applies exchange control with the mutual understanding and consultation with the other governments.
Unilateral methods:
1. Exchange pegging:
Exchange pegging refers to the policies of fixing the exchange value of the currently according to the some deserved rate. When exchange rate is fixed higher than the market rate, it is called pegging up and if the exchange rate known as pegging down.
2. Standstill agreement :
In this agreement the relationship between two countries in term of capital movement remain unchanged. The debtor country is allowed to replay loan in installment or the short term loans.
3. Compensation agreement:
According to this agreement goods of equal value are exported and imported from each other country. Hence, no balance is left and no foreign exchange is involved.
4. Payment agreement:
In this method Creditor country will export more and more to debtor country and the creditor will import less and less from the debtor country to settle the account.
5. Foreign exchange rationing:
Government has the right to direct all the exporters and other investors to surrender all foreign exchange with the central bank. Foreign exchange so collected can be retaining by fixing quota of the amount and the rate of foreign exchange.
6. Blocking of foreign exchange:
During emergency a country may block the foreigner to transfer their funds in their home accounts.
Bilateral methods:
1. Cleaning agreement:
When two countries agree to settle their accounts in their home currencies, through the central bank, this method is known as cleaning agreement.
2. Moratorium application:
A legal authorization to debtor to stop payment is known as moratorium application. It is used to solve temporary problems of payment. A country can stop to make payments for imports and interest on capital.
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