What are the Objectives of Exchange Control?

In many countries of the world exchange control is regarded as a necessary evil. There are several objectives in practising exchange controls. The main objects of foreign exchange control may be stated as follows:

1. Conservation of Foreign Exchange :

Exchange control may be introduced by the monetary authority to conserve the gold, bullion, foreign exchange currencies, etc., i.e., foreign exchange resources, of the country. It may be necessary to ensure the availability of sufficient amount of foreign exchange needed to buy essential foreign goods.

2. Check on Flight of Capita:

Under the free exchange system there is the danger of huge outflow of capital which may weaken the country’s economy. Especially erratic shifting of capital tend to accentuate the disequilibrium in the balance of payments and it also adversely affects future growth of the country. Exchange control, however, offers a prompt and effective means to prevent such capital outflows.

3. Correcting Disequilibrium in Balance of Payments:

To correct the deficit in the balance of payments, the country needs to put a curb on imports. For this purpose, the use of Foreign exchange earnings by exporters for import of goods must be checked through appropriate exchange control. Again, exchange control is essential to implement an import policy very effectively. In short, exchange control may be introduced to protect the country’s balance of payments.

4. Stabilisation of Exchange Rates:

In a free exchange market, exchange rate is a fluctuating phenomenon. Thus, exchange control may be adopted to maintain exchange rates at an arbitrarily chosen fixed point.

5 . Protecting the Interest of Home Producers:

Exchange control may be used for giving protection to domestic producers by restricting the competition from foreign traders through import control.

6 . Redemption of External Debt:

The Government may use the exchange control device to obtain foreign exchange needed for repaying or servicing of its foreign loans.

7 . Effective Economic Planning:

For successful economic planning, foreign trade has to be coordinated with planned programmes and the outflow of capital should be restricted in order to make it available to domestic industries. Thus, for mitigating the economic repercussions of foreign trade endangering economic plans, exchange control becomes inevitable.

8 . Maintaining Over-value of Home Currency:

Sometimes exchange control is used in order to maintain the external value of the country’s currency at an overvalued level. For this purpose, the available foreign exchange resources are rationed for use of specific and important purposes only and the government thereby, seeks to adjust total demand with total supply of foreign currencies.

9 . Generating Public Revenue:

Under exchange control, by adopting multiple exchange rates system, the Government can yield revenue income through difference of average buying and selling rates, less costs of administration.

10 . To prevent Spread of Depression:

Depression in a big country may spread from country to country via international economic relations. Exchange control may work as a preventive against such spread of depression by controlling the main doors – imports and exports.