Exchange Control Methods are being discussed here.The presence of central bank in any country is necessary for exchange control. The central bank frames different policies to control foreign exchange. The State Bank of Pakistan is performing these functions in Pakistan. There is a separate department in S.B.P for the purpose of exchange control.

 Exchange Control Methods;Methods of exchange control can be divided into two classes:

1. Direct Methods:

These include all those methods, which are adopted by the government to make the rate of exchange stable.

2. Indirect Methods:

These cover all those steps, which are taken by the government to control the imports and exports.

1. DIRECT METHODS

The direct methods of exchange control are as follows:

• Exchange Restrictions:

To improve the weak position of foreign exchange reserves necessary steps are taken to reduce the supply of home currency in the international exchange market. This situation is created due to excessive repayment of foreign debts, which reduces the volume of foreign exchange reserves.

• Rationing of Foreign Exchange:

All the foreign exchange earned by the citizens is deposited under exchange control to the central bank of the country in exchange for home currency. Then central bank allocates the foreign exchange keeping in view the national economic preferences and the demand of the importers.

• Government Intervention:

Under this method, to stabilize the exchange rate of home currency government purchases it from international market against foreign currency.

• Clearing Agreements:

Clearing agreement is an agreement between the two countries under which importers in both countries pay the purchase price of all goods imported into an account at their respective central banks. The exporters can receive the amount of goods sold from their central banks in home currency. The two countries settle balances by transferring gold or foreign exchange after a fixed time.

• Stand Still Agreement:

Under this system, either the short-term debt is converted into long-term debt or provision is made for its gradual repayment.

• Transfer Moratoria:

Under this system, importers and others pay their foreign debts in their domestic currency to specified authority in the country. When the moratorium is concluded, these funds are remitted abroad. A foreign creditor is sometimes allowed to use his funds in the country in a way specified by the government.

 Exchange ‘Pegging’:

I Ins device was used during war in order to minimize exchange Um lunlion h means to fix the exchange rate below or above the • |inlil>imm exchange rate in a free market, to facilitate the foreign nun mi mins. Ihc main objective is to maintain confidence in the currency m l iohihange imports.

 Blocked Account:

When the payment of foreign debts is made in domestic currency n. ilu central bank but it is not allowed to remit abroad without the permission of the government, blocked accounts are said to arise. The           foreign creditors are allowed to use their funds according to the manner prescribed by the government.

Compensation Agreements:

I Ins method resembles with barter agreement. According to this uhilu id the two countries import and export the commodities of equivalent •ilin Imports thus compensate for exports, leaving no balance rsettlement foreign exchange.

Multiple Exchange Rates:

Sometimes two or more exchange rates are employed for ii.in ..u ling foreign exchange to encourage or discourage specific types of – -pnils and imports.

3. INDIRECT METHODS

following are the indirect methods of exchange control to regulate .uni।onlrol the import and export of goods:

1. II Import License:

I hc government issues the license for different goods according to ilu ii importance to the importers to economies the use of foreign exchange.

      hanges in Interest Rate:

By increasing rate of interest foreign investors are attracted in the • iiunlry and transfer of capital to abroad is discouraged and foreign • <hange receipts are inc eased.

 Import Duties:

To discourage the use of foreign exchange for less important goods mipta I duties are imposed. If the import of certain goods is to be more •hsiouraged, heavy rate of duties is imposed.

4. Export Promotion:

Various steps are taken to promote the exports by making them cheaper in the international market. For this purpose, generally export duties are not imposed and subsidiary is paid on the export of some specific export items.

5. Export Bonus Scheme:

To encourage the exporters, a certain portion of foreign exchange of their exports is given to them to import the goods at their sweet will.