Definition of Change Control
1 Concept of Change ControlIt is an official intervention in the foreign exchange market, in such a way that the normal mechanisms of supply and demand, there are total or partially out of operation and instead applies administrative regulations on purchase and sale of foreign exchange, which usually implies a set of constraints both quantitative and qualitative of entry and exit of foreign exchange.
Characteristics of change control• Fixing of foreign exchange by authority of the State
• The normal mechanisms of supply and demand are out of operation.
• Administrative regulation for its control is applied by the State.
• Restriction of the entry and exit of foreign currency.
Types of change control• Absolute change control: is the total regulation of the supply and demand for currency, is virtually impossible to implement it, by the inevitable and multiple evasions and leaks that occur when the economy is not entirely centralized.
• Parallel market or partial control: is determining partial control of the supply of currency, at certain prices, with whose currencies are met essential needs of the economy; and a marginal market, is allowed in which they buy and sell quantities of surprising exchange of operations that are left free, and determine market prices; This marginal, or parallel market is warranted to prevent the functioning of the black market.
• Multiple changes: it is one in that for each group of operations, supply and demand, fixed exchange rate, all preferential and input of capital, and for certain imports and output of capital; non-preferential rate for the remaining operations.
• Rigid change: is the one whose fluctuations are contained within a certain range. This is the case of gold standard, in which Exchange rates can range from so-called points or limits of import or export of gold, above or below the parity. If Exchange rates would exceed these limits would occur as movements of gold that would return to the given margin contributions. Its operation requires the concrete possibility of such movements of gold and ensures, through a mechanism of capital movements in the short term, linked to a relationship between Exchange rates and monetary rates of interest.
• Flexible exchange: is the one whose fluctuations have not precisely certain limits, it does not mean that such functions are unlimited or infinite. It is the case of the pattern of pure change and paper inconvertible currency. They are the mechanisms of the foreign exchange market and in general the dynamics of international transactions in the country, which, under the essential condition of flexibility, permit a relative stability of the changes, given the elasticities of supply and demand for the various components of the balance of payments.
• Fixed rate: it is that determined administratively by the Monetary Authority as the Central Bank or the Finance Ministry and it can be combined with both supply and demand free partly free and exchange restrictions and exchange control.
• Only change: This applies to all foreign exchange transactions, either that their nature or magnitude. Tolerated some difference between the types of purchase and selling of the currency as operating margin for the money-changers in terms of administration, operation and normal benefit expenses. The ideal of the International Monetary Fund is this type of system, which does not support discrimination in terms of the source of origin of the currency, nor in terms of the same applications in international payments.
2 Concept of Change ControlShift control to the action of the State monitor and limit, totally or partially, is called the operations of purchase sale of currency within the territory where it exercises sovereignty, with effects on the balance of payments.
People buy currency to travel, to save, to pay for products that matter (purchased elsewhere) etc.
In this case, when there is control of change, the price of the currency not is set by supply and demand, but to a certain value, which does not coincide with the real, which is traded on the parallel market. Another form of control is to prevent the purchase of currency or restrict them.
The purpose is the protection of the foreign reserves of the State and avoid capital flight.
When States are in deficit State implemented the exchange control, as happened in Venezuela since 1983. When individuals come to the State is in crisis they intend to seek refuge in foreign currency, to protect their savings, and this deepens the problem by increasing the value of the foreign currency with respect to the country, further destabilizing the economy.
Argentina has also implemented the exchange control, establishing a price for the official dollar, and having individuals request permission for the purchase of foreign currency, which only comes in certain specific cases, and according to the contributory capacity of each applicant.
The countries of the European Union possessed also control (MEC) change from the year 1979, to achieve some estaibidad in their respective currencies, on the European continent that later unified in a common currency: the euro, in 1999.
3 Concept of Change Control
What is a change Control?Change control is a tool of exchange rate policy, which is to officially regulate the buying and selling of foreign exchange in a country. In this way, the Government intervenes directly in the foreign exchange market, controlling the inputs or outputs of capital.
Is it a good or bad measure?Change control is not good or bad by itself. Its effectiveness depends on the causes that they have done necessary, the objectives of its implementation and the way you operate in practice.
What can cause it?Situations of high instability that threaten the economic security of a nation, some of them being:
• A strong loss of international reserves.
• Acceleration of the devaluation of the national currency, product of a hasty exit of capital and speculative movements.
• A bank or financial crisis.
• A situation of political and social upheaval that threatens the stability of the country, as for example a declaration of war.
So is it adopted?It establishes, among other reasons, to:
• Prevent the flight of capital abroad, and therefore prevent the decrease of the international reserves.
• Avoid the increase of prices, product of the devaluation of the national currency.
• Defend the value of the Bolivar against speculative attacks.
• Exercise control over certain types of imports, which could be considered to be non-priority.
• Avoid excess demand of foreign exchange that exceeds the real needs of the national economy.
Benefits• Ensures the provision of dollars to basic consumer (medicines, food) and essential imports, which adjusts its price and avoid speculative hikes.
• Avoided a collapse in the country with foreign economic relations, to send the message that the Government is seeking mechanisms to remain solvent and meet its commitments, for example, the payment of the foreign debt.
• It induces a stabilization and reduction of the interest rates in the country.
• Domestic production is favored, since restrictions on imports and the outflow of capital, domestic producers have more opportunity to place their goods on the domestic market, thus supplementing the demand for those products that were originally imported.
Costs• Certain goods and services imported, as luxury products or very specific, can make it more expensive or scarce. This should be particularly taken into account due to the high component of products imported in our economy.
• You can generate some discomfort due to the administrative process for the granting of foreign currency that everyone must comply.
• Change control demands difficult policy adjustments, for example, cuts to the national budget.
• Controlled activities could be diverted to the black-market, redirecting to a non-controlled market. Such a situation is nearly impossible to avoid, but this time there is more control over it.