Business Activity: Exchange Control - Currency Convertibility in the Current and Capital Markets by @swaylee

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Greetings Everyone
Welcome to my blog. It's your brosev Rasheed again and I am here with another learnwithsteem special. Today we will be looking at money in the form of bank notes (paper money) and it's convertiblity amongst nations. I'm sure everyone here likes money and we have an idea of it's convertiblity so we would easily relate with the topic now let's take a closer look at the topic of the day.

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Currency Convertiblity

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Currency Convertiblity simply means that the currency of a nation can be freely converted into another nations currency at the market determined rate of exchange. For example, the convertibility of Rands means that Rands can be converted into dollars, yen, pounds and they can be converted to Rands too at the market determined rate of interest.

A currency may be converted on current account only (i.e exports and imports on merchandise) only. A currency may also be convertible on capital account that is in respect of capital flows like like flows of portfolio capital, direct investment flows, flows of borrowed funds and dividends.

Thus convertiblity of naira on capital account basis means that those who bring in foreign exchange for purchase of bonds, stocks in Nigeria stock exchange market or for direct investment in power projects, highways, steel plants and so on cam get them freely converted into naira without taking any permission from the government and the profit from these projects can easily be converted into their own currencies and repatriated back to their countries.

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Advantages of Currency Convertiblity

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✓ Encouragement of Exports
An important advantage of currency convertibility is that it encourages exports by increasing their profitablity. The ease at which these currencies can be converted encourages a country to export as it would be easier to procure goods from the exporting countries.

✓ Encouragement of Import Substitution
Since free or market determined rates of exchange is higher than the previous officially fixed rate, imports become more expensive after convertibility of currency. This hence discourages imports and gives boost to import substitution.

✓ Self- Balancing Mechanism
When there is deficit in the balance of payment due to over valued exchange rate under currency convertibility the currency of a nation depreciates which gives rise to exports by lowering their prices on one hand and discouraging import on the other hand. In this way, the deficit in balance of payment gets automatically without government intervention.

✓ Specialization in accordance with comparative advantage
Another merit of currency convertibility has is that it ensures production pattern of of different trading countries in accordance with their comparative advantage and resource endowments. It is only when there is convertibility that's market exchange rate truely reflects the purchasing power of their currencies which is based on the prices and cost of goods found in different countries.

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Disadvantages of Currency Convertiblity

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✓ Changes in the foreign debt
Although there is ease of taking loans from foreign countries hence one can accumulate foreign debt but when it's time for repayment, the market determined rate of exchange could be higher and repayment would eventually cost more because the exchange rate has become unfavorable.

✓ It has an adverse effect on the balance of trade and export
The convertibility removes regulation and makes the rate of exchange dependable on the market forces this would eventually make the country less competitive in the international market when it comes to exports as the rates are no longer regulated.

✓ High Level of Volatility
The exchange rates which is often regulated is then decided by the market forces hence there would be high volatility this would later lead to devaluation of that countries currency or even lead to high level of inflation and this would all be detrimental to the countries economy.

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Conclusion

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It really is a nice concept to allow the market forces to influence the exchange rates instead of fixing it on a stable amount but we should always look at the disadvantages and how to counter them if not, no system is perfect. I hope we all enjoyed the lecture. Thanks for reading.

Post Name:	Business Activity: Exchange Control - Currency Convertibility in the Current and Capital Markets by @swaylee
Owner's name :	@swaylee
Business Address	Barnawa, Kaduna, Nigeria
About us	Link

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