Currency convertibility, as an aspect of a country’s
exchange rate policy, refers to the ease with which domestic currency can be
traded for foreign currency, for a particular usage and at a given exchange
rate.
Currency
convertibility policy of a government has two aspects: (a) current account convertibility
and (b) capital account convertibility. Current account convertibility allows
residents to make and receive trade-related payments, i.e. receive foreign
currency for export of goods and services and pay foreign currency for import
of goods and services like travels, medical treatment and studies abroad. In
other words, it permits free inflows and outflows for all purposes other than
for capital purposes.
Capital account convertibility
allows freedom to make investment in foreign equity, extend loans to
foreigners, buy real estate in foreign lands and vice versa. Broadly speaking, it
allows anyone to move freely from local currency into foreign currency and
back.
Current account
convertibility was introduced in India in August 1994 with the acceptance of
the obligations under Article VIII of the IMF’s Articles of Agreement. This
drastic measure contributed significantly to boost India’s exports. Presently,
there is almost full convertibility on the current account and partial
convertibility on the capital account.
This
book explains and examines various aspects of currency convertibility risks and
their management. With focus on India, it discusses convertibility experiences
of a number of Latin American countries (Argentina, Brazil, Mexico, Chile,
Colombia, Peru, Paraguay, Venezuela, Bolivia, and Ecuador) and selected
countries of East and South-East Asia (Thailand, South Korea, Indonesia,
Malaysia, and Philippines). The experiences of these countries, in a
comparative perspective, will help to understand the requisites of a regime of
sustainable convertibility.
