Currency Convertibility
Currency convertibility is the ability to exchange a currency for foreign currency without official restriction. A currency may be convertible for trade payments but restricted for investment flows, and a legal right to convert does not guarantee the foreign currency is available.
Also called: convertibility · convertible currency · current-account convertibility · capital-account convertibility
Economists separate two layers. Current-account convertibility covers payments for trade, services, interest and remittances; members of the IMF that accept its Article VIII commit not to restrict these. Capital-account convertibility covers investment, lending and moving savings abroad, and many countries limit it.
A currency is called fully convertible when both layers are open, as with the dollar, euro or yen. The renminbi and the Indian rupee are convertible for trade but controlled on the capital side. Some currencies are non-convertible outside their home market altogether and are traded offshore only through non-deliverable contracts.
Convertibility on paper and convertibility in practice can differ. A peg may promise conversion at a fixed rate while banks ration access, demand paperwork for each purchase, or require exporters to bring earnings home. Any payout or collection product in a controlled market has to be designed around what can really be converted, by whom, and with which documents.
Commonly confused with
| Term | How it differs |
|---|---|
| Freedom of transfer | Convertibility is the right to exchange one currency for another. Freedom of transfer is the right to move the result wherever its owner wants. A country can grant the first and still restrict the second. |
See also
- Capital ControlsCapital controls are government limits on moving money into or out of a country, or on converting its currency at the official rate. Imposed by a central bank or finance ministry, they determine whether a payment corridor is workable at all, and in which direction.
- Currency PegA currency peg is a policy under which a central bank fixes its currency's exchange rate to another currency or a basket and stands ready to buy and sell at that rate. The peg lasts only as long as the reserves and credibility behind it.
- Hard CurrencyA hard currency is one that is widely accepted for international payment, freely convertible and expected to hold its value, such as the US dollar, euro, yen, pound sterling or Swiss franc. Suppliers abroad generally insist on being paid in one.
- Current-Account TransactionA current-account transaction generally relates to ordinary economic activity such as trade in goods, trade in services, income or certain transfers. Legitimate trade payments usually fall within this category, subject to documentation and bank review.
- Capital-Account TransactionA capital-account transaction involves activity such as direct investment, portfolio investment, cross-border borrowing or movement of investment capital. These transactions can face different registrations, approvals, quotas and controls from ordinary trade payments.
- Export Proceeds RepatriationExport proceeds repatriation is a rule requiring exporters to bring their foreign-currency earnings back into the country within a set period, and often to sell some or all of them to local banks or the central bank for local currency.