Non-trade Foreign Exchange Management
Introduction
Non-trade foreign exchange management is an important function in any country through which the FX rate between currencies is determined. The inter-affectedness of currencies, the different economic perspectives, the expectations of economic performance and the attitude of the investors all have an influence on the FX rate. During the past few centuries, foreign exchange has been managed mainly to stabilize the exchange rate and to try to attain a balance of payments. In the recent decades, it is also managed to fund economic growth and development. In this article, we will discuss the nature of non-trade foreign exchange management and its importance.
Forms of Non-trade Foreign Exchange Management
The most common forms of non-trade foreign exchange management are central bank intervention, sterilization policy and free market pricing. Central bank intervention is when a central bank steps in to buy or sell currency either directly or through private sector banks to change the demand and supply of currency. This can be done to manage the exchange rate or to control the amount of money in circulation. Sterilization policy involves the central bank buying or selling currency to keep a lid on domestic money supply when there are big inflows or outflows of currency respectively. Lastly, free market pricing allows the foreign exchange to be determined in the open market taking into consideration the fluctuating demand and supply of a currency.
Importance
Non-trade foreign exchange management is important in order to manage the rate of exchange. It is also important to maintain a balanced amount of money in circulation in the economy. The different economic perspectives of buyers and sellers become important when the exchange rate is to be managed. This is because the exchange rate is determined by the demand and supply of a particular currency. If the demand for a particular currency is greater than its supply, then the value of that currency would increase, and if the supply is greater than its demand, then the value would decrease.
Moreover, non-trade foreign exchange management is important to provide a platform for international trade to take place. This is mainly because it allows importers and exporters to buy and sell currencies in order to convert the currencies they need to pay for goods and services. The different exchange rates between two countries also make it easier for countries to buy goods and services in other countries at a cheaper rate as well.
Conclusion
It can be concluded that non-trade foreign exchange management is an important mechanism that helps to maintain an orderly and balanced rate of exchange. It also helps to provide a platform for international trade by providing a platform for global importers and exporters to buy and sell different currencies in order to fund their transactions. Lastly, it helps to manage the money supply in the economy, and also achieve a balance of payments.
