The National Currency's Convertibility

Convertibility or exchangeability of the national currency is an opportunity for the participants of foreign economic transactions freely and without restrictions to exchange it for foreign currencies for the performance of all types of international transactions.

The degree of currency convertibility is inversely proportional to the volume and rigidity of practiced foreign exchange restrictions in the country. On this basis, the currency may be fully convertible, partially convertible and non-convertible.

The exchange restrictions are any actions of the official instances which lead to a narrowing of opportunities, increase costs or cause undue delays in the implementation of foreign exchange and international payments. The main principles of foreign exchange restrictions are:

• centralization of foreign exchange transactions in the central and authorized banks;

• licensing of foreign exchange transactions;

• full or partial blocking of foreign currency accounts;

• limited convertibility of currencies.

The degree of currency convertibility depends on the scope of exchange restrictions: on the current account of the balance of payments or on capital transactions.

Current account convertibility is the absence of restrictions on international transactions related to trade in goods, services, income and transfers transferring. The following forms of currency restrictions are used on the current account of the balance of payments: the blocking of foreign exporters' income from the sale of goods in the country, the limiting of their abilities to dispose of these funds, surrender of foreign exchange proceeds of exporters to the central banks and authorized banks, limited sale of foreign currency to importers, restrictions on forward purchases of foreign currency by importers, the prohibition of the sale of goods abroad in the national currency, the prohibition of any import of certain goods in foreign currency; regulation of the terms of payment for exports and imports, etc.

Capital account convertibility is the absence of restrictions on international transactions which are associated with the movement of foreign direct and portfolio investments, capital grants. In the case of the passive balance of payments, foreign exchange restrictions are used that limit the outflow of capital and stimulates the inflow of capital in order to support the exchange rate. It is the limiting of export of local and foreign currency, gold, securities, loans, supervision of credit and financial markets; limiting of the participation of national banks in the provision of international credits in foreign currency; compulsory withdrawal of foreign securities, which belong to the residents and their sale to currency; total or partial cessation of external debt payment or settlement of its national currency without the right to transfer abroad, etc.

When the balance of payments is active, in order to deter capital inflows into the country and to improve the exchange rate of national currency, it can be used the depositing on non-interest bearing account with the central bank of new foreign banks' liabilities; the prohibition on investments of non-residents and the sale of national security to foreigners; mandatory conversion of foreign currency loans in the national central bank; the prohibition on the payment of interest on time deposits of foreigners in the national currency; the introduction of negative interest rates on deposits of non-residents in domestic currency (interest is paid by the depositor of banks or by the bank, which is interested in attraction of foreign currency deposits and pay by itself to the state monetary institutions); the limit on the import of currency into the country, limits on forward sales of foreign currency [6, p. 421].

Currency exchangeability is not a purely technical category of the possibility of its exchange. In essence, it is a special bond character between the national and world economies, the deep integration of the first into the last one. The exchangeability of the national currency gives the country long-term benefits of participation in the multilateral system of global trade and investment, as follows:

• free choice of producers and consumers of the most profitable markets and procurement within the country and abroad at any given time;

• empowerment to attract foreign investment and to invest abroad;

• stimulating impact of foreign competition on efficiency, flexibility and adaptability to changing business conditions;

• tightening of domestic production to international standards on prices, costs, and quality;

• possibility of international payments in national currency;

• specialization for relative advantage, efficient and economical use of material, financial and human resources at the level of the economy as a whole.

Convertibility of the currency in terms of the relationship to the currency by residents and non-residents may be internal or external. When there is the internal convertibility, the residents have the right to buy and carry out transactions in the country with a currency, bank deposits, which are denominated in foreign currencies. Internal convertibility covers current and capital transactions. It exists in all developed countries. Foreign currency can be a means of payment, if buyer and seller want this. When there is external convertibility, residents have the right to deal in foreign currency with non-residents.