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Retained Foreign Currency Accounts

The object of foreign exchange control is to limit the effect of international economic transactions and fluctuations on the domestic economy, particularly by restricting the amount of out-flow of domestic currency without prior approval.

Another principal feature is that receipts of foreign currencies that arise from trade and capital transactions usually have to be converted into domestic funds within a limited period of time. In both cases, the intent is to protect the international reserve position of the country that institutes exchange control.

Countries that have an exchange control usually have a relatively high foreign trade ratio, and are therefore dependent upon foreign trade for their standard of living. Their exchange control authorities will, then, necessarily be concerned that certain legitimate business reasons for holding foreign currencies are honored.

For example, exchange control commonly recognizes that a trading, or exporting, company, which receives foreign currencies for its exports, may have foreign currency obligations against them.

In most European countries that have exchange controls, domestic exporting companies are permitted to hold foreign currency receipts in local accounts set up for that purpose.

Upon presentation of the proper documents, foreign currency export proceeds can be credited to such accounts held at local banks and, in a few cases, abroad, being held in suspense until they are needed for authorized or legitimate payments in that currency.

There should be a reciprocal, although not necessarily identical, flow; funds usually may not be held in such accounts for an indefinite period.

There is two-fold advantage to the exporter in having foreign currency accounts. They avoid exchange conversion costs, which would normally be borne twice, if proceeds were converted and reconverted, and they maintain a neutral exposure position in the currency for those transactions.

In fact, such foreign currency holdings may constitute a short-term hedge against the exporter's local currency, although the exchange authorities will not view that as desirable.

Conversion costs in transferring dividends in foreign currency to a parent company can also be avoided. In certain countries, currency accounts can earn interest at Euro-currency rates, which transforms them into a type of accumulation account.

If interest-bearing deposits are maintained continually, however, the exchange control authority may require that they be converted into local currency, because investment of foreign currencies is not their underlying justification.

Of course, the same advantages of (and rationale for) foreign currency accounts exist for exporters in countries where there are no restrictions on international transfers, or foreign exchange holdings.

The principle of maximizing availability of funds to the company through accelerating sales receipts applies to purely local or domestic transactions. Delays in receiving funds that are due from various parts of a single country can also arise from postal and banking processing time.

Although that area does not usually involve foreign exchange per se, it is typically the responsibility of the corporate money manager that intra-country movements of funds be handled as efficiently as possible.

There are systems and techniques for the interception and concentration of sales receipts domestically, and they are comparable with those used for export transactions.

Analysis and implementation of such techniques would complement other IMM efforts such as acceleration of export receipts domestically, and they are comparable with those used for export transactions.