Economics 101: The ins and outs of capital controls

Julie Brownlee, Fsp Invest, 30 Jul. 2015

Tags: capital controls, what are capital controls, economics, south african capital controls,

Governments across the world have a number of tools at their disposal to help during times of crisis or to protect their financial systems.

This includes capital controls.

So what are capital controls? And when are capital controls used?

Read on to find out…

What are capital controls?

Capital controls describe any measure that a government uses to regulate money flowing in and out of its country.

There are a number of different capital controls a government can use. Some of the most common include:

  • Limits on the amounts individuals or companies can send out of a country.
  • Limits on the amount of money individuals or companies can take out of the bank.
  • Restrictions on how much local currency individuals or businesses can buy or sell through official channels.
  • Caps on the level of foreign investment in the domestic market.
  • And taxes on transactions on the purchase or sales of specific assets.

When do governments use capital controls?

During times of crisis, a government may resort to capital controls to try to stop money leaving the country. A large movement of money out of a country has the potential to destabilise the financial system.

This is what happened recently during the Greek debt crisis.

A government may impose capital controls in a bid to prevent volatile capital inflows from worsening imbalances in the local economy, the experts at Money Week explain. This is the case in China and Brazil.

From the 1940s to the 1970s, capital controls were part of the Bretton Woods system of fixed exchange rates. But developed countries abolished these controls when they changed to floating exchange rates.

South Africans are all too familiar with capital controls. For example, the South African government has capital controls in place to make it harder to take large amounts of money out of the country.

This is quite a common practise in emerging markets. Capital controls are in place to help improve financial stability.

So there you have it. The ins and outs of capital controls.

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