FX101 - Restricted Currencies

Want to buy Cuban pesos or Iranian rials? You may be in for a shock when you realize that getting the currency you want might not be as easy as walking up to your favourite foreign exchange retailer. Some currencies are considered restricted, meaning buying, selling or sending money may be more difficult than expected.

Wait, how can a currency can be restricted?

We know. It’s a shock when you expect your bank to carry US currency on hand and you realize it’s going to take 4 days for them to receive it. But it can be an even bigger shock when you’re planning a vacation to an obscure or exotic destination, and a foreign exchange specialist like Continental Currency Exchange has restricted access to the currency you need. Why is a currency “restricted”, and what should you do about it?

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Why are some currencies restricted?

Before the 1980s and 1990s, most countries in the world had some sort of currency restrictions. As free markets spread around the globe, however, the majority of countries abandoned these restrictions.

There are many reasons that a currency may be restricted. Most often the restrictions are voluntarily imposed by the government of the country which issues the currency. For example, Angola’s government chose to restrict foreign currency transactions and limit the amount of currency available to travelers, in part because of falling oil prices.

The decision to restrict currency is often made to:

• Prevent currency devaluation
• Prevent capital flight
• Limit access to foreigners

By preventing residents or non-residents to exchange a currency, the hope is that the value of that currency remains more stable.

Types of currency restrictions

Some types of currency restrictions will affect Canadians more than others. Overall most currency restrictions usually involve one or more of the following:

• Banning or limiting locals from holding foreign currency
• Setting exchange rates (rather than letting the market determine rates)
• Banning currency exchange or limiting it to currency exchange retailers approved by the government
• Banning or limiting the use of foreign currency within the country
• Limiting the amount of money that may be imported or exported

Wait, so why are some currencies restricted?

As a previous FX101 explains, there are many factors that affect exchange rates, one of which is supply and demand.

Simply put, the more people that buy or want to buy a currency the higher the exchange rate will climb and the more people selling or trying to sell a currency, the lower the exchange rate will fall. So in times of economic trouble, a country may stop people from selling their currency in order to artificially increase its value.

Similarly, limiting foreign exchange prevents capital flight. Investors can’t pull their money out of a country without exchanging the local currency for that of another country. Imagine if real estate or stock market investors all tried to sell at once – the economy would collapse! By limiting currency exchange, investors simply can’t sell because there would be nowhere for their money to go.

Sometimes the decision to limit access to foreign currency is a political decision rather than an economic one, especially in countries like Venezuela, Cuba, and North Korea. Similarly, countries may impose sanctions on one another to prevent their citizens from doing business with or visiting certain countries.

So in short, the reason why some currencies are restricted is because of their political and economical ties to their backing nation. But there are many types of restrictions, and each accompanies a currency with varying degrees of limitations.