Ease of Money Transfer Index

| Wednesday, October 22nd, 2014

Introducing the Ease of Money Transfer Index

With large variations globally in international money transfer and currency restrictions, we at FXcompared Intelligence have a created a simple to use index known as the “Ease of Money Transfer Index” to categorise how easily money can be transferred to and from a specific country.

In most developed economies, there are very few restrictions on the buying and selling of foreign currency. Some governments, particularly with weaker or developing economies, however, seek to restrict the amount of local or foreign currency that may be traded or purchased by either or both residents and non-residents. There is no economic consensus on the utility of exchange controls, but reasons governments may use them include managing the exchange rate and reducing volatility, ensuring adequate supply of foreign currency to pay foreign debts, and to lower the cost of domestic credit for residents. Such countries are in a minority as governments, particularly since the trend towards economic liberalisation began in the 1990s, have steadily reduced such controls, but they do persist to varying degrees. These can range from little more than limits on the amount of cash one can bring in or out of a country such as in the US, or much tighter controls in order to restrict the degree of exchange rate fluctuation as in the case of China.

Foreign exchange controls can take various forms:

  • Restricting or prohibiting the use of foreign currency for domestic transactions
  • Restricting or prohibiting residents from holding foreign currency domestically
  • Restricting currency exchange to government-approved exchangers
  • Managed exchange rates
  • Restricting the amount of currency that may be imported or exported
  • Requiring importers/exporters to buy/sell foreign currency from the central bank at an official rate
  • Restrictions on the payments of income to non-residents

We have categorised our 75 target markets into how open the foreign exchange regime is, drawing on such considerations as the extent of foreign exchange and capital controls, extend of domestic use of foreign currency, quality of monetary policy-making, and reporting requirements. These form our Ease of Money Transfer Index where we categorise a country from Low up to High:

Low: Most advanced economies do not apply restrictions to foreign exchange operations and overseas money transfers. They fall into the “low” category if the majority if one or more of the following conditions apply: --national currency is freely convertible to foreign currencies --unrestricted foreign capital inflows and outflows related to trade, investment and personal transfers --some reporting requirements, including Anti-Money Laundering and Counter-Terrorism Financing (AML/CFT) guidelines

Medium: Many countries, primarily developing countries, fall into the “medium” category due to a variety of restrictions on forex operations. These measures can be related to efforts to protect the value of the national currency or to combat problematic crime and money laundering, including: --some restrictions on foreign currency conversion or ability to hold foreign currency in domestic bank accounts --limited restrictions on current or capital account transactions --caps on daily or monthly foreign exchange withdrawals without justification

High: Countries with high levels of control impose strict restrictions on foreign exchange transfers and capital flows. These include: --ban on electronic or cash transfers of national currency outside the country --tight limits on daily or monthly foreign exchange purchases, including for travel abroad --strict controls on incoming or outgoing foreign capital transfers, such as hard deadlines for the repatriation of foreign-earned revenue

We plan to release the first set of data for this index during November.

Ease of Money Transfer Index: Examples

Cyprus: Low-to-Medium

Cyprus was one of the hardest-hit economies in the Eurozone, primarily due to its massive exposure to Greek debt. Cypriot GDP dropped by over 8% between 2009-2013. As part of its economic reform plan, the government moved to temporarily restrict outgoing foreign exchange transfers in an effort to buoy the banking sector.

For example, businesses and individuals are only authorised to transfer €5,000 out of the country each month. Companies involved in trade and other foreign business may spend up to €1m per international settlement, after which they must obtain central bank approval. Capital controls may make it more difficult for Cyprus to attract foreign investment in the short-term, although they were judged necessary in order to strengthen its banking sector.

Nigeria: High-to-Medium

Nigeria maintains several currency controls, including limits on forex conversions for foreign travel and daily caps on local withdrawals from incoming forex transfers. However, the Central Bank of Nigeria (CBN) raised the ceiling for person-to-person outgoing money transfers in October 2014 from US$2,000 per transaction to US$5,000 per transaction. Being Africa’s largest population and economy, Nigeria is a key regional market for cross-border money flows, and the eased restrictions should help to encourage greater forex transfers in the near-term.

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