FX Inflow: How Foreign Currency Inward Transfer Works

Last updated on February 12th, 2024 at 01:47 pm

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Foreign currency inward transfer commonly referred to as FX inflow is foreign currencies sent from another country to the other e.g. money sent from the United Kingdom to the United States.

For an individual, it is a currency sent from another country to the domiciliary account of a recipient in another country.

The most popular currencies used for inflow transactions or global trade are USD, GBP and EUR. Most times, other foreign currencies will first be converted to one of the three currencies.

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An active domiciliary account is a major requirement for fx inflow. In Nigeria, for instance, a dom account is used to receive foreign currencies which can then be sold or converted into naira.

FX inflow goes beyond receiving USD, EUR or Pounds from a relative overseas into one’s account.

Channels of FX Inflow

The inflow of foreign exchange into a country’s economy occurs through various channels. Four major channels of foreign exchange inflow are:

Foreign Direct Investment

Also known as FDI, Foreign Direct Investment occurs when a foreign company invest in another country either by building a factory for production or by acquiring a domestic or by making their operations available in another country. When a foreign firm does this, they bring in foreign exchange into the hosting country.

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Economically vibrant countries around the world do not joke with FDI, they do this by implementing investment-friendly policies such as Ease of Doing Business, improving infrastructure, robust security architecture etc.

Export of goods and services

While FDI is a great way to boost FX inflow, it is also important for a country to be productive in order to be able to export to earn in foreign currencies.

When a country sells its products or services to other countries around the world, it receives payment in foreign currency. Earnings from the export of goods and services form a significant part of the FX inflow for many producing countries. For instance, the United States is known for the export of its military hardware and sophisticated ammunition.

Remittances

This is the most popular channel of FX inflow for many African and Asian countries because their citizens who work abroad send foreign currency back home to their family members and loved ones.

Tourism

Any country that wants to boost its foreign currency inward transfer should invest more in its tourism potential to attract tourists around the world. Foreign tourists and visitors bring foreign currency into the host countries. That’s why tourist attraction locations in Kenya, South Africa, and Italy are a boost for the inflow of foreign currencies into these countries every year.

Financial & capital markets

When there favorable and stable economic policies, foreign investors will most likely be interested in buying or investing in the country’s stocks, bonds, or other financial instruments that will bring in foreign currency.

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Example of how Foreign Exchange Inflow works

Let’s say a major Japanese automobile company, for instance, Toyota, decides to set up a new manufacturing plant in the U.S. For Toyota to achieve this, the company needs to invest a large sum of money for land acquisition, construction, machinery, wages, and other operational costs.

As the investment is made in the U.S., it’s denominated in U.S. dollars. If Toyota’s reserves are in Japanese Yen, they would need to buy U.S. dollars in the foreign exchange market. This process effectively brings in foreign currency into the U.S. economy, thereby creating a foreign exchange (FX) inflow.

Advantages of Foreign Currency Inward Transfer

From this example, here are the benefits of fx inflow for the economy of the U.S.:

1) FX inflow helps maintain a country’s foreign exchange reserves. Let’s say a Frenchman decides to buy stocks of a U.S. technology company. To do so, he would need to purchase U.S. dollars with his Euros to pay for the stocks.

2) It helps to stabilize a country’s currency exchange rates.

3) It boosts the country’s ability to pay for its imports.

4) Good fx inflow is a boost to economic growth

5) It helps in job creation.

6) It will boost the government’s revenue from tax

7) It helps to boost the standard of living because the wages paid to the employee will help to reduce the government’s burden in the area of social security.

8) The money will circulate in the U.S. such as money spent on raw materials.

9) It further increases fx inflow because once the manufacturing plant begins operation and start exporting cars, the revenue from exports that comes into the U.S. in the form of foreign currency constitutes another source of FX inflow.

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Shortcomings of FX Inflow

While inflows of foreign exchange into a country have lots of benefits, it has to be properly managed as one of the measures to control inflation.

If it is not properly managed, it can lead to an over-reliance on certain sectors (like commodities exports) that can be volatile. To avoid the issue of over-reliance on foreign goods, some countries place restrictions on the import of certain goods.

Conclusion

A country that is able to attract FDI is able to increase its foreign exchange reserves, which can provide a cushion against economic instability. It FX inflow can be used for international trade or to influence the value of its own currency.

In reality, the process of foreign currency inward transfer can be quite complex and can possibly involve multiple transactions, different types of market participants, and fluctuating currency exchange rates, but this article is a simplified illustration of how FX inflow works.

Author

  • Opeyemi Quadri

    Ope is a finance writer and researcher with 10+ years of experience in content creation. His interests cut across decentralized finance, investment, foreign exchange, government policies and politics.

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