Whether the government sets the official exchange rate or restricts foreign exchange transactions, it will make the exchange rate deviate from the market equilibrium exchange rate. For developing countries, exchange rate distortion is mainly manifested in the high exchange rate of local currency. This may be because the government has set a high official quotation for the local currency, or it may be the result of the government's restrictions on foreign exchange supply and demand. This distorted exchange rate has a negative impact on resource allocation. First, it will hit agriculture in developing countries. In the case that developed countries generally provide huge subsidies for the export of agricultural products, the market price of world agricultural products is already very low; The overvaluation of local currency exchange rate further reduces the local currency price of imported agricultural products, which leads to the decline of agricultural products prices in developing countries. This is an important reason for the slow development of agriculture and the huge difference between urban and rural areas in many developing countries. Secondly, overvaluation of the local currency exchange rate will generally hit the country's export industries and import substitution industries, because it raises the foreign currency prices of the country's export commodities and depresses the local currency prices of imported commodities. Finally, from a global perspective, exchange rate is one of the price signals that guide international capital flows, and the distortion of exchange rate makes it difficult for people to make correct investment decisions. For developing countries, the high exchange rate of local currency is not conducive to attracting foreign investment, which makes foreign investment only control a small amount of actual resources of the country; In the long run, this is not conducive to the country's economic development, technological progress and the improvement of international competitiveness.
2. To some extent, it affects the development of international trade and the process of opening to the outside world.
From a global perspective, foreign exchange control hinders the formation of a free multilateral settlement system, and naturally hinders the normal conduct of international trade and international capital flows. For developing countries, overvaluation of local currency exchange rate and restrictions on free foreign exchange transactions will dampen the enthusiasm of export enterprises to earn foreign exchange, and the shortage of foreign exchange will also affect the development of their import trade. Restricting capital outflow and return of investment income will also discourage foreign investors from investing in the country. The experience of many countries proves that to break the vicious circle of balance of payments deficit, insufficient foreign exchange reserves, foreign exchange control, low degree of opening to the outside world and slow economic development, we must find a breakthrough in gradually abolishing foreign exchange control.
3. There is a black market in foreign exchange, and the coexistence of official foreign exchange prices and black markets may bring about power and money transactions.
When the foreign exchange quotation is obviously depressed, it is difficult to avoid the emergence of the foreign exchange black market. When the foreign exchange black market is big, the government even wants to open the foreign exchange swap market, which makes the country have a legal dual-track exchange rate system. In order to buy foreign exchange at a lower official price, some individuals and enterprises may pay bribes to officials who have the right to distribute foreign exchange, which will promote social corruption.