# 1. Introduction

In Angola, it can take longer than a month for a foreign-owned firm to transfer foreign exchange abroad to make a dividend payment to foreign shareholders. The commercial bank making the transfer must review documentation of the payment, which must then be submitted to the central bank for review and issuance of a license before the transfer may be made. Government approval is also needed for firms to receive a long-term foreign loan, or to hold export earnings in bank accounts abroad. To the northeast, in Uganda, firms may convert and transfer currency freely, and making a dividend payment abroad only takes a couple of days. No approvals or procedural steps are required, and firms may similarly conduct other foreign exchange transactions for international business without restriction.

This difference between Angola and Uganda reflects why the ease of converting and transferring currency abroad is a crucial consideration for firms investing in a foreign economy. The ability to bring in foreign capital, freely convert local currency and foreign exchange, and repatriate investment returns back home are fundamental aspects of foreign direct investment (FDI). Access to foreign exchange is necessary to pay for imports of goods and services, and being able to use export proceeds freely is an incentive for firms to engage in international business.

Perceptions of global business leaders confirm the importance of converting and transferring currency. In response to a recent survey by the Multilateral Investment Guarantee Agency, 40 percent of senior executives from multinational firms investing in developing economies identified ‘transfer and convertibility restrictions’ as the most concerning type of political risk to their cross-border investments in the next three years.<sup>i</sup> Nearly 28 percent of companies report having actually withdrawn or cancelled planned investments due to such restrictions in the previous 12 months.

Converting and Transferring Currency (CTC) measures the foreign exchange regime relevant for FDI across 98 economies to provide comparable and actionable information about this regulatory space. There are numerous components of the investment climate that governments may want to reform as they increasingly seek to attract FDI as a driver of long-term development.<sup>ii</sup> The foreign exchange regime is one such component, and the CTC indicators identify restrictions affecting foreign exchange transactions that are relevant for FDI and related international business to benchmark economies and identify good practices. The specific indicators cover:

1. Receiving investment inflows, including whether restrictions exist on receiving inflows of foreign equity or long-term foreign loans.

2. Repatriating investments and income, covering whether there are restrictions on repatriating liquidated investments or restrictions on making dividend payments or loan repayments abroad.

3. Making payments abroad, including whether there are restrictions on paying for imported goods; paying for imported services; paying for international travel; and making personal payments/transferring wages abroad.

4. Holding foreign exchange, identifying whether export proceeds must be repatriated and surrendered and whether a firm can hold foreign exchange bank accounts at home and abroad.

The rest of this note presents the results and policy implications of the CTC indicators. The macroeconomic context of foreign exchange restrictions is discussed, followed by a description of the design of the indicators. An overview of the results is presented, as well as the common types of foreign exchange restrictions identified across economies. Evidence that the CTC indicators are correlated with economic outcomes such as FDI flows is shown, and the note concludes with policy recommendations.

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