What is Current Account Convertibility?

Current account convertibility" is a term that is used to describe the flow of funds into and out of an account that are not connected with some type of capital income or expense. Typically, transactions that would be considered part of a current account convertibility would have to do with trade-related issues such as the purchase of goods or services like the purchase of a new kitchen appliance or paying for air fare as part of a travel package. This is different from capital account convertibility, which would involve transactions such as making payments on loans or using funds to purchase investments that constitute capital assets or liabilities.

Typically, current account convertibility takes place when the transactions involved require some type of currency conversion in order to be completed. For example, if a consumer in the United States wished to purchase a CD directly from a customer based in the United Kingdom using funds in his or her checking account, the transaction would involve converting the currency from US dollars to the British pound. In like manner, if a customer wished to purchase and import goods from a foreign supplier, there is a good chance that a currency conversion would be involved that would make it necessary to be aware of the current rate of exchange and apply that rate to the transaction.

The determination of whether or not a transaction involves current account convertibility or capital account convertibility often depends on specific financial and trade regulations that apply. These regulations are often set by the countries involved in the transaction. At times, the focus is on the total amount of the transaction, with smaller figures considered a current account transaction and any figures exceeding a certain threshold being considered a capital account transaction. In some nations, transactions involving specific goods such as heavy equipment are processed as a capital account convertibility regardless of the amount of funds involved.

A current account convertibility does not necessary have to be involved in the purchase of goods or services. Money transfers may also involve this type of conversion strategy. For example, if one party chooses to wire funds to a recipient residing in a different country, the conversion is conducted at the current rate of exchange that is applicable to the date of the transaction. Since the rate of exchange between the two currencies involved can change quickly, it is important to determine that current rate just before the transaction is initiated.