DEFINITION of 'Limited Convertibility'
A situation in which government regulations prevent the free conversion of the home currency into a foreign one. Because the government is only able to regulate currency transactions within its borders, foreigners are still able to trade the currency. Only residents are unable to convert a currency with limited convertibility.
BREAKING DOWN 'Limited Convertibility'
Limited convertibility can have a cooling effect on trade as well as foreign direct investment. However, countries that are in the process of moving to a more open economy may need to open up currency restrictions in steps rather than all at once. This has been the case in the development of countries that once had centrally planned economies, as opening up domestic markets would subject the home market to foreign competition.