Exchange rate policy andthe parallel market for foreigncurrency in Burundi

Government control over the allocation of foreign exchange in Burundi has led to thecreation of a parallel market for foreign currency. Despite its negative impact on Burundi’seconomy, this market has not, so far, attracted the attention of researchers. This paperlooks at the functioning of the parallel market and discusses macroeconomic policies inthe country to shed light on the context within which the market evolved. Analysis oftime series properties of the variables used in an empirical model covering 1970–1998reveals that the premium is stationary, guiding the decision to estimate a stationary modelof the premium. Econometric results show that the premium is determined by the expectedrate of devaluation, trade policy variables and GDP growth. This conforms with empiricalstudies on other African countries, although the Burundian case is particular in one respect:The market is characterized by a relatively low premium, which, as a stationary variable,is also generated by stationary fundamentals, in contrast with findings for other Africancountries. This particularity reflects a relatively more flexible exchange rate policy overthe sample period. In terms of policy, the paper argues that political stability and morefundamental changes in Burundi’s economy and its management will be needed to ensurethe success and sustainability of the current foreign exchange reforms.