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Parallel markets, the foreign exchange auction, and exchange rate unification in Zambia

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  • Aron, Janine
  • Elbadawi, Ibrahim A.

Abstract

A large thriving parallel market for foreign exchange has coexisted with a rich menu of official exchange rate policies aimed at achieving a more flexible exchange rate and price system as well as financial and trade liberalization. Despite aggresive policies in these areas, particularly for the exchange rate, the black market premium (defined as the ratio of the black market rate to the official rate) remains high. The authors examine the origins of the parallel market, the statistical properties of the parallel premium, and the shocks and macroeconomic policy changes that influence its evolution. Using annual data, they specify and estimate and eclectic error-correction model for the premium. They find that the large parallel market might have caused problems in macroeconomic management and economic reform. Also, the findings show that foreign inflation and depreciation of the black market rate (in a cost-push manner) directly increases domestic inflation. The authors conclude that exchange rate reform without fiscal reform may be futile and that it is important to liberalize major trade and financial markets in such a way as to compress the parallel market and prevent the premium from serving as a major signal to the economy.

Suggested Citation

  • Aron, Janine & Elbadawi, Ibrahim A., 1992. "Parallel markets, the foreign exchange auction, and exchange rate unification in Zambia," Policy Research Working Paper Series 909, The World Bank.
    • Handle: RePEc:wbk:wbrwps:909
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    Cited by:

    1. Howard White, 1995. "Import Support Aid: Experiences from Tanzania and Zambia," Development Policy Review, Overseas Development Institute, vol. 13(1), pages 41-64, March.
    2. Ebaidalla Mahjoub Ebaidalla, 2017. "Determinants and Macroeconomic Impact of Parallel Market For Foreign Exchange in Sudan," Working Papers 1155, Economic Research Forum, revised 11 2017.
    3. Aron, Janine & Elbadawi, Ibrahim, 1994. "A typology of foreign exchange auction markets in sub-Saharan Africa : dynamic models for auction exchange rates," Policy Research Working Paper Series 1396, The World Bank.
    4. Simplice Asongu, 2015. "Liberalisation and Financial Sector Competition: A Critical Contribution to the Empirics with an African Assessment," South African Journal of Economics, Economic Society of South Africa, vol. 83(3), pages 425-451, September.
    5. Njindan Iyke , Bernard & Odhiambo, Nicholas M., 2015. "A re-examination of long-run Purchasing Power Parity (PPP) hypothesis: the case of two Southern African countries," Working Papers 18980, University of South Africa, Department of Economics.
    6. Aron, Janine & Elbadawi, Ibrahim, 1994. "A typology of foreign auction markets in sub-Saharan Africa," Policy Research Working Paper Series 1395, The World Bank.
    7. Themba G. Chirwa & Nicholas M. Odhiambo, 2019. "The nexus between key macroeconomic determinants and economic growth in Zambia: a dynamic multivariate Granger causality linkage," Empirical Economics, Springer, vol. 57(1), pages 301-327, July.
    8. Alshubiri, Faris, 2021. "Financial deepening indicators and income inequality of OECD and ASIAN countries," The Journal of Economic Asymmetries, Elsevier, vol. 24(C).
    9. Kiguel, Miguel A. & O'Connell, Stephen A., 1994. "Parallel exchange rates in developing countries : lessons from eight case studies," Policy Research Working Paper Series 1265, The World Bank.
    10. Mr. Nils O Maehle & Ms. Haimanot Teferra & Armine Khachatryan, 2013. "Exchange Rate Liberalization in Selected Sub-Saharan African Countries Successes, Failures, and Lessons," IMF Working Papers 2013/032, International Monetary Fund.
    11. Mkenda, Beatrice Kalinda, 2001. "Long-run and Short-run Determinants of the Real Exchange Rate in Zambia," Working Papers in Economics 40, University of Gothenburg, Department of Economics.
    12. Collier P., 1993. "Macroeconomic policies: an analytic review based on African experience," ILO Working Papers 992966493402676, International Labour Organization.
    13. Teferi, Mequanite, 2009. "Aid and the Dutch-Disease in Ethiopia," Ethiopian Journal of Economics, Ethiopian Economics Association, vol. 16(2), pages 1-99, February.
    14. Morris, Stephen, 1995. "Inflation dynamics and the parallel market for foreign exchange," Journal of Development Economics, Elsevier, vol. 46(2), pages 295-316, April.
    15. Howard White, 2005. "Dollars, dialogue and development: an evaluation of Swedish program aid," Development and Comp Systems 0511012, University Library of Munich, Germany.
    16. Themba G. Chirwa & N.M. Odhiambo, 2015. "The Dynamics of the Real Sector Growth in Zambia," Global Journal of Emerging Market Economies, Emerging Markets Forum, vol. 7(3), pages 217-235, September.
    17. Stuart John Barton, 2016. "Policy Signals and Market Responses," Palgrave Studies in the History of Finance, Palgrave Macmillan, number 978-1-137-39098-1, December.
    18. Ndlela, Thandinkosi, 2010. "Implications of real exchange rate misalignment in developing countries: theory, empirical evidence and application to growth performance in Zimbabwe," MPRA Paper 32710, University Library of Munich, Germany.
    19. repec:ilo:ilowps:296649 is not listed on IDEAS

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