The financial hit of the COVID-19 pandemic has slowed efforts by central banks in a range of countries to unify parallel exchange rates, leaving them with currency black markets that cause more economic damage, a report by the Institute of International Finance (IIF) has found. The report stated that 22 countries now have more than one exchange rate, adding that where official rates differ sharply from the rates available to ordinary people or businesses that can cause a range of economic problems. Reuters quoted IIF chief economist for the Middle East, North Africa, Caucasus and Central Asia, Garbis Iradian, as saying that: “An official exchange rate significantly stronger than a market-clearing rate will discourage FDI (foreign direct investment), reduce the interbank FX market, encourage rent-seeking, and impede business development.
“In the current difficult global environment, confronted by both global (COVID-19) and country- specific challenges (sanctions in Iran and Syria, political paralysis in Lebanon), central banks in some countries with multiple exchange rates have held back from tightening monetary policy and from undertaking the reforms to their exchange rate systems necessary to achieve successful unification,” the report said. Parallel market rates in March 2021 exceeded the official exchange rates by 720% in Lebanon, 520% in Turkmenistan and 490% in Iran, it added.
Lebanon joined the “club of problematic currencies” in late 2019 when political paralysis led to a sharp loss of confidence, the report said. “Large premia encourage smuggling or illegal trade,” wrote Iradian, adding subsidies for basic products like fuel saw a high proportion of it end up in neighbouring Syria. While Iran has had a number of failed attempts at unifying its exchange rates in recent years, the currency could appreciate in the parallel market significantly in the second half of 2021 if an agreement is reached to restore its nuclear deal with world powers. “Such an agreement combined with tighter monetary stance and structural reforms would enable the authorities to unify the two rates by mid- 2022,” Iradian said.
Meanwhile attempts by policy makers to enforce capital controls have proven to be ineffective. Analysts note that the Central Bank of Nigeria (CBN) has in recent years come under pressure from both the International Monetary Fund (IMF) and the World Bank to unify the country’s multiple exchange rates. The Bretton Woods institutions contend that the absence of a single rate creates confusion and discourages foreign investment. CBN Governor, Godwin Emefiele, said last year that the apex bank will pursue exchange rate unification around the Investors and Exporters’ ( I&E) window rate.