Pandemic thwarts efforts to end currency black markets, study says

LONDON, April 23 (Reuters) - 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 states
such as Lebanon and Iran with currency black markets that cause
more economic damage, a study found.
Twenty-two countries now have more than one exchange rate,
the Institute of International Finance (IIF) found in a report.
Where official rates differ sharply from the rates available to
ordinary people or businesses, that can cause a range of
economic problems.
"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," said Garbis
Iradian, IIF chief economist for the Middle East, North Africa,
Caucasus and Central Asia.
"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.
Looking at a number of case studies from Angola to Egypt,
the IIF found that adjusting the official rate to a
market-clearing level did not necessarily lead to further
depreciation. But tight monetary and fiscal policies as well as
structural reforms were necessary to stabilize a unified
exchange rate beyond the near-term, the IIF said.
Meanwhile attempts by policy makers to enforce capital
controls have proven to be ineffective.

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IIF parallel exchange rates https://tmsnrt.rs/3xsADfp
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