Dual exchange rate systems
Name(s):
Dual currency systems
Incidence
Countries in which there is also a black market exchange rate can be considered to offer a second exchange rate system. Dual systems are especially common in low-income African countries. They effectively tax exports. Only following the conclusion of the GATT Uruguay Round did China agree to terminate its own dual currency system. The official exchange rate for the yuan in 1993 was approximately 5.8 to the dollar, but only about 20% of hard currency transactions were conducted at that rate. The remainder occurred on currency exchange markets at a rate of about 8.7 to the dollar (or on the black market which effectively offered a third exchange rate). Foreign investors may be penalized by such two-tier systems because of the requirement that they convert their share of capital at the less advantageous rate.
Counter-claim
Unifying the exchange rate system may help the export sector, but the temporary loss of revenue can lead to larger fiscal deficits and higher inflation.
Reduces
Strategy(ies)
Type
(E) Emanations of other problems