Black Market Exchange Rate and Macroeconomic Performance in Algeria: What Impact?

Abstract

Excessive control on foreign exchange market undertaken by Algerian government for nearly four decades has led to black market for foreign currencies. As a consequence, two exchange rates (official and black) coexist and operate simultaneously. Despite its negative impact on the Algerian economy, black market exchange rate has not, so far, attracted attention of researchers. The aim of this paper is twofold. First, it attempts to highlight the determinants of the black market exchange rate premium in Algeria over the period 1980- 2016. Second, the impact of such premium on Algerian macroeconomic performance is assessed by focusing on the main macroeconomic indicators, these are namely; economic growth, inflation, foreign direct investment and balance of payment. Our empirical results point out that variables such as money supply, terms of trade, economic growth and real exchange rate affect significantly the black market exchange rate premium. Furthermore, the results reveal a harmful effect of the black market exchange rate premium on the Algerian macroeconomic performance. This effect was captured by using Impulse response functions (IRF) which show the premium’s negative shock on economic growth, foreign direct investment and balance of payment. Inflation was however, positively affected. The same effect was found when a variance analysis was introduced. According to the above mentioned results, this paper contributes to the existing literature on the black market for foreign currencies. As far as policy makers are concerned, the gap between the two rates should be narrowed by means of reducing the demand for foreign currencies or unifying the two rates. Finaly, the phenomenon of black market exchange rate has to be taken into account when drawing monetary and fiscal policies in Algeria.