Black Market Premia, Exchange Rate Unification, and Inflation in Sub-Saharan Africa

Abstract

World Bank and International Monetary Fund (IMF) programs favor unification of official and black market exchange rates on the argument that multiple exchange rates misallocate resources. This article shows that such policy advice sometimes overlooks an important consideration: when multiple rates are a means of taxation, the widened deficit from unification increases inflation. This article uses the experience of Ghana, Nigeria, and Sierra Leone to illustrate the tradeoff between the benefits of unification for resource allocation and its costs for inflation.