Currency Control Effects

You might look at a country like Nigeria, Argentina, or Egypt and see two wildly different exchange rates for the same currency pair. Why do black market rates differ from official rates? Here are the main reasons. 1. Overvalued Official Rates Governments often keep official rates stronger than market fundamentals would dictate. This is done to: Reduce the cost of imports (fuel, medicine, food) Make the country look stable to international investors Pay foreign debt with cheaper local currency However, an overvalued rate is unsustainable. It creates excess demand for foreign currency because everyone wants to buy cheap dollars. With limited supply, a parallel market emerges where dollars trade at their real price. ...