Reliance upon exchange controls and restrictions played an important part in the economic policies of the Arab countries, with the exception of the Gulf Cooperation Council (GCC) countries, and Lebanon, which adopted early on an open trade and payments system. The extent and character of exchange controls, however, varied among the countries depending on their economic orientation, resource endowments, and external sector circumstances. In those countries with a dominant public sector, exchange controls were part of an overall system of administrative allocation of resources, while balance of payments concerns were the main reason for the use of restrictions in market-oriented economies.

Reliance upon exchange controls and restrictions played an important part in the economic policies of the Arab countries, with the exception of the Gulf Cooperation Council (GCC) countries, and Lebanon, which adopted early on an open trade and payments system. The extent and character of exchange controls, however, varied among the countries depending on their economic orientation, resource endowments, and external sector circumstances. In those countries with a dominant public sector, exchange controls were part of an overall system of administrative allocation of resources, while balance of payments concerns were the main reason for the use of restrictions in market-oriented economies.

This paper briefly surveys the practice of exchange controls in 12 Arab countries since 1980. The countries experienced widespread distortions and inefficiencies that resulted in lower economic growth and severe external payments difficulties that, in some cases, culminated in the accumulation of external payment arrears. The paper supports the view that the reliance on exchange controls to maintain an unrealistic exchange rate results in distortions and inefficiencies as reflected in the overvaluation of the exchange rate, the bias against exports, the prevalence of a parallel market for foreign exchange, the diversion of workers’ remittances from official channels, the fostering of capital flight and currency substitution, as well as the decline in overall productivity.

With the costs of exchange controls becoming more and more prohibitive, these countries were under increasing pressures to adjust and liberalize their exchange systems. Recently, most of them have taken steps in that direction, in conjunction with the adoption of comprehensive adjustment programs. However, the steps undertaken in this context, and their effectiveness, have varied considerably among the countries concerned.

An Overview of Exchange Controls in the Arab Countries

Typically, the classical methods of adjustment of a balance of payments deficit consist of allowing flexible exchange rate determination or the pursuit of monetary and fiscal policies consistent with a fixed exchange rate. Apart from these classical methods of adjustment, another method that has come to be widely used by developing countries to contain external imbalances is exchange controls, that is, restricting foreign payments to a level consistent with foreign exchange receipts and external borrowing.1 Exchange controls can, however, also be imposed for other than balance of payments considerations, as part of the economic management of resources by the public sector.

By imposing exchange controls, the country suppresses the excess demand for foreign exchange and partly insulates the domestic economy. The immediate implication of such intervention in the foreign exchange market is the suspension of the convertibility of the currency; and the direct outcome is an exchange rate level for the domestic currency that differs from the one determined by the free interplay of market forces. This intervention in the foreign exchange market, under a system of fixed exchange rates, aims at protecting the official external value of the domestic currency, while, under an adjustable peg, its purpose is to stabilize the exchange rate at a desired level.

A survey of exchange rate regimes shows that most Arab countries determine their exchange rates on the basis of a peg, either to a currency or to a basket of composite currencies related to imports or payments, as well as to the SDR (Table 1). The exception is Lebanon, which has maintained a flexible exchange rate system. The exchange rate regimes of these countries differ in several aspects, and as such can be divided into two main categories. The GCC countries, which do not impose restrictions on international transactions, fall into the first category. These countries share a similar exchange rate policy objective, namely, the stabilization of their respective currency in terms of the currencies of their trading partners so as to reduce the negative impact of exchange rate variations on domestic costs, prices, and output. They enjoy substantial external current account surpluses, resulting from large oil revenues, and they rely on the market as a system of economic management. They also maintain their foreign exchange markets free from restrictions, to facilitate the investment of their oil surplus funds in foreign assets. The rest of the Arab countries, other than Lebanon, had imposed exchange controls on both current and capital transactions and fall into the second category. They are the subject of this paper.

Table 1.

Exchange Rate Regimes in the Arab Countries, 1980

Source: IMF, Annual Report on Exchange Arrangements and Exchange Restrictions (1981).

Lebanon has a market-determined exchange rate system.

The extent and character of exchange controls among the Arab countries surveyed vary depending on their economic and political systems and their external payments position. Two reasons seem to justify the imposition of exchange controls, namely, the allocation of resources by the public sector and the management of the balance of payments. Accordingly, the countries that had imposed exchange controls can further be divided into two groups. The first group (group A) consists of countries that have, or had, a dominant public sector and a centrally planned economy, and where the government exercised strict control over the volume and allocation of foreign exchange. In these countries, the predominant reason for exchange controls was the direct allocation of resources. The second group (group B) consists of countries with market-oriented economies and whose main reason for exchange controls was the management of the balance of payments.

Direct Allocation of Resources

In their endeavor to achieve the objectives of rapid growth, employment, and income redistribution, the countries in group A followed a strategy of development and an economic philosophy that placed emphasis on industrialization, centered around import substitution, and a dominant public sector role in the economy. To influence the mobilization and allocation of resources, they relied upon a set of coherent policies consisting of a state monopoly over production, distribution, and external trade, accompanied by administrative controls over domestic prices, wages, interest rates, investment, and production decisions. Controls were inherent in this system of economic management, and the use of exchange control’s was a normal and consequential by-product of it. Thus, the imposition of exchange controls in such cases may not have been for balance of payments purposes only, but also for allocative purposes as an element of the economic system (irrespective of the state of the balance of payments and foreign exchange reserves).

The type of measures used (referred to here as “administered allocation measures”) included the drawing of a yearly import program, within which import priorities were set. Priority was usually given in the program to import requirements of public enterprises and investments, as well as to basic consumer necessities. In addition, a foreign exchange budget was also drawn, to allocate foreign exchange proceeds in accordance with the import program. Imports within this framework, as well as exports of the country’s major products, were carried out by state monopolies. Import licenses were required and were issued in accordance with the import program or foreign exchange budget. Export licenses were also required in certain cases. In some cases, a list of prohibited imports was drawn for the protection of domestic production. Along with this, a system of multiple exchange rates was implemented in some countries to discriminate in the allocation of foreign exchange, on the one hand, in favor of official and public sector payments, and on the other, to subsidize basic consumer necessities to discriminate against exports and private sector imports.

Management of the Balance of Payments

The use of exchange control for management of the balance of payments prevailed among the countries of group B. The proponents of exchange controls, as opposed to adjustment, harbor the belief that exchange rate and demand management as mechanisms of adjustment are ineffective and have a contractionary and inflationary as well as a distributional impact on the economies concerned. They argue that, in view of the structure of these economies and the short-run income and price inelasticity of their import and export demand,2 devaluation would not have, at least in the short run, the desired impact on the balance of payments and would only work, through different channels, to exert a contractional impact on output and employment. It would also greatly increase the cost of imports and of servicing foreign debt. They also refer to the lag effect of a devaluation at a time when the scarcity of foreign reserves calls for quick positive results in the balance of payments. Moreover, they point to the inflationary pressures induced by a devaluation and its impact on income distribution. The decrease in income and employment opportunities would occur in the import substitution sector, which is highly protected by the government and where vested interests are firmly entrenched. Furthermore, they refer to some additional advantages of exchange controls over devaluation, in terms of the protection it provides to the economy concerned. It gives the policymakers a freedom of action in the design and implementation of fiscal and monetary policies to foster domestic economic objectives, with the benefit of a suppressed balance of payments constraint. Finally they consider that exchange controls are effective in preventing capital outflows and in helping retain domestic savings in the country.

The type of “restrictive measures” implemented by these countries were aimed at restricting and directing the flow of foreign exchange for balance of payments and exchange rate support. These measures often included restrictions on the holding and use of foreign exchange accounts for resident nationals, and restrictions on payment for both current and capital transactions. In addition, exporters were required to surrender most (or all) foreign exchange proceeds, at the official exchange rate in most cases, and import surcharges were added to the cost of imports, over and above existing customs duties. Moreover, importers were required to deposit in advance the full or partial value of their imports. Finally, several countries settled a portion of their trade through bilateral payments agreements.

Features of the Exchange Systems in Arab Countries

As explained previously, the Arab countries under study can be divided into two groups, with exchange controls imposed for allocative purposes in group A and for balance of payments considerations in group B. Appendix 1 provides a summary of the exchange controls used in each country under discussion.

Exchange Systems for Allocative Reasons

“Administered allocation measures” were widely prevalent in the exchange control systems adopted by the countries in group A. The system of foreign exchange rationing and import allocation was strictly adhered to by the seven countries in the group with a few variations. Iraq and the Socialist People’s Libyan Arab Jamahiriya did not apply a foreign exchange budget, while Somalia and Sudan did not apply an explicit import program. In Egypt, imports were regulated by exchange budget allocations rather than by import licenses and prohibited import listing.

Multiple exchange rate systems were widely prevalent in Egypt, the Syrian Arab Republic, Somalia, and Sudan. The official exchange market, where multiple exchange rates prevailed, was generally restricted in these four countries (with some variation among the countries and over time) to government current and capital transactions, public sector imports, basic consumer imports, and valuation of surrendered export proceeds. In many cases, other transactions were effected at depreciated, albeit administratively determined, rates.

Among the countries in this group, multiple exchange rates proliferated the most in the Syrian Arab Republic. In 1987, the Syrian Arab Republic applied seven official exchange rates: the effective official rate, the parallel rate, the tourist rate, the export rate, the travel rate, the promotion rate, and the airline rate. These were reduced to four in 1988, and an additional “rate in neighboring countries” was added in 1989. This last, administratively determined rate was supposed to be flexible enough to reflect market conditions. It represented an interim measure toward the intended unification of the exchange rate system.

Egypt also applied several rates in 1987, namely, the effective official rate, the special rate, the official free rate, the bank pool rate, and a newly introduced, flexible “new bank market” rate. This last rate was introduced to establish a flexible parallel market rate, as an interim measure toward exchange market unification.

Official rates applied by Sudan in 1988 were the effective official rate, the commercial bank rate (or parallel market rate), the export rate, and the remittance rate. Thereafter, measures were taken toward unifying the exchange market. Somalia has applied a dual official exchange rate system, albeit intermittently, since 1980.

Algeria and the Socialist People’s Libyan Arab Jamahiriya both applied a separate depreciated official rate, as an incentive, to private remittances, in addition to the effective official rate that applied to all transactions financed through the banking system. Meanwhile, the official exchange system in Iraq remained unitary. Furthermore, the countries in this group effected a portion of their trade through bilateral payments agreements. In addition to these “administered allocation measures,” all countries in group A also applied strong restrictive measures.

Exchange Systems for Balance of Payments Reasons

The system of exchange controls in group B relied more on “restrictive measures” rather than administered allocation measures. The public sector in these countries did not play as big a role in the economy as was the case in group A countries, and allocation of resources relied more on the market mechanism.

Import listing and licensing by administrative priority and for protection, which was practiced in both Morocco and Tunisia, have been greatly curtailed since 1980. State trading has also been limited to key mineral exports: phosphates in Morocco, Tunisia, and Jordan; petroleum in Tunisia; and iron in Mauritania.

Multiple exchange rate practices in this group have been very limited: Morocco applied a “premium” exchange rate applicable to remittances of workers abroad until 1983. The Yemen Arab Republic had a secondary exchange market for transactions through commercial banks from 1985 until 1987, when it was merged with the official market. Dual markets were reintroduced in 1990, following the unification of North and South Yemen.

All countries in this group applied restrictive measures of the same nature as those practiced by group A. The degree of restrictiveness has varied between countries and over time. Jordan and the Yemen Arab Republic, for example, had few restrictions on current transaction payments during the first half of the 1980s but introduced tighter restrictions in later years.

Degree of Restrictiveness of Exchange Controls

Perhaps the best indicator that differentiates the two groups of countries and reflects the degree of restrictiveness of their exchange control system, and the economic distortions created thereby, is the divergence between the official (effective) exchange rate and the free (or parallel) market exchange rate. As indicated in Table 2, this divergence was most pronounced in group A, where most of the countries (except Somalia) had a ratio of parallel to official exchange rates exceeding 3 during the second half of the 1980s. In group B, on the other hand, this ratio was well below 1.4 for most countries, except Mauritania, for the same period.

Impact of Exchange Controls in Arab Countries

Economists have usually focused their attention on the inefficiencies and distortions introduced by exchange controls in the allocation of resources and in international trade.3 It is argued that exchange controls have a number of negative consequences, namely, the creation of a parallel market, distortion of the exchange rate (overvaluation of the currency), shortages of goods, corruption, rent seeking, and capital flight. All these consequences work together to make exchange controls ineffective as a means for protecting the balance of payments.

Exchange controls are accompanied by a parallel market for foreign exchange, which constitutes a means for the diversion of foreign exchange inflows from official channels, denying the country additional foreign reserves. The partial insulation of the economy, afforded by exchange controls, encourages the adoption of expansionary financial policies, contributing further to the overvaluation of the domestic currency. As domestic prices rise above foreign prices, the officially pegged exchange rate diverges further from the equilibrium exchange rate that would have prevailed in the absence of exchange controls. The overvaluation of the currency in the official market tends to encourage imports at the expense of exports and their diversification. It is also conducive to a reallocation of resources in favor of nontradables, resulting in a decline of the agricultural sector, the mainstay of a large segment of the population. Moreover, it also encourages the choice of capital-intensive projects, which is incompatible with the labor surplus characterizing the countries under consideration and exposes the economy to distorted price signals for long-run allocation decisions.

Table 2.

Exchange Rate Divergence Between Official and Parallel Markets

Source: International Currency Analysis. Inc., World Currency Yearbook, various issues.

Prior to unification.

The shortage of foreign exchange resulting from lower exports leads to import restrictions, which tend to create some production bottlenecks on the supply side and favor the emergence of a parallel economy, as well as rent-seeking activities, which divert real resources from productive uses to quick profit-making activities.4 Finally, the existence of exchange controls tends to be undermined through capital flight and underinvoicing of exports or overinvoicing of imports.

This section will point out the distortions induced by exchange controls and their negative impact on the balance of payments and growth in the respective countries. Countries in group A with overregulated economies have experienced higher distortions than those in group B.

Currency Overvaluation

Several of the countries surveyed experienced highly expansionary fiscal and monetary policies, together with a pegged exchange rate system, during the 1970s and a large part of the 1980s. These two factors combined led to an open appreciation of the real effective exchange rates for many countries during that period. The real appreciation was more pronounced in the countries of group A.

Countries in group A, for which data are available, namely, the Syrian Arab Republic, Egypt, Algeria, and Sudan, experienced a more protracted appreciation of the real effective exchange rates. In Sudan, Egypt, and the Syrian Arab Republic, real effective exchange rates rose steadily and substantially over the period 1980–90 (Appendix Table A13). Relative to the level in 1980, the Syrian Arab Republic’s real exchange rate reached a peak of 191 percent in 1987, before declining to 43 percent in 1990, while in Sudan it reached 160 percent in 1990. Egypt’s real effective exchange rate rose by 98 percent by 1989. Algeria’s real effective exchange rate, as well, rose until 1986, but then reversed in the latter half of the 1980s. The relatively limited flexibility in the nominal exchange rates of Sudan, Egypt, Algeria, the Syrian Arab Republic, and Somalia, in the face of higher domestic inflation rates than in their trading partner countries, resulted in serious distortions in their real effective exchange rate. Although data for Iraq and the Socialist People’s Libyan Arab Jamahiriya are not available, the rigidity in the exchange rate policy pursued by these two countries in the face of changing economic conditions would certainly suggest a high real effective appreciation of their respective exchange rates as well.5

In contrast, among the countries of group B, the real effective exchange rates in Morocco and Tunisia have been kept on a steady downward trend over the entire period 1980–90. The trend has been sufficiently pronounced in both countries, with real effective exchange rates falling by 33 percent and 35 percent, respectively. In Jordan and Mauritania, the real effective exchange rates rose by less than 20 percent during the first half of the 1980s, but the trend was reversed in both countries in the second half.

Reduction in Exports

The real increase of the effective exchange rate for countries in group A, and to a lesser extent in group B, contributed to the diversion of domestic resources from the production of traded to nontraded goods, as well as to an erosion of competitiveness that discouraged export growth.

The export performance of the countries in group A during the period 1980–90 was very disappointing. Exports at constant prices exhibited a steady declining trend for the majority of countries. Measured at constant prices, exports in 1990 were lower than they had been in 1980 for Algeria, Iraq, the Socialist People’s Libyan Arab Jamahiriya, Somalia, and Sudan (Appendix Table A14). In Egypt and the Syrian Arab Republic, real exports declined significantly between 1980–88 before recovering during 1989–90. The real appreciation of the exchange rate hampered the production of exportable goods through its negative impact on incentives and served to increase the relative profitability of the nontradables sector.

In Iraq, Algeria, and the Socialist People’s Libyan Arab Jamahiriya, where oil is the main export item, the price and level of production of oil played a major role in the decline in the value of their exports. Nevertheless, the real appreciation of their exchange rate and the diversion of exportable goods to domestic consumption as a result of highly expansionary policies contributed to the creation of an unconducive environment for diversifying the export base. Traditional agricultural and manufactured exports (mainly in the Syrian Arab Republic and Egypt) declined in the face of foreign competition. In Somalia, the appreciation of the real exchange rate prevented the diversification of markets during a period when its traditional exports faced a ban from its main trading partner.

Faced with a shortage of foreign exchange during the period 1980–90, these countries resorted to further trade restrictions, which resulted in a sharp contraction of imports. In most countries, real imports were much lower in 1990 than they were in 1980 (Appendix Table A15). The reduction in imports had a negative impact on output, growth, and employment. In turn, the shortage of imported goods led to the emergence of a parallel economy, rent-seeking activities, and a loss of revenues by the government.

Parallel Market for Foreign Exchange

The expansionary financial policies adopted by countries in group A, together with the pegged exchange rate, led to an excess demand for foreign exchange. This excess demand suppressed by exchange controls resulted in the proliferation of parallel markets for foreign exchange, with a marked divergence between the official and parallel market rates for foreign exchange. In countries of group A, parallel market premiums rose rapidly from low levels during the early 1980s to relatively higher levels toward the end of the decade. The parallel market rate in Algeria, that stood at 250 percent above the official rate in 1980, rose to 420 percent by 1988. In Egypt, the Syrian Arab Republic, and Sudan, the rate increased from 95 percent, 35 percent, and 72 percent to 250 percent, 350 percent, and 270 percent, respectively, over the same period.

On the other hand, in the countries in group B, the foreign exchange premium was relatively low, as the parallel market rate remained fairly close to the official rate (Table 2), except for Mauritania, whose parallel market rate in 1988 exceeded the official rate by 200 percent.

Diversion of Foreign Exchange

The high foreign exchange premium in group A countries encouraged the diversion of foreign exchange inflows, particularly workers’ remittances, away from the banking system toward the parallel market. It also contributed to capital flight and the substitution of domestic currency by foreign currency. This exacerbated these countries’ balance of payments problems and eroded foreign reserves.

Data on workers’ remittances, derived from balance of payments statistics, show that some countries in group A experienced a substantial decline in these receipts over the period 1980–90 ranging from 13 percent in Algeria to 76 percent in Sudan (Appendix Table A16). This decline occurred despite efforts made by the recipient countries to capture part of these flows, by providing depreciated preferential exchange rates (Egypt, Algeria, Somalia, the Syrian Arab Republic, and Sudan). The effect of the overvaluation of the exchange rate on the flows of remittances through the banking system can be illustrated by comparing the receipts of workers’ remittances in Algeria and Morocco. Although Algeria had a larger population working abroad, Morocco’s receipts stood at $2 billion in 1990 while Algeria’s amounted to only $350 million. One of the main reasons behind this difference was the high parallel market premium in Algeria, while in Morocco the parallel market was very limited and the premium marginal.

With regard to capital flight, the countries surveyed experienced a situation similar to that prevailing in some Latin American countries. The overvaluation of their currencies, combined with negative real interest rates and inflationary pressures, encouraged capital flight and discouraged the holding of domestic currencies. A recent study by the World Bank estimated capital flight over the period 1980–89 at 21.7 percent of GDP in Egypt, 15.9 percent in Jordan, 15.1 percent in the Syrian Arab Republic, 3.0 percent in Algeria, and 1.6 percent of GDP in the Yemen Arab Republic.

Meanwhile, with the exception of direct investment related to the development of the oil sector, these countries did not benefit much from the inflow of foreign capital. In general, because of the policies pursued, these countries could not attract foreign direct investment.

As for currency substitution, the overvaluation of the domestic currency combined with negative real interest rates provided incentives to the private sector to increase its holding of foreign assets in an attempt to protect its wealth. This process is similar to the process of “dollarization” prevailing in some Latin American countries. Available data for Egypt, Algeria, and the Yemen Arab Republic show that currency substitution was rising. Taking foreign currency deposit holdings by the private sector as a partial indicator of this process, these deposits (benefiting from the liberalization of the exchange system) rose in Egypt from $9.5 billion in 1986 to $16 billion in 1991, and in the Yemen Arab Republic from $200 million to $310 million over the same period.

Growth and Productivity

During the 1980s, real economic growth declined steadily from the higher levels achieved during the second half of the 1970s. Real output in most countries surveyed grew on average less rapidly than the increase in population, despite relatively high investment rates, suggesting that the productivity and capacity utilization declines contributed to lower growth. Indeed, the incremental capital output ratios (ICOR) in these countries (Appendix Table A17) were high, suggesting a relatively high level of inefficiency and a deterioration in the quality of investment. This could be accounted for by the impact of the protection provided through trade policy measures (tariffs and quantitative restrictions) and the over-valued exchange rate, which allowed the import of capital goods at prices below their true cost to the economy. The distortions resulted in inefficient domestic production techniques and a high level of capital intensity (as demonstrated by the high ICOR) inconsistent with the rapidly growing labor force. This bias toward capital intensity was also reinforced by the import licensing system, which gave priority to capital imports.

Thus, the relatively high level of investment in these countries did not contribute to the solution of their growing unemployment problem. It comes as no surprise, therefore, that unemployment in these countries increased rapidly to reach 26 percent in the Yemen Arab Republic, 25 percent in Jordan, 24 percent in Algeria, 20 percent in the Syrian Arab Republic, and 15 percent in Egypt in 1992.

Reform of the Exchange Systems in Arab Countries

The costs of exchange controls in the Arab countries surveyed, as we have seen, were reflected in the emergence of a parallel market, lower export growth, diversion of foreign exchange, particularly workers’ remittances, capital flight, currency substitution, and declining overall productivity. Moreover, in a world characterized by a high degree of international economic interdependence and increasing interpenetration between national economies through trade, capital, labor, and technological flows, the partial insulation provided by exchange controls is greatly reduced, in particular in those economies that rely heavily on the external sector. All these factors, along with the awareness of the limitations of the import-substitution strategy pursued, have led to a shift in policy orientation with the adoption of market-oriented policies and an outward-looking strategy.

Many Arab countries have carried out adjustment programs during the 1980s with the aim of redressing the macroeconomic disequilibria and the structural distortions in their economies. However, adjustment measures were often implemented piecemeal and failed to deal with the underlying structural misallocations effectively and tended to exacerbate rather than solve the problems. Faced with currency overvaluation and excess demand, for example, some countries implemented partial devaluations that, in conjunction with insufficient stabilization measures, triggered an endless vicious circle of inflation and devaluation. This was most pronounced in Sudan, Somalia, and Egypt.

In an attempt to deal with the overvaluation of their currency, the authorities in Sudan, Egypt, the Syrian Arab Republic, and Somalia, as previously mentioned, resorted to the segmentation of the foreign exchange market, with the application of multiple depreciated exchange rates that discriminated against some sectors of the economy. In so doing, they not only complicated the exchange rate structure but also failed to narrow the gap between the official and the parallel market rates. Thus, it became increasingly clear that reform and adjustment should be implemented within a comprehensive framework of economic restructuring and stabilization, including the liberalization of the exchange system to achieve a realistic and unitary exchange rate, to abolish most “administered allocation measures,” and to ease the “restrictive measures.”

As the experience of several Arab countries shows, the liberalization of the exchange system cannot be successfully carried out or sustained without a stabilized macroeconomic environment and a favorable external sector position. A stable macroeconomic environment entails sound noninflationary fiscal and monetary policies to avoid the loss of competitiveness caused by inflation and real exchange rate appreciation discussed earlier. The authorities can help achieve external balance by following a realistic exchange rate policy, maintaining an adequate level of reserves, and liberalizing the incentive system to promote exports. A further precondition is the credibility of reform, where the government’s commitment to the reform process is firm and evident.

Pattern of Reform in Group A

Given the external sector difficulties that countries in group A have faced since 1980, and the complexity of the exchange systems they have adopted, the transition to a liberalized exchange system was attempted in stages rather than in a one-step correction. These general stages are outlined below without implying a necessary sequence for implementation.

  • A dual exchange market is introduced. External private sector transactions are directed to the free segment of the dual market. Under this situation, the exchange rate in the free segment of the market is flexible enough to reflect market conditions. Resident nationals are free to hold foreign exchange accounts in domiciled banks, whereby the sale of balances in those accounts is not restricted. Transfers abroad of these balances, however, are still restricted. Introducing a parallel market, with a free or flexible exchange rate mechanism, aims at incorporating the flow of remittances and the “own resource” import financing into the domestic banking system.

  • Flexibility of the official rate is introduced to avoid large margins between the official and parallel rates.

  • Most administered allocation measures that apply to the parallel market are abolished.

  • Official market transactions are gradually shifted to the parallel market.

  • Transactions in the official market are discontinued, and other multiple fixed exchange rates are abolished.

Egypt introduced a “free bank market” for foreign exchange in 1987, where the exchange rate was adjusted daily to reflect market conditions. This market operated in parallel with the official or primary market, where the exchange rate was still pegged to the U.S. dollar. The operation of the system in the period 1987–90 faced difficulties reflecting the worsening condition of the external sector and the mounting foreign debt problem. The dichotomy between a rigid official rate and a flexible parallel rate added to these difficulties, and eventually the free bank market was unable to meet the demand for foreign exchange. Consequently, the parallel market re-emerged and the use of dollar notes in circulation became widespread. However, Egypt’s external sector position improved greatly as a result of the debt relief and external assistance it received in 1990 and 1991. Adjustment policies also succeeded in reducing the budget deficit from 24 percent of GDP in 1988 to 9 percent of GDP in 1991. The current economic programs aim at virtually eliminating this deficit by the mid-1990s.

As a result of these improvements, it became feasible to carry out a drastic exchange reform. During 1991, Egypt introduced a free foreign exchange market parallel to a “central bank pool market” with a set maximum rate of divergence between the two markets. Resident nationals were also allowed to maintain foreign currency accounts with domiciled banks without limitations. Balances in those accounts could be used to settle authorized transactions or sold in the parallel market. Later in the year, Egypt merged all transactions into the free market, thus unifying the exchange system under a floating regime. These measures abolished, in effect, the bulk of the administered allocation measures that were in practice before. Other liberalizing measures during 1991 included abolishing the foreign exchange budget system for public enterprises, reducing import deposit requirements, and abolishing surrender requirements of export proceeds.

In Sudan, multiple exchange rates and dual exchange markets were operational throughout the 1980s and up to 1992. Efforts were often made to reform the exchange system, and several administered allocation measures were abolished in the early 1980s, including some state trading monopolies. A parallel market with a flexible exchange rate mechanism was introduced in 1985. This market was terminated in 1987 and reestablished in 1988. However, the exchange system was not flexible enough, nor were external sector conditions favorable enough to ensure the efficient operation of the system. Thus, shortages of foreign exchange persisted. The authorities had to resort in several intervals to the “own resources” import-financing system, which was supposed to have been superseded by the parallel market.

In 1992, and in spite of persisting external sector difficulties, Sudan introduced a unified foreign exchange market with a flexible exchange rate determined in an interbank market by the association of commercial banks. However, unlike in Egypt, these reforms did not introduce sufficient flexibility into the exchange system, nor were they accompanied by sufficient measures to relieve the country of the massive debt crisis it faces.

External debt arrears in Sudan accumulated throughout the 1980s to reach 1,652 percent of exports of goods and services by the end of 1991. Efforts to achieve internal equilibrium were not very successful. In the period 1989–91, the budget deficit averaged around 11 percent of GDP. Consequently, parallel market activity persisted, casting doubt over the sustainability of the 1992 reforms.

Similarly, Somalia introduced a dual exchange system with fixed rates in 1981, where the official rate applied to a limited number of official transactions and basic imports, while the bulk of transactions were effected at a depreciated parallel rate. Concurrently, import licensing under the own resources (franca valuta) system was suspended. In the same year, several state trading monopolies were also abolished. In 1982, the dual exchange system was unified, and the exchange system was switched from a dollar- to an SDR-pegged one.

Here again, the reforms proved insufficient, as the exchange system remained too rigid and the stabilization effort was inadequate. Parallel market transactions grew, and the authorities reinstituted the franca valuta system. Further reforms were introduced in 1985 whereby the franca valuta system was reabolished, and a dual exchange system was reintroduced, albeit with more flexibility. The official exchange market was based on a managed floating system, while the parallel market rate was freely floating. Somalia then abolished the parallel (or secondary) market in 1987, thereby unifying the exchange system. However, external sector conditions remained unfavorable (as indicated by the ratio of accumulated arrears to exports of goods and services that reached 881 percent by the end of 1991) and hampered the sustainability of the exchange system reforms.

Although a “free” foreign exchange market is still operational among authorized holders of foreign currency accounts (mainly nonresident nationals and exporters), Somalia implemented a system of proportional foreign exchange rationing among licensed importers. This was replaced in 1990 by a foreign exchange auctioning procedure. It is difficult to say, at present, how successful these reforms would have been in the absence of the current political situation and the massive external debt burden that the country is suffering from.

During 1990 and 1991, Algeria implemented several liberalizing measures with the aim of introducing more flexibility into the exchange rate system, and channeling foreign exchange resources from the parallel market and the own resources import finance to the banking system, thereby setting the stage for the introduction of a parallel foreign exchange market in the near future. The measures implemented included allowing Algerian nationals (resident or nonresident) in 1990 to maintain foreign exchange accounts with domiciled banks. Balances in these accounts could be used to pay for licensed foreign transactions or could be sold at a freely negotiated exchange rate, but could not be freely transferred abroad. Furthermore, in 1991 all regulations requiring prior authorization to import and those controlling foreign exchange payments for imports were abolished.

In effect, imports and import payments could now be effected through the banking system without restrictions, provided the importer processed the necessary financial resources. The official exchange market remained restricted to priority transactions as defined by the state. At the same time, other liberalizing measures introduced in 1991 were expanding the scope of permitted foreign investment in nonpublic sector activities and introducing forward foreign exchange facilities. While the official exchange rate remained pegged, frequent adjustment relative to the peg had been effected since 1987. Algeria’s efforts to liberalize the exchange system are still constrained to a certain degree by the external sector difficulties that it faces. The presence of these difficulties has resulted in the reinstitution of some import restrictions in 1992.

The Syrian Arab Republic has also carried out several reforms recently with the stated objective of unifying its exchange rate system by 1994. The Syrian Arab Republic applied seven administratively determined exchange rates in 1987, in addition to the unofficial market (the “Beirut market rate”) that financed a large portion of private imports under the own resources system. By 1991, the applicable rates numbered four: the official rate, the airline rate, the promotion rate, and the rate in neighboring countries. It is significant that, although these rates are administratively determined, the last (rate in neighboring countries) was incorporated into the official exchange system in 1989, with a frequent adjustment arrangement, whereby the rate is to be reviewed when it deviates by more than 5 percent from the unofficial market rate. The inflexibility of the other rates, however, still creates wide divergences in the exchange rates. At the beginning of 1992 the rate in neighboring countries was almost four times the official rate per U.S. dollar.

The Syrian Arab Republic proceeded to shift transactions toward the more depreciated of the four rates, such that, by mid-1992 the rate in neighboring countries covered a significant number of transactions including: 25 percent of surrendered private sector export proceeds, private remittances from abroad, textile exports, and allowances for invisibles. The official rate, by then, applied mainly to oil exports, government transactions and loans, and valuation of private exports under the bilateral agreement with the former U.S.S.R. Other reforms in the Syrian Arab Republic during 1991 included introducing (in May 1991) a new investment law that offered private and foreign investors exemptions from tax and exchange limitations, terminating one out of three active bilateral agreements, with the remaining two to be phased out in the near future, eliminating import deposit requirements, and increasing foreign currency allowances for travel abroad.

The economic environment has been rather favorable to continuing this process of exchange reforms. During the period 1988–90, the Syrian Arab Republic managed to maintain its budget deficit (excluding grants) within 2 percent of GDP. Its balance of payments has also been improving, mainly as a result of increasing oil exports. During 1989–91, the balance of payments recorded consecutive surpluses exceeding $1 billion annually. Nevertheless, the approach to adjustment continues to be piecemeal, at a time when the measures undertaken need to be formulated within a comprehensive adjustment program.

The Socialist People’s Libyan Arab Jamahiriya and Iraq, on the other hand, did not introduce any significant changes to their exchange systems during the 1980s and up to the present time. It is worth noting, however, that the Socialist People’s Libyan Arab Jamahiriya allowed private imports under the own resources system in 1988 after having banned them in 1983. Since 1988, the Socialist People’s Libyan Arab Jamahiriya has also waived the surrender requirement for export proceeds, provided such proceeds were used to finance imports.

Table 3 summarizes the developments in the exchange rate systems of group A countries. Algeria, Iraq, the Socialist People’s Libyan Arab Jamahiriya, and the Syrian Arab Republic still peg their official rates.

Reforms in Group B

Among the countries in group B, Morocco and Tunisia revised radically their external sector policies within the framework of comprehensive adjustment programs initiated in 1983 and 1986. The protectionist trade policy was overhauled, quantitative restrictions were eliminated, and most licensing requirements were abolished. The system of high and variable tariffs resulting in distorting effective rates of protection was replaced by a low and simple tariff structure. Overall, the measures taken since 1983 in Morocco and 1986 in Tunisia resulted in a more realistic exchange rate supported by restrictive fiscal and monetary policies, a nearly complete elimination of trade policy-induced distortions, and, as a result, a reduction in distorting differentials between domestic and international prices. This process culminated in these two countries announcing in 1993 their acceptance of Article VIII of the IMF’s Articles of Agreement, thereby establishing the convertibility of their currencies for current transactions.

Mauritania implemented in 1985 a comprehensive adjustment program with a view to liberalizing the economy. In this context, the authorities adopted a flexible exchange rate policy in an attempt to depreciate the currency through a series of small devaluations. This policy was to be supported by restrictive financial policies and by domestic price liberalization, as well as the removal of all import licensing and quotas on imports. Given the economy’s extreme vulnerability to external shocks (drought, commodity prices, a heavy debt burden, foreign exchange constraint) the implementation of structural reforms has been slow, and fiscal restraint has proved to be difficult. The authorities, however, remain committed to pursuing the adjustment of the economy and liberalizing of the exchange system.

Table 3.

Exchange Rate Developments in Group A Countries

Frequent adjustment with respect to the peg.

Frequent devaluations in both rates took place during the period.

Rate in neighboring countries.

The exchange control system in Jordan had been mildly restrictive and stable throughout the 1980s. In 1989, some tightening measures were taken, including mainly the introduction of an advance import deposit requirement. Thereafter, during the period 1990–92, the changes that took place were mostly toward the liberalization of the system within the framework of a comprehensive adjustment program. These included the easing of the surrender requirement of export proceeds, increasing the limits on foreign currency deposits allowed for resident nationals, increasing the payment allowances for some categories of invisibles (twice during the period), and revoking the advance import deposit requirement, leaving it to the discretion of individual banks. Continuing on this trend, Jordan is presently in the process of evaluating the elimination of all restrictions on current account transactions.

Table 4.

Exchange Rate Developments in Group B Countries

Frequent adjustment with respect to the peg.

The Yemen Arab Republic faced a period of economic difficulty following the unification of the country on May 22, 1990. Foreign exchange shortages led to a widening of the gap between the official exchange rate and the unofficial rate in the “gray” market that is operated by money changers. The ratio of official to unofficial exchange rate increased to around 2.4 during 1990–91 (Table 2). The situation prompted the authorities to legitimize an own-resources finance system, whereby commercial banks were authorized in August 1990 to open letters of credits for most self-financing imports. The Yemen Arab Republic’s external sector difficulties could be attributed, in large part, to its substantial fiscal deficit (18 percent of GDP in 1991). In December 1992, regulations that legalize the parallel market and the status and activities of money changers were promulgated. Although most nongovernmental transactions now take place at the market-based parallel rate, a unification of exchange rates at a market-clearing level supported by an adequate fiscal policy to ensure external competitiveness and the removal of distortions in the economy is still needed.

Developments in the exchange rate systems of countries in group B are summarized in Table 4, which shows that exchange rate flexibility was introduced by most countries during the 1980s.


Considerable efforts to reform the exchange systems in the Arab countries were made during the 1980s. The reform process gathered momentum in recent years, with most countries in both groups A and B substantially liberalizing their exchange systems. Countries that introduced exchange reforms since 1980 did so in conjunction with, or subsequent to, more general economic reform efforts toward structural liberalization of the economic system and stabilization of the domestic economy and the external sector.

In group A, both Egypt and Sudan abolished their respective multiple exchange rate systems by 1992 and introduced a unitary and flexible exchange arrangement. The two countries also abolished several of the administered allocation measures that were in practice previously. The Syrian Arab Republic and Algeria introduced liberalizing measures; the Syrian Arab Republic’s reforms, in recent years, aim to achieve a unitary and flexible exchange system, while Algeria’s exchange liberalization measures during 1991 were within the context of the intended introduction of a liberal foreign exchange market.

Most countries in group B introduced exchange reforms since 1980, abolishing quantitative trade restrictions and introducing flexibility into the exchange rate mechanism. Liberalization in Morocco and Tunisia culminated in their accepting Article VIII of the IMF’s Articles of Agreement. Jordan is currently considering the removal of all restrictions on current transactions.

Of the 12 countries under study, only the Islamic Republic of Iran and the Socialist People’s Libyan Arab Jamahiriya have not attempted to liberalize their exchange systems since 1980, while the Yemen Arab Republic’s originally open exchange and trade system became more restrictive in recent years as a result of a deterioration in the balance of payments caused in large part by large and growing fiscal deficits. Countries that attempted to liberalize the exchange system but still face financial disequilibria, especially in the external sector, have been unable to complete or sustain the reform process.

In recent years, the implementation of stabilization programs, as well as favorable exogenous factors, has resulted in improvements of the respective external sector positions of Egypt, the Syrian Arab Republic, Morocco, and Tunisia. The improvements should make it possible for the four countries to carry through and sustain the exchange system reforms that they have been implementing.


Exchange Controls in Arab Countries

Sources: International Monetary Fund, Annual Report on Exchange Arrangements and Exchange Restrictions, various issues, and Developments in International Exchange and Payments Systems (June 1992); International Currency Analysis, Inc., World Currency Yearbook, various issues; World Bank, World Debt Tables, various issues; and reports from central banks of member countries.
Table A1.

Algeria: Summary of Exchange Controls

Other than basic mineral exports.


Recent Changes

  • Several liberalizing measures were taken since 1990, mainly:

  • 1990

    • Allowing nationals (residents and nonresidents) to open foreign exchange accounts with domestic banks.

    • Expanding the scope of permitted foreign investment in the private sector.

    • Increasing the proportion of foreign exchange that can be retained by the exporter.

    • Revoking a regulation that requires nonresident nationals to repatriate foreign exchange amounts.

  • 1991

    • Abolishing all regulations requiring prior authorization to import and those controlling foreign exchange payments for imports. Traders can import freely through the banking system, provided that they have the necessary foreign exchange. This measure is supposed to regularize the trade sector and set the stage for the intended introduction of a “parallel foreign exchange market.”

    • Allowing the introduction of forward foreign exchange facilities.

    • Allowing foreign residents to open foreign exchange accounts.

    • Allowing foreign borrowing to finance imports through the banking system.

  • 1992

    • Allowing foreign exchange purchases to finance categories of current transactions.

    • Entering into effect of multilateral payments agreement with the other Maghreb countries.

Table A2.

Egypt: Summary of Exchange Controls

Other than basic mineral exports.

Recent ChangesLiberalizing measures were taken in recent years starting with the introduction of the “new bank foreign exchange market” in 1987, which operated as a limited scope free exchange market parallel to the official exchange market (or central bank pool).During 1991, an expanded “free foreign exchange market” was introduced, while the official exchange market was phased out, such that, by the end of the year, the free market exchange rate became applicable to all transactions.This in effect abolished the pegged exchange rate systems, as well as most measurers in category (A) above.Other measures during 1991 included:

  • Abolishing the foreign exchange budget system for public enterprises.

  • Reducing the import deposit requirement.

  • Abolishing the surrender of export proceeds requirements.

Table A3.

Iraq: Summary of Exchange Controls

Other than basic mineral exports.

Recent and Expected ChangesNo significant changes took place in recent years.
Table A4.

Jordan: Summary of Exchange Controls

Other than basic mineral exports.


This ratio improved to around 1.0 in 1992.

Recent Changes

  • Jordan tightened its exchange control restrictions in late 1989:

    • Advance import deposit requirements were introduced.

    • Financing of free zone imports through the banking system was prohibited.

    • Foreign exchange deposits with the central bank were imposed on banks with such deposits.

    • Surrender of export proceeds requirement was reduced.

    • Since then the trend has been toward the liberalization of the exchange system:

  • 1991

    • The approval requirement for loans to foreign currency depositors was partially removed.

    • Foreign exchange limits for categories of travel abroad were doubled.

    • Advance import deposit requirements were halved.

    • Reserve requirements were introduced on Jordanian-owned offshore banks.

  • 1992

    • The limit on Jordanian currency that can be taken out of the country was increased.

    • The advance import deposit requirement was revoked, to become a discretionary requirement of individual banks.

    • Export credit limits were increased.

    • Limits on transfers abroad to finance invisibles were doubled.

    • The central bank issued certificates of deposits denominated in U.S. dollars at the London interbank offered rate plus interest rates.

Table A5.

Libyan Arab Jamahiriya: Summary of Exchange Controls

Other than basic mineral exports.


Recent and Expected ChangesNo significant changes took place in recent years.
Table A6.

Mauritania: Summary of Exchange Controls

Other than basic mineral exports.


Recent Changes

  • 1989

    • New investment code that allows transfer of profits was introduced.

    • Surrender requirement for export proceeds was reduced.

    • System of import licensing was abolished.

  • 1991

    • Some tariffs were reduced.

Table A7.

Morocco: Summary of Exchange Controls

Other than basic mineral exports.


Recent Changes

  • 1989

    • Advance dirham deposits against requests to purchase foreign exchange were abolished.

  • 1990

    • Foreign exchange allowed for tourism abroad was increased.

    • The minimum requirement for nonresident convertible dirham accounts was reduced.

    • Limits on foreign investors’ share in Moroccan enterprises were abolished.

  • 1991

    • Exporters were allowed to retain more of their foreign exchange proceeds.

    • Nonresidents were allowed to transfer more of their earnings.

    • Foreign exchange allowances for business travel and study abroad were increased.

    • Foreign exchange arbitrage operations by authorized banks were allowed.

Table A8.

Somalia: Summary of Exchange Controls

Other than basic mineral exports.


Recent Changes

  • 1989

    • A new law allowing residents and nonresidents to establish commercial banks was introduced.

    • The state monopoly on some exports was abolished.

    • Exemption from approval requirement to import some items.

  • 1990

    • The surrender requirement for some exports was reduced.

Table A9.

Sudan: Summary of Exchange Controls

Other than basic mineral exports.


Recent Changes

  • 1989

    • Ban on own exchange imports was generalized.

    • Holders of foreign exchange accounts were permitted to finance certain imports through them.

    • Foreign exchange allowance for travel to Egypt was reduced.

    • Possession of foreign currency was prohibited.

    • Withdrawal of bank notes from foreign currency accounts was prohibited.

    • Transfers of workers’ remittances were moved from official to commercial exchange rate.

  • 1990

    • Export procedures were simplified and regulated.

  • 1991

    • Official exchange rate was devalued from LSd 4.5 to LSd 15 per U.S. dollar.

    • One hundred percent of export proceeds for irrigated cotton and gum arabic was to be surrendered at official rate.

    • Commercial exchange rate was devalued from LSd 12.3 to LSd 30 per U.S. dollar.

  • 1992

    • A unified foreign exchange market, with a flexible exchange rate, was introduced. The exchange rate is determined in an interbank market.