PAUL M. DICKIE and DAVID B. NOURSI *
Economists have recently been giving increased attention to dual exchange markets as a result of their use in several industrialized countries.1 However, such arrangements have been applied extensively in less developed countries, but for different objectives. Whereas the predominant purpose of two-tier exchange markets in industrialized countries has been to separate disruptive capital flows from regular foreign trade transactions, the dual and multiple markets in less developed countries have generally been a tool for selective devaluation—leading in many cases to across-the-board devaluations. Nevertheless, there is a broad similarity in that the difficulties encountered regarding implementation and maintenance, particularly with respect to evasion and intermarket arbitrage, are almost identical in both industrialized and less developed countries.
In the Syrian Arab Republic, the dual exchange market is of particular interest because of its lengthy history and its evolution in response to the changing environment and policy. In addition, the availability of statistics permits the testing of alternative hypotheses. The dual market was introduced in January 1964 with the establishment of a “parallel market” and, although the dual market was modified in the intervening years, it was effectively maintained until mid-1971.2 The parallel market covered private capital movements and transactions associated with specified goods and services, and the rate in this market was characterized by a persistent but variable discount from the official rate. While there was no official intervention in the parallel market in the form of central bank purchases or sales of exchange, the definition and scope of the market were modified periodically to increase its effectiveness.
This paper assesses the performance of the parallel market and its contribution to the Syrian Arab Republic’s overall balance of payments position. A model is developed in Section I, followed by a statistical analysis of one major subperiod (1964–66) in the history of the market. The principal conclusion is that a parallel market properly formulated and supported by foreign exchange controls can contribute to an improvement in the balance of payments. However, the costs, which are mainly administrative, are substantial.
APPENDIX: Data Definitions and Sources
Parallel Market Rate (RP): Monthly averages of daily rates in Syrian piasters per U.S. dollar. Source: Central Bank of Syria. A series covering recent periods is published in The Central Bank of Syria Bulletin.
Beirut Rate (RB): End-of-month rate in Syrian piasters per U. S. dollar. Source: Bulletin Statistiques Mensuel, Direction Centrale des Statistiques, Lebanon (various dates). Daily rates and/or monthly averages are not currently being published.
Volume of Purchases and Sales in the Parallel Market (Z and X): Monthly volumes in millions of Syrian pounds. Source: Central Bank of Syria.
Money Supply (M): End-of-month data, with broad definition of money in millions of Syrian pounds. Source: International Monetary Fund, International Financial Statistics, various issues.
Industrial Origin Output Data (Y): Annual data, in millions of Syrian pounds, at 1963 prices. Source: Central Bureau of Statistics, Statistical Abstract (Damascus, 1971). Quarterly estimates utilized in the analysis are derived as follows (i = quarters):
Mr. Dickie, Assistant Division Chief in the Middle Eastern Department, has degrees from the University of British Columbia (Canada) and from the University of Southern California. He has been a member of the faculty of the George Washington University and Director, Economics Branch, National Energy Board, Ottawa. He has also contributed a number of articles to professional journals and is coauthor of Multinational Corporations and Eastern European Socialist Economies.
Mr. Noursi, a senior economist in the Middle Eastern Department, was educated at San Francisco State College, the American University of Beirut, and the University of Iowa. Before joining the Fund, he was Deputy General Manager of a commercial bank in Jordan and prior to that was Director, Research Department, Central Bank of Jordan. He also worked for the Central Planning Commission of Jordan, contributing to the formulation of the Seven-Year Development Plan of Jordan, 1963–1970.
See, for example, Vittorio Barattieri and Giorgio Ragazzi, “An Analysis of the Two-Tier Foreign Exchange Market,” Banca Nazionale del Lavoro, Quarterly Review, No. 99 (December 1971); and J. Marcus Fleming, “Dual Markets and Other Remedies for Disruptive Capital Flows,” Staff Papers, Vol. 21 (March 1974), pp. 1-27.
Officially the parallel market continued until July 1973 when it was subsumed in an overall reform of the exchange system. However, from mid-1971 to the end of 1971, most transactions were transferred to the parallel market; from December 1971 to July 1973 only the exports of petroleum and cotton and the inward transfers of pipeline transit dues were maintained at the official rate. All of these transactions were under the jurisdiction of public agencies, and the requirement for domestic budget adjustment was the apparent basis for the reluctance to unify the rate.
This ignores capital transactions in which the effect of yield differential should be taken into account, but capital movements, other than those for the settlement of trade accounts, were relatively small during the relevant period. Nevertheless, there was some outward capital transfer in response to exchange controls, as well as substantial inward remittances from Syrians working abroad, but neither of these is very responsive to interest rate differentials.
Moreover, if, as expected, the covered goods and services recorded a deficit prior to transference, the sum of the export and import elasticities can be less than unity and yet a net improvement on devaluation would occur. See, for example, Charles P. Kindleberger, International Economics, Irwin Series in Economics (Homewood, Illinois, rev. ed., 1958), pp. 610–12.
The estimation technique was developed by C. R. Wymer, London School of Economics, and adapted by Niranjan S. Arya and Mohsin S. Khan of the International Monetary Fund staff.
The Import and Export Company of the Public Sector (SIMEX) was formed February 18, 1965. Nationalized exports (cotton, wheat, barley, and their derivatives) accounted for 75 per cent of total exports, and they were almost exclusively transacted on the official market. Nationalized imports accounted for 55 per cent of total imports and included both basic and nonessential commodities.
The magnitude of contribution would be even greater if the long-term elasticities had been utilized in the calculation. However, even at the indicated level, there is undoubtedly some overstatement due to the suspected presence of inter-market evasion with respect to exports.
The official market applied to (a) export of major commodities and other items, such as raw cotton and by-products, wood, leather, cereals, and crude petroleum; (b) import of essential consumer goods, basic raw materials, and capital equipment; (c) invisible transactions relating to trade settled in the official market, remittances for study abroad, servicing of government debt, and pipeline royalties; and (d) government capital transactions.
The parallel market applied to (a) exports of other specified items, including most processed and manufactured goods, such as yarn, woven fabrics, clothing, iron and steel products, soap, cement, cattle, and poultry; (b) all other invisible transactions; and (c) private capital transactions.
Substantial export volumes (for example, animal offal, woodboard, and jute) encompassing eight tariff items were shifted from the official to the parallel market. On the other hand, some exports were shifted to the official market, and part of the remittances for students studying abroad was shifted to the parallel market.
For example, the exports of many foodstuffs and other prime necessities were banned from July 23 to September 27, 1967, and the stringent exchange controls regarding import payments imposed on July 13, 1967 and overseen by a Special Foreign Exchange Commission were partially relaxed on January 20, 1968 and eliminated in February 1969.
For example, exports of cottonseed cake (January 9, 1967), export and import of medical and pharmaceutical products (May 7, 1967), exports and imports of sunflower seeds (February 8, 1968), imports of alcoholic beverages (March 9, 1968), export of cotton waste and lint (March 9, 1968), and imports of synthetic yarn (April 18, 1968) were nationalized.
This may be due to the reorganization of SIMEX, on September 1, 1969.
For example, as of January 9, 1971, importation was permitted of a large number of agricultural goods previously prohibited or suspended; and as of February 25, 1971, importation was allowed for a number of previously prohibited or suspended foodstuffs.