Exchange rate policy and the parallel market for foreign currency in Burundi
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Date
2020-04-27
Authors
Nkurunziza, Janvier D.
Journal Title
Journal ISSN
Volume Title
Publisher
AERC
Abstract
Government control over the allocation of foreign exchange in Burundi has led to the
creation of a parallel market for foreign currency. Despite its negative impact on Burundi’s
economy, this market has not, so far, attracted the attention of researchers. This paper
looks at the functioning of the parallel market and discusses macroeconomic policies in
the country to shed light on the context within which the market evolved. Analysis of
time series properties of the variables used in an empirical model covering 1970–1998
reveals that the premium is stationary, guiding the decision to estimate a stationary model
of the premium. Econometric results show that the premium is determined by the expected
rate of devaluation, trade policy variables and GDP growth. This conforms with empirical
studies on other African countries, although the Burundian case is particular in one respect:
The market is characterized by a relatively low premium, which, as a stationary variable,
is also generated by stationary fundamentals, in contrast with findings for other African
countries. This particularity reflects a relatively more flexible exchange rate policy over
the sample period. In terms of policy, the paper argues that political stability and more
fundamental changes in Burundi’s economy and its management will be needed to ensure
the success and sustainability of the current foreign exchange reforms.