Why DZD Quoted More on Parallel Market than Official Rate?

Created in 1954, the Algerian dinar has been quoted at the franc until 1973, with 1 dinar for 1 franc and 1 dinar for 5 dollars. Since 1974, the value of the dinar has been fixed according to the evolution of a basket of 14 currencies, with a 150% depreciation from 4.82 to 12.191 (USD/DZD rate) between 1986 and 1990, followed by a second depreciation of around 22% in 1991.

Forex traders in Algiers made and broke the euro balance.

With the cessation of payment in 1994 following the rescheduling and conditionality imposed by IMF, there was a new devaluation of more than 40% against the US dollar, followed by a commercial convertibility of the currency from 1995 to 1996. Why is the value of the Algerian dinar so insignificant as 108 dinars for 1 euro and 77 dinars for 1 dollar according to the forex rate on April 15, 2014 (note: 147 dinars for 1 euro and 128 dinars for 1 dollar according to the official rate on July 21, 2020) compared with the Tunisian dinar, for example, which was quoted 1.57 per dollar, and the Moroccan currency which was quoted 8.05 per dollar？ Unlike its neighbors which had a small gap, the parallel market in Algeria had its gap ranging from 140 dinars for 1 euro at the end of 2013 to more than 155 dinars per euro in February/March 2014 (note: 191 dinars for 1 euro and 167 dinars for 1 dollar according to the official parallel market rate on July 21, 2020). The currencies were sold and bought in the public square without any banking intervention.

Six reasons for the devaluation of the Algerian dinar on the parallel market

For several decades in Algeria, there have been distortions in exchange rate between the official and the parallel market. The Port Saïd Square and some certain places in the east and west Algeria are considered to be the open-air parallel banks serving as a stock exchange where prices evolve day by day according to the supply and demand and the international quotations of the dollar and the euro. This illegal market acts as a softener to the exchange control which is excessively rigid. Although the data is often contradictory, some sources estimated that almost 2 or 3 billion dollars would have been exchanged annually on the Algerian parallel market between 2009 and 2012. The amount is extremely small compared with the outflow of the currency. For example, in 2013, more than 55 billion dollars of goods and 12 billion dollars of services, that is, a total of 67 billion dollars of currency out flowed. I have identified 6 reasons of this important gap in prices between the official and the parallel market:

1. The difference is explained by the decrease in supply amid the global crisis and the deaths of many Algerian retirees, which has largely wiped out the savings of emigration. This decrease in supply of foreign currencies has been offset by the fortunes acquired regularly or irregularly by the Algerian community locally and abroad, which exchanges foreign currencies in Algeria. The re-remitting of the money from corruption plays a role in the distortion of the exchange rate with reference to the official rate (for example, you invoice me 120 or 130 instead of the goods purchased for 100, which creates complexity for foreign operators rather than easier operations and faster trade). It shows clearly that the currency parallel market is much more important than the savings of emigration, which allows real estate speculators to explain the soaring prices, especially in the large cities and even in the semi-urban areas. It promotes the communication between abroad areas and Algeria and strengthens the supply. Therefore, there is a dialectical link between these currency outflows due to the over billing and the supply, without which the supply would be greatly reduced and the prices on the currency parallel market would be more expensive. Thus it paradoxically absorbs the shock of the dinar on the parallel market.

2. The demand comes from the ordinary traveling citizens: tourists, people who treat themselves abroad. This is because the allowance level of conversion currency is low. But travel agencies that failed to benefit from forex trading rights also resort to the illegal market for their import services. Usually, they export foreign currencies instead of importing them like the tourism logic of Turkey, Morocco or Tunisia.

3. Strong demand comes from the informal sector which controls 40% of the circulating money supply (concentrated in the rentier minority) and 65% of different market segments: fruits and vegetables, red and white meat, fish market, and the textile and leather market through imports by small dealers. There is an informal financial intermediary institution far away from the national circuit court. This sphere is created by the bureaucracy, thus everything handled in cash is conducive to dialectical connections with certain smaller authorities. As a result, corruption occurs. The National Trade Union of Algerian Businessmen estimated that the tax evasion caused by this sphere is about 3 billion dollars per year.

4. The difference is explained by the shift from Remdoc to Credoc in 2013 (documentary credit, explaining the flexibility measures), which penalized small and medium-sized companies representing more than 90% of the declining industrial structure (5% in GDP). Credoc didnt make it possible to curb the rise in imports as expected, but reinforced the trends of import monopolists where, according to the official, 83% of the overall economic structure consisting of trade and small services with low added value. In order to avoid supply disruption, many small and medium-sized businesses have had to resort to the currency parallel market. The government has raised it to 4 million dinars (the official rate was 1 euro for around 100 dinars) and can pay for emergency imported raw materials or spare parts for free, but this is still not enough.

5. Lots of foreign operators use the parallel market for foreign currency transfer. Since each Algerian was entitled to 7,200 euros per transfer, Algerian employees were used to increase the amount.

6. The difference is explained by the level of inflation. At a strict economic level, the currency is first of all a social relationship formed according to the level of economic and social development, reflecting the trust between the country and its citizens, the level of trust, and the deterioration according to the level of inflation. The real rate is higher than the official one, which is an objective analysis of inflation. Its assumption is to grasp the dialectical connection among the development of social class, income distribution and consumption models. People who get 200 euros a month have a different understanding of inflation than those who get 30,000 euros. The non-proportionality between the public expenditure programmed at 500 billion dollars from 2004 to 2013 (there wasnt any real financial balance to date) and the low impact with an average growth rate not exceeding 3% (it should have exceeded 100%) is a source of inflation. It also explained the deterioration in the quotation of the dinar (supply-demand imbalance is supplemented by a massive importation) on the free market compared with the foreign currencies that the Bank of Algeria supports artificially. The payment of wages without productive counterparts increases the inflation because Algeria has a very low productive capacity. To guard against the inflation and deterioration of the Algerian dinar, Algerians invested not only their land assets, real estate and gold, but also a part of savings in foreign currencies.

Of course, many Algerians took advantage of the real estate crisis, especially in Spain, to acquire apartments and villas in Iberian Peninsula, France and some other places in the US and Latin America, rather than resorting to tax havens. Its a choice of security in a country where the evolution of oil prices is decisive. If there were no oil, gas or foreign exchange reserves, the euro would be traded at 300 or 400 dinars. Thanks to foreign exchange reserves, the official exchange rate fluctuated between 105 and 110 DA per euro from 2012 to 2014. In the face of political uncertainty and mental illness caused by financial scandals, many owners sold assets to exchange overseas ones. In addition, many households put themselves in the situation of falling oil revenue. In view of the fluctuations in gold prices, which have been falling since 2013, they bought foreign currencies on the informal market.

In short, all these refer to the weakness of the local production structure, while the hydrocarbon income gives an artificial official quotation. According to an OECD report, Algeria's labor productivity is one of the lowest levels in the Mediterranean basin. The grants and the distortion of the exchange rate in prices between the official and the parallel market of neighboring countries are the fundamental explanations for over billing. After 50 years of political independence, it has 98% of hydrocarbon exports and 70% of the needs in households and public and private companies whose integration rate doesnt exceed 15%.

By programming an unequaled public spending since the political independence, with exorbitant additional costs as shown on the World Bank report devoted to the infrastructures (between 25% and 30%), by freezing the supervision mechanisms including the Court of Auditors dependent on the presidency of the republic, by creating institutions dependent on the executive being judge and party colliding, the most effective control is the democratization of the society and the rule of law. With the gap in prices between the official and the parallel market, such imports have surged and required inside trading. This distortion of currency quoted in neighboring countries also explains the leakage of overseas products.

The administrative measures can only be temporary, otherwise an army of supervisors will be required. The solution lies in a new governance and some new regulatory mechanisms. They are expected to revitalize local production in value-added segments within internationalized sectors. This requires efficient companies (cost/quality) in the era of globalization to be integrated into large groups. Among them, Europe-Africa and Europe-Mediterranean space are the natural ones for Algeria, thanks to a win-win partnership (currency balance shared, accumulation of the local technological and managerial transfer). Human resources are essential for the cooperation. These are the conditions for improving the quotation of the dinar, tariffs and subsidies, which provides the beneficiaries with a clear statement about the income.

In order to avoid spending virtual social peace extravagantly, the balance (exemption of value-added tax and increasing interest rates) for the beneficiaries of various investment institutions has become urgent. This is always due to the ephemeral hydrocarbon income which is a well used blessing and a curse as the source of corruption and misuse. Let us remember the Dutch disease. It is because Algeria has been in transition since 1986, becoming neither a market economy nor an administered economy, and it explains the difficulties in political, social, economic and financial regulation and the transition from an income economy to an economy outside hydrocarbons. It is a function of the energetic transition within the framework of the global comparative advantages.