How can there be a black market for foreign currency when you can walk into an exchange and get a better rate?
My wife once worked in Egypt and mentioned that US dollars were in demand and would fetch more on the black market than at official exchange rates. I never really thought about it, but yesterday’s Washington Post printed an article about tipping (available for free for the next two weeks) while traveling that included the following paragraph:
I understand how black markets arise for goods that are not legal or are rationed by the government. Please explain how there can be a black market in a commodity that is openly available without legal restriction. Why would anyone pay more for a US dollar than they would have to by going to an exchange service?
In some nations, the “official exchange rate” is a rigged rate controlled by the government for various reasons.
I recall that the former Soviet Union used to have an exchange rate that was GROSSLY out of line with “real-world” values, which would tend to create a black market.
The black market will pretty much always be offering a more favorable rate than the one prevailing at “official” currency-exchange outlets (as your quote indicates). This is usually because there’s some sort of officially dictated exchange rate that the legitimate outlets must observe, but which is out of touch with reality.
Additionally, black currency markets revolve around currencies that are in very little demand. The Iranian Rial, for instance. The currency is largely unwanted outside Iran. Therefore, the rial has very little value in an open market and the Iranian government controls it’s price within Iran. In the black market the rial brings far less return than the official rate.
In addition to the chance that an official exchange rate might be tinkered with to be favorable to a government, black market money changes are also useful for the black market in general, especially if a country subjects currency exchanges to oversight.
For example, China severely limited the ability of Chinese people to buy US dollars. If an ordinary Chinese wanted to buy dollars for some reason, it would often be difficult through official channels. Black markets are able to sell dollars at premium prices to Chinese. How does the black market get its hands on these dollars that are sold to Chinese? Why, they buy dollars from Westerners at rates that are better than what tourists could get at the official exchanges.
On a related note, I vividly recall going into one black market currency shop in Beijing, which was in the back of a street stall that sold t-shirts or something, and seeing a British guy exchanging what must have been 5,000 or 10,000 GBP for Chinese currency to pay the workers at his local business. I was shocked that someone would exchange so much money and then have to stuff thick wads of yuan into all his pockets to wander off down a street known for pickpockets. Anyways, I just exchanged by $50 and left.
Kind of a highjack but I noticed when I went to Canada, the stores just over the border would give you a worse exchange rate than official. I reckon that is because of the convenience factor
Well, in a free country anyone can offer any exchange rate they like. However, if you offer too high an exchange rate no one will bother, if you offer too low an exchange rate you’ll be arbitraged out of existance.
In a free country the “official” exchange rate is only the consensus rate, what merchants are banks are offering to sell or buy for.
However, there are many countries where there really is an “official” exchange rate, usually they set the value of their currency artificially high and force tourists and foreign businesses to buy the local currency at higher than market rates. The Soviet Union was notorious for this, if you could smuggle hard currency like dollars or pounds or deutchemarks into the USSR you could get many times the official exchange rate for them. It was basically a scheme to confiscate hard currency from western tourists.
In many countries there’s a legal trade in currency outside of banks by people on the street - in Peru they even wear bibs with $$$ on them! - which gets you a slightly better than bank rate, but which is legal but unregulated and entails some risk by doing your cash business in the open where everyone knows what you’re doing… or simply getting shortcahnged with no receipts of the transaction. Frequently there are particular streets or areas at border crossings where the changers hang out, and most are honest but of course trying to wheedle themselves the best margin while still offering better than the banks.
One pitfall in exchanging money on the street is that in countries which put out new editions of bills regularly owing to inflation which adds a whole lot of zeros, you have to be careful to get the most current bils so as not to be shortchanged by a factor of ten or more (worst case scenario ending up with worthless old currency). Always a good idea to know what the current bills look like before going to a street moneychanger.
As an aside, should you be bringing a roll of ones to East Crazystan be sure to bring ones which aren’t even the tiniest bit torn or missing even the teeniest piece of the corner. For a lot of people that throws the bill into disrepute and no one will want it.
It’s very strange, having to say “Well OK then, I’ll just take this dollar bill to any cashier in the US itself, where it’ll spend just fine…”
When I was in Romania a couple of years ago I had a hard time finding a place to exchange money. Twice I had to go through the “black market”. I first stopped at the exchange over the boarder that wasn’t open, but the woman who was there did it for me anyway. The second at a hotel when I was unable to find a place open and needed a place to stay. I was told at the hotel the reason they do it is because companies will give more for hard currencies so they can buy items easier on the open market. For me I actually got a better deal and I didn’t have to pay any fees.
But note that street exchanges aren’t neccesarily “black market”, they could be perfectly legal, and they could give you a better exchange rate than the banks for perfectly legal reasons.
It’s only a black market if the currency exchange is against the law. Most countries like this will have restrictions on how much hard currency you can bring into the country, and will often force you to exchange a certain amount of hard currency for local currency at the official exchange rate. So you have to buy, say, 100,000 kopeks for every day you are planning on staying in East Crazystan, but when you get there you find that you’re hard pressed to spend even 10,000 kopeks per day. And when you go to leave you find that the government won’t buy the kopeks back, or let you take them out of the country. So even if you could smuggle in dollars or euros and get 5 times the official exchange rate for them, there’s no point because you’ve got all the kopeks you can spend.
There’s no such thing as a “more favorable rate”. Every transaction has two parties to it, and what’s a good rate for one is a bad rate for the other. As others have pointed out, currency black markets can only exist where there is oppressive government interference preventing a free, open market. For instance, if the Soviet ruble really exchanged on a par with the dollar (or whatever rate the government was trying to enforce), then the Russians who were operating the black markets would just go to the official government exchanges and trade their rubles for an equal number of dollars, rather than paying fifty rubles for a tourist’s dollar. It’s only the fact that the government would not allow the Russians to trade unlimited amounts of cash at the official rate that made a black market possible.
In Vietnam, we did all our currency trading in that well-know financial institution, the counterfeit Levi jeans stall at the markets. The guy there was recommended to us. Nice bloke, seemed pretty honest, and did us a good rate. Problem was, we exchanged A$600, and as the nervous Vietnam newbie who’d arrived complete with hidden money belts and whatnot, I ended up having to walk outta there with enough Vietnamese Dong that it represented two house brick-sized bundles in a plastic supermarket bag. All I could do was hold it in front of me, and rely on my imposing 6’4" frame to get to a taxi and back to where we were staying.
On subsequent trips, I just cashed a few bucks into Dong, and the rest into US dollars. Later, I didn’t bother with the US dollars, because Australian ones are accepted in most places.
Interestingly, by the time I left, the local traders were starting to prefer Australian currency to US notes, and for a rather surprising reason. When trading hard currency in Vietnam, you’ll often get a slightly better price for it if the foreign notes are new and crisp, because they can circulate for longer (the local banks aren’t about to return old US dollars for destruction like they would back in America), and once a note falls apart, nobody wants it much. The Australian currency is polymer, and more durable. This increased its value slightly, regardless of the exchange rate.
I’m not sure I understand this comment. The context here is an individual seeking to exchange foreign currency for local currency. It is not infrequently the case that by shopping around (sometimes in the “black market”) he can get more local currency for the same amount of foriegn currency. He will naturally tend to find that more favorable.
At the same time, the “black marketeer” is almost certainly showing a profit on the transaction (else why would he bother?). So he finds the transaction more favorable than the alternative (tourist gets hosed at the official currency exchange, black marketeer does no business). IOW, the black market rate is favorable to both parties.
It’s not favorable for the marketeer, because he could get a much better rate (for him) at the official exchanges. Or at least, he could, if he were allowed to. The alternative we’re talking about here isn’t “tourist goes to official exchange”; that obviously doesn’t help the native. The alternative we’re talking about is “native goes to official exchange”.
But (as you imply) he isn’t allowed to - the more favorable rate is in fact unavailable.
It’s essentially always true that when an artificial “official” exchange rate is enforced, it’s a one-way deal. In the Soviet Union, tourists may well have been obliged to exchange one dollar for one rouble, but you can be quite sure than no one was able to walk in with one rouble and exchange it for a dollar (or anything even close to a dollar).
More generally, at any exchange there’s a difference between the “bid” and the “asked” price. A black market will arise when this difference gets large enough to be worth the trouble.