Can someone please explain how and why this Black Market transaction works?
I went to the Duty Free shop at Bangkok International and with $20 US and bought 2 bottles of Johnny Walker Red and 2 cartons of 555 cigarettes.
I fly into Burma and the taxi driver outside the airport in Rangoon buys the whisky and cigarettes for the equivalent of $70 US in Burmese Kyats.
These Kyats can’t be used for air tickets or high end hotels and restaurants, but they can be used for train travel, inexpensive lodging and eating places. These Kyats also can’t be exchanged for other currencies when one leaves the country. I only had a week in Burma and because things are so cheap, it wasn’t easy using up the $75 US. (The government forces all travelers to officially exchange at least $5 US.)
I know the Burmese government is manipulating their currency, but how and why?
Maybe I’m missing something, but how is this currency manipulation? Your taxi driver is buying something from you that he can sell on the black market at a higher price that he paid to you. Maybe these items are unavailable in Myanmar, or maybe they’re highly taxed. In any case, he’s going to make some money.
This doesn’t have to be directly related to government policy. I suppose it’s indirectly related, in that, since the kyat is more or less worthless outside the country, a black market will naturally come into existence.
Question, was your $70 worth of kyat the official rate? Which is something like 5-8 kyat per USD? Or, the black market rate which is like 100 times that?
The average person cannot import or buy foreign (luxury) goods because nobody will take their currency outside the country.
You arrive willing to exchange rare foreign goods for worthless Burmese currency because you actually can use them. They get something they cannot get, and likely at substantially less than the real black market rate and without needing to find foreign dollars. You get currency at much better than the official exchange rate, which you will use while there to buy something. You both come out ahead.
If the government mandates “the exchange is X” but nobody from the outside world will trade at that, then what happens is very little legal trade happens and most outside merchandise is in short supply.
Man, that reminds me of good old Soviet days - end of 70s - when the official rouble/dollar rate was 0.65 rouble per dollar, but the “black market” (meaning “anyone on the street”) rate was 4-5 roubles per dollar. With average Soviet monthly salary at the time being 100 or so roubles, any American was fabulously rouble-rich. Too bad I wasn’t one at the time
You get this kind of thing whenever a country tries to ‘protect’ its currency or manufacturing from the rest of the world.
Back in the 70s I was lodging with a family who came from Bombay (now Mumbai). A regular thing was that a young Indian man would call at the house and be given several hundred pounds. I was told that they were generally students studying in London. My landlord would give them Sterling, and someone back in India, would give my landlord’s family, Rupees. Of course, a degree of trust was required, but because of currency restrictions at the time, both parties profited without breaking any laws.
The “official rate” may be X kyat per dollar, but in a country with that sort of economic situation, the average citizen cannot just walk into a bank or government office, hand over “$20 dollars worth of kyat” and get $20 in US currency. Thus, there is no way no how they could simply save up the money and buy foreign goods at “list price, listed exchange rate” while behaving legally.
This happens when a country artificially pegs their currency at a certain rate, but the true market rate is actually different. This creates arbitrages for creative entrepenuers.
See the current situation in Venezuela where their currency is pegged at $6.30 per each Ven Bolivar, but the actual market value is closer to $40 per Bolivar, as their economy is experience hyper inflation.
Because of this many people are utilizing loopholes in the currency controls via international airline tickets to take advantage of the currency mismatch.
Governments manipulate currency to keep exports high and imports low. High exports mean more jobs at lower wages. Low imports mean domestic manufacturers have less competition and can make more money.
The way Burma seems to be doing this is establishing a crazy exchange rate and not letting anyone trade their currency openly and making the official exchangers have a really low exchange rate.
The reasons for this could be several. First the government makes money by shafting the tourists byover charging them for the local currency. The currency manipulation also makes money for local manufacturers at the expense of the local consumers. Those in government could be the same as the local manufacturers or in league with them. Another reason is that the government wants to encourage local manufacturing in the hopes that the manufacturers learn their business well enough to eventually compete on the global market. The manufacturers also provide jobs at low wages and the governments fear unemployment causing unrest and so artificially prop up manufacturers.
As Saintly Loser pointed out, it’s likely that the taxi driver shortchanged **Mangosteen **relative to the “real” black market price for the goods. As far as **Mangosteen **is concerned, the driver paid a hefty premium over Mangosteen’s cost. However, the driver will probably turn around and sell some or all of the goods for the 100-$160 US worth of Kayat you’d expect.
I sold a $200 VCR (BETA) in Korea for $600 worth of Won. There was a short bidding war when 3 guys showed up to look at it. I took the Won to the back alley behind my apartment and traded it for $550 American. How the black market works is very confusing to an outsider. I did give bottles of whisky out to my Korean friends as gifts sometimes, and I am sure they each sold them. I paid $4 each for them and was allowed 8 bottles a month from the exchange. This was in the mid 80’s. At the time I was told VCR’s had a 300% tax on them when bought from a store.
Yeah - keep the local currency low.
Exports make the producers a lot of money since they pay employees is cheap local money and collect hard currency which is worth a lot more.
Impots are prohibitively expensive, so the demand is not met but the amount imported is much lower than otherwise - almost nobody can afford the stuff.
Of course, the exporters have accumulating bank accounts and can afford luxury goods. however, usually the government taxes both the foreign hard currency profits, and the goods coming in, to make some real money for themselves. Those 50-foot portraits of the beloved leader don’t pay for themselves, you know…
As China has found, if you are too successful, you still accumulate giant bank accounts full of foreign currency that eventually ahs to be spent outside the country. You can buy USA Treasury Bills, or Greek govrnment debt, but one problem is - eventually with a country that does this well, their money appreciates. Then, that $100M treasury bills you bought when the Yuan was 6 to the dollar will be worth a lot less locally when the yuan reaches 3 to the dollar…
OTOH, if your economy sucks and you can’t get your act together (think Egypt today) then the available hard currency becomes less and less, so you have to put limits on how much foreign currency a local citizen can buy. Spare aprts, computers, oil, etc. become more and more expensive, your ability to pay back government loans gets worse to the interest you pay for that risk gets higher, etc. The economy is on a death spiral.
Foreign diplomats can get all the kyat they want, but it is useless for traveling to other countries or buying imported goods in Burma, because it is artificially pegged and not convertible. So their kyat are sold to foreign travelers for whatever exchange rate the market will bear.
Rates in Soviet bloc countries in Eastern Europe used to have black market rates as high as 10 or 15 times the official rate, and African students were often the money exchangers to get hard currency for the consular staff from their countries. If a traveler wanted to exchange western cash, just look for a black student.
