Question

Have you heard about black markets for currencies? Let's take some time to learn and discuss about this. Do you think that black markets for currencies are good bad or necessary for some economies? Why do you think they develop?

Answer 1

The countries who refuse to accept that the economy is going through high levels of inflation , there exists fake exchange rate and thus the black market for currencies come into existence. It is an illegal market, where a official exchange rate exists and a parallel exchange rate exists parallel to it.In a dual exchange rate, the currencies can be either fixed or floating.

It can be good at times, as they help an economy undergoing difficult times by reducing the pressure on the reserves. It can also help combat the inflationary pressures but there are limitations of this as well.

Black market for currencies develop due to the following reasons:

• When there is high inflation in the economy and the foreign reserves in the economy is limited.
• when the domestic currency is pegged( fixed ) to some other currency at a high exchange rate.
• When the citizens have lost confidence on the economy of the nation.
• The country has strict controls, that prohibit the inflow of reserves into the country.