Smuggler's Blues at the Central Bank: Lessons from Sudan

Abstract

The ineffectiveness of real devaluation as stabilization policy does not imply that the nominal exchange rate should be held constant in the face of a domestic inflation. tn this circumstance, import duties and export subsidies would have to be escalated to counter the potential erosion of the trade balance. This escalation of trade barriers generates a rising black market premium and offers increasing incentives to smuggling, already a pervasive problem in the African countries. As a consequence, the central bank would find it more and more difficult to hold the nominal exchange rate constant. This leads us to consider a passive exchange rate policy of stabilizing the real exchange rate by moving the nominal rate in line with domestic inflation. If such passive policy is not accompanied by the elimination of trade barriers, however, the black market premium will not disappear. Unless exchange rate policy and trade policy are consistent with each other, the smuggler's blues will reach the central bank. Indeed, this is not just a theoretical possibility, it is the major lesson from the recent experience of Sudan.

Exchange Rate Reform in China: An Experiment in the Real Targets Approach

“…First, instead of targeting the real exchange rate as conventionally suggested, China targets the ratio of the exchange rate to the foreign exchange earning cost. This has the same effect as the approach suggested by Branson and de Macedo (1989) in that it prevents the profit squeeze in the export and import-competing sectors in the face of domestic inflation while working more directly on exports. Second, such an approach permits a certain fixity in the nominal rate while the 'effective' exchange rate was flexible; hence it may help check price hiking in the domestic economy without international competitiveness being compromised.…”

“…The changes in the exchange rate may be linked to the domestic money growth rate, movements of domestic prices, or the differential between home and foreign inflation rates. Branson and de Macedo (1989) illustrate a case for the real targets approach in a 'rigid' economy. They argue that in such an economy real devaluation as stabilisation policy is not effective since import payments and export receipts in home currency will increase in proportion to the change in the exchange rate.…”

Parallel Currency Markets in Developing Countries: Theory, Evidence, and Policy Implications

“…This class of models emphasizes the impact of rising trade taxes on smuggling activities and illegal currency transactions. I/ As shown by Macedo (1987) and Branson and Macedo (1989) for instance, an importer will tend to smuggle if the tariff is so high that it pays to purchase foreign exchange in the parallel market at a premium, given the possibility of getting caught by the customs enforcement agency. If r denotes the tariff, TT the probability of success in smuggling, and p the premium, a necessary condition for import smuggling to occur is nr > p. Similarly, under the same detection technology, the incentive to smuggle exports out will exist when •& < np, that is, when the subsidy (or tax rate) on exports # is smaller than the parallel market premium weighted by the probability of success in smuggling.…”

Currency Incontrovertibility, Trade Taxes and Smuggling

“…From (17) Note that the analysis is applicable when instead of an export tax, we have an export subsidy, as in Branson and Macedo (1986). In that case, -12taxes and subsidies rising at the same rate would keep t and thus Sm and s constant but would nevertheless imply a rising black market premium from (22).…”