In the last few years, there has been significant discussion about Algeria’s dual exchange rate regime and the impact it has on its monetary policy and economic stability. Recent academic research suggests that Algeria’s managed floating exchange rate regime, combined with a large informal sector in its economy, has resulted in a dual exchange rate system – with a difference between the official and parallel market rates.
It is under this economic scenario that a game-changing application enters the Algerian market. This innovative app aims to connect users, allowing them to exchange their cash directly, thereby effectively bridging the gap between the official and the parallel markets, and contributing to the unification of the exchange rate.
Understanding the Dual Exchange Rate Dilemma
Algeria’s current exchange rate regime is officially a managed floater. However, the existence of a parallel market where the Dinar trades at a higher rate has created a dual exchange rate system. This duality is an issue as it can lead to economic distortions, encourages informal trade, and complicates monetary policy.
A recent study found that from 2014 to 2018, Algeria maintained a de facto crawling band around the EURO that was narrower than or equal to ± 2%, both in the official and parallel markets. This difference between the official classification and actual practice suggests that Algeria was more committed to stabilizing its exchange rate than controlling inflation.
A New App: Bridging the Gap
The proposed application’s main premise is to connect users who wish to exchange currencies directly, without an intermediary. It’s like a peer-to-peer marketplace for currency exchange. The app would operate within Algeria’s legal and regulatory frameworks, ensuring all transactions are transparent and traceable.
Users can list the amount and type of currency they wish to exchange and search for matches. The app then connects users with complementary currency needs, enabling a fair and agreed-upon exchange. As more people use this app, the differences between the official and parallel exchange rates would lessen, effectively contributing to the unification of the exchange rates.
App’s Impact on the Exchange Rate Unification
Technology can contribute to exchange rate unification in several ways.
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Transparency: By facilitating transactions that would otherwise occur in the unregulated parallel market within a regulated space, the app increases the transparency of the foreign exchange market in Algeria.
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Market Equilibrium: By connecting users directly, the app promotes market-driven exchange rates. This way, the app can aid in closing the gap between the official and parallel market rates.
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Policy Simplification: By reducing the size of the parallel market, the app simplifies the task of monetary authorities. A unified exchange rate can help Algeria’s monetary policy to become more effective.
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Economic Stability: In the long run, a more unified exchange rate would lead to greater economic stability. The app can play a part in achieving this by enabling more predictable and stable transactions.
In conclusion, the proposed app represents a novel and potentially effective approach to addressing Algeria’s dual exchange rate dilemma. By creating a more transparent, direct, and market-driven currency exchange process, the app can play a significant role in unifying the exchange rate. The success of this initiative will rely on user uptake, legal approval, and continued evolution to meet the needs of Algerian society. The journey towards economic stability is long and complex, but with innovative solutions like this, Algeria is taking steps in the right direction.