There Is No Such Thing as the Price

In a country with a parallel exchange rate, there is no such thing as the price. There is the price at the official rate, the price at the street rate, and a set of prices in between that depend on how you paid and who processed it. A traveller who does not understand which rate they are transacting at can pay two or three times what a local pays for the same bed, and will usually never find out.

How the gap opens

A parallel market appears when a government fixes an exchange rate that the market does not believe. If the official rate overvalues the local currency and hard currency is rationed, then anyone who needs dollars — an importer, a family paying tuition abroad, a saver protecting themselves against inflation — will pay more than the official rate to get them. The gap between the two is a direct measure of how little the fix is believed, and it widens with every shortage.

The fix is rarely irrational at the moment it is imposed. Governments hold an overvalued rate to keep imported food and fuel affordable, to hold down the local-currency cost of foreign debt, or simply because devaluing is politically fatal. What makes it unsustainable is that the fixed rate has to be defended with reserves, and reserves run out. The parallel market is what the economy does while waiting for the arithmetic to be acknowledged.

Argentina ran the best-known version of this for years, with a spread between the official rate and the so-called blue dollar that at times exceeded a hundred per cent, and a whole vocabulary of intermediate rates for tourists, for card payments, for particular financial instruments. Venezuela, Nigeria, Egypt, Iran, Zimbabwe and Sudan have all run variants. The details differ enormously; the arithmetic does not.

The gap between the official rate and the street rate is not a curiosity for economists. It is the multiple by which a visitor overpays for everything.

What it does to a traveller

If your card converts at the official rate and cash converts at the parallel rate, then every card transaction is silently marked up by the size of the gap. In a country with a fifty per cent spread, paying by card means paying half as much again for dinner, for the room, for the bus. Nothing on the receipt says so. The mark-up is invisible because it is embedded in the exchange rate rather than added as a line.

Governments know this, which is why several have introduced a special tourist rate — a legal rate for foreign card transactions set closer to the parallel one, precisely to stop visitors funding the street market and to capture their spending inside the banking system. Where such a rate exists it is generally the right answer for a visitor: most of the benefit, none of the exposure.

The second effect is on quoted prices. In a high-spread economy, businesses that deal with foreigners frequently quote in dollars, and the dollar price is not always converted at any rate you would recognise. A hotel quoting a rate in hard currency in a country whose currency is collapsing is protecting itself, and the rate it uses to convert if you pay locally is a commercial decision rather than a market one.

The part that matters more than the money

Changing money on the street is illegal in some of these countries and merely unregulated in others, and the distinction is not always visible to a visitor. Where it is illegal, the risk is not only a fine: counterfeit notes, short-counts and setups are standard in exactly the places where the spread is widest, and the victim of a currency scam has no recourse because the transaction was itself an offence.

Where a legal mechanism exists — a tourist rate, an authorised bureau, a transfer service that pays out in local currency at something near the market rate — use it, because it captures most of the gap without any of the exposure. Where one does not, a hotel or an established business is a poorer rate and a much better counterparty than a man at a bus station.

And check the position again immediately before travelling. Parallel-rate regimes change by decree, sometimes overnight: a devaluation can close the gap in a week, a new control can open one just as fast, and a tourist rate can be introduced or withdrawn between one season and the next. Advice more than a few months old about which rate to use in these countries is not conservative — it is simply wrong.