The Parallel Market for Foreign Exchange in an Oil Exporting Economy: The Case of Iran, 1978-1990


WP/95/69-EA
The Parallel Market for Foreign Exchange in an Oil
Exporting Economy: The Case of Iran, 1978-1990 by Adnan Mazarei

The first aim of this paper is to provide a model for exploring the
determination of the parallel market premium for foreign exchange in an oil
exporting country. The model extends the work of Lizondo (1991) to
incorporate some of the features specific to these economies, such as the
accrual of oil export earnings to the government. The model incorporates a
foreign exchange rationing board that obtains foreign exchange through oil
export earnings and the surrender requirements on non-oil exports. It then
allocates resources for the importation of different commodities.

Next, the above framework is used for understanding the developments in
the Islamic Republic of Iran during 1978-90, when an active parallel market
for foreign exchange developed in response to a number of domestic and
foreign political shocks and to the exchange and trade restrictions adopted
by the Iranian authorities. Iran's postrevolutionary experience with the
parallel market for foreign exchange is particularly marked by its long
duration and sizable premium, which exceeded 2,000 percent.

After a discussion of the theoretical determinants of the parallel
market premium, the statistical properties of the parallel market exchange
rate in Iran are examined in detail. This examination pointed to the
presence of predictable patterns in the Iranian foreign exchange market.
Finally, the theoretical model is econometrically examined. Although the
empirical results obtained were not strong, they do provide some evidence
for the negative impact of a decline in oil revenues on the parallel market
premium in Iran.