I used to travel to Lebanon a lot for work, and I used to exchange USD for a much higher rate than the official bank rate. How did those selling the USD at this much better make profits?
In: Economics
Its possible that they were using the money exchange as part of a money laundering operation, so they weren’t offering the service to make a profit so much as to make their money harder to trace, or for other illegal purposes like moving currency from one country to another. I imagine they also avoid all forms of taxes and regulations and fees that would make it cost more to get money changed at a bank,
If there are limits on how much foreign currency you can get at a low rate from the bank, and you need more than that, then paying a premium to get it through the black market is a cost of doing business.
Governments restrict how much foreign currency can be sold and purchased with their own currency as a means of controlling what they think or need the value of their own currency to be.
Black, grey, and blue markets all base their currency exchange rates, not based on what is best for the country’s economy (or what is thought is best by government leaders), but based on raw supply and demand.
This leads to disparities in the official and unofficial exchange rates.
If an economy is doing poorly, the government has an interest in artificially keeping the exchange rate high so that more of their own currency gets used and confidence remains high. But real supply and demand on unofficial markets will not reflect this.
If an economy is doing well, demand for foreign currency is low and criminal organizations seeking to launder money must work harder to do so. One of the ways to do this is to sell dirty currency at better exchange rates than the regulated market.
ELI5: many Lebanese people do not want lebanese currency, probably because they expect it to have very high inflation. They want dollars. Other people, like you, do want Lebanese currency because you want to buy things in Lebanon. The dealer gives the Lebanese ppl dollars at an exchange rate like 80,000 LBP : 1 USD and gives people with dollars the Lebanese pounds at a rate of 1 USD : 79,000 LBP. Over time the difference in buy sell rates is profit for them.
If your question is why can they trade at a higher exchange rate, or why don’t the Lebanese people get dollars at the official bank rate, the answer is almost always because the bank won’t allow people to trade at that rate. This restriction is what creates the black market dealer.
Do you mean how can they *buy* USD from you at a better rate than the official rate? They’re selling USD to Lebanese people at a similar rate and to do that they need USD. Since they can’t buy USD from the bank at the official rate, they need to get it from you.
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