SUMMARY
- Countries like Kenya, Egypt, Zimbabwe, Nigeria, Ghana, and Zambia are grappling with a US dollar shortage.
- The shortage, primarily a result of an imbalance in these nations' balance of payments.
- Addressing the issue requires both domestic and external intervention, including adjustments in public spending.
Kenyan President William Samoei Ruto has called upon African nations to shift away from using the US dollar for intracontinental trade. During his recent address at the Djibouti parliament.
A selection of African nations - including Kenya, Egypt, Zimbabwe, Nigeria, Ghana, and Zambia - are currently grappling with an inadequate supply of US dollars. The dollar is a key player in global transactions, and these countries heavily depend on it for settling foreign debts, procuring essential goods, and acquiring industrial resources. Christopher Adam, a development economist, sat down with George Omondi from The Conversation Africa to delve into the roots of US dollar shortages and potential solutions.
When we talk about a dollar shortage, we mean a situation where the demand for the US currency surpasses its available supply, at the existing exchange rate. The dollar, along with other major currencies like the Euro, Japanese yen, Chinese renminbi, and the UK’s pound sterling, is crucial for executing global trade. Governments, firms, and individuals worldwide require these currencies to import goods and services, and make international payments.
The manifestation of a dollar shortage can vary based on the exchange rate system in place. In nations that uphold a fixed exchange rate regime - where the local currency is tied to a strong currency - the shortage might be tangible. Banks that typically cater to their customers' dollar needs may have none to offer or may need to restrict their limited stock. Conversely, countries with a flexible exchange rate may not experience an actual shortage, but dollars become pricier, thereby decreasing the purchasing power of the domestic currency.
A country’s balance of payments, which accounts for its financial transactions with the rest of the world, can reveal the immediate cause of a dollar shortage. This imbalance could spring from unexpected occurrences such as a natural disaster wiping out a nation’s dollar-earning tourism sector or a surge in the demand for vital imports like food and medicine. Other triggers include a hike in debt service payments or a drop in remittances from overseas workers. The loss in the value of the domestic currency against the US dollar is often seen as a gauge of the dollar shortage severity.
The recent dollar shortage in Africa stems from a cocktail of disturbed exports and worsening trade conditions. The 2020s introduced several shocks that have culminated in the dollar scarcity. COVID-related lockdowns, a global recession, the resurgence of global inflation, the Russia-Ukraine conflict have all played roles in driving this issue. As a result, imports become limited and pricier, causing a drop in spending and stunting economic progress.
While dollar shortages can theoretically be evaded through self-sufficiency, this is an impractical approach, particularly for developing countries. As nations manage to produce more of their required goods and services, they can gradually ease their reliance on imports, thus mitigating the risk of future dollar shortages. However, this is a long-term process.
In the meantime, strategies should be put in place to address the current dollar scarcity. Notably, this could include reduction in public spending and the encouragement of export production. External aid, from international financial institutions and multilateral development banks, will also be crucial in effectively managing this situation.
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