There Is No Shortage Of Forex In Zimbabwe – It’s Just The Wrong Price

Given Zimbabwe’s recent history it’s entirely remarkable that the government is still getting this wrong. Perhaps some people just need things explained again and again and again before they get it. For there is no shortage of foreign exchange in Zimbabwe. That’s not how the supply and demand of things works, especially not something as mobile as currency. No, what Zimbabwe has is the wrong price for foreign exchange. Which is pretty much the problem the place has had the last two times and third time isn’t going to be lucky unless the government grasps this now.

All we need to explain is this:

It’s simple and true By Paweł Zdziarski (faxe), Astarot – Own work, CC BY-SA 3.0, https://commons.wikimedia.org/w/index.php?curid=741993

Yes, I know, very boring. But the supply and demand of something will meet at a price. There will be, at some price, enough willing sellers of that thing to meet the desires of all the desirous buyers of it at that price. If we now set the price below this then what happens? We have more willing buyers and fewer willing suppliers? That is, supply and demand no longer meet, we have a shortage.

This is what Mugabe did to the Zim $, this is what more recently happened to bond notes and RTGS. Although the opposite way around, government supplied too many therefore the price fell. Same thing though, simple supply and demand.

So, this isn’t true:

Forex shortages hit Zim’s payment systems

There is no forex shortage. There’s just the wrong price for FX.

ZIMBABWE’S payments ecosystem faces collapse as players in the sector are failing to pay licensed and maintenance fees to foreign service providers, Standardbusines has established. In recent weeks, the banking systems, which heavily rely on telecoms infrastructure, have come under strain with services being constantly disrupted. Zimbabwe Information and Communication Technologies (ZICT) chairman Jacob Mutisi said the country received all its internet bandwidth from outside Zimbabwe. “All payment systems in Zimbabwe have a foreign link and that foreign link has to be paid for in foreign currency, so (the shortages) are affecting all the payment systems.

And sure that’s a different problem. The electronic systems might well fall over but it’s not because of an FX shortage, it’s because the government is trying to insist that the FX price is too low. Or, the same thing, that the RTGS price is too high:

Meanwhile, banking industry sources said mobile telephone operators would continue to face disruptions because they were failing to get foreign currency to maintain their infrastructure.

OK. Big problems ahead obviously enough. But the solution is for the government to stop trying to hold the exchange rate too high. That it is too high being shown by the way in which foreign exchange isn’t freely offered for trade at the current price. Simply because there’s no such thing as an actual shortage of currency. Only a shortage at a price, that you can’t get it showing that the price you’re offering is to low, the price you’re demanding for your own too high.

Free the foreign exchange market in Zimbabwe and there won’t be any problem with gaining foreign exchange. Simply because that’s what free market prices are, the price at which all demand is met by supply. This is not theory, this is definition.

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Jonathan Harston
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Jonathan Harston

I’ve never understood that diagram. I understand the explanation in words, but I can never get the words to match what I see on the diagram. Maybe it’s labelled differently to what I expect from the written description. I think I sort-of expect the axes to be labelled P(rice) and (D)emand, and there’s too many lines.

Shibusa
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Shibusa

Price on the Y axis, quantity (demanded/supplied) on the X

Blue line
***********
As the price increases for a good, the supply increases.

D1 Red line
***********
At the start of the line the price is high, so quantity demanded is low. Follow the line and the price comes down as demand goes up (because of the low price)

The convergence point of the lines is the equilibrium price, or the market clearing price.

D2 Red line
**************
This only serves to illustrate what happens if demand increases (quantity supplied increases and price increases)