Introduction
A major way of determining a progressive nation is through the number of forex inflows into the country over time. When the total inflows exceed the outflows then we say the economy is healthy and productive. This strengthens the country’s currency at the exchange market too.
On the contrary, a high outflow of forex with little inflows results in a forex shortage. When more people are eager to convert the indigenous currency into a foreign currency, then, the country will probably run short of forex supply. This affects the country negatively and often reduces the value of the country’s currency at the exchange market.
Many reasons could lead to this situation including the interest rate of the country compared to other countries. This work has therefore examined in detail the major effects of forex shortage on national development.
Meaning of Forex Shortage?
Anyone who has a previous idea on the meaning of forex or trades forex will have no difficulties construing the concept described by forex shortage. Forex trading in itself has to do with the exchange of foreign currencies. When combined, the concept of forex shortage refers to a situation where a country records high outflows of foreign currencies compared to the number of foreign currencies coming into the country.
When the rate at which the country’s indigenous currency is converted into the US dollar or any other foreign currency gets so high and exceeds the number of inflows into the country, then the country runs into a forex shortage.
What is the effect of forex shortage on national development?
Now that you have known the meaning of forex shortage from our discussions above, it is now very easy to guess the impacts it is going to have on national development.
The first major effect of forex shortage is a devaluation of the indigenous currency due to the high demand for forex. When there is more demand for forex with little inflows, the value of the currency falls drastically. This further results in a higher inflation rate as the currency will lose its buying power in the market.
In this same vein, Forex Shortage is known to slow down national development. Thus, the incidence of forex shortage is evidence that investors are no longer confident about the country’s economy and hence they are moving out to invest in other foreign economies. This slows down growth and development within the country.
Above all, a forex shortage will always impact negatively on the country’s GDP over time. A country with a high forex shortage during a particular quarter will likely have a negative GDP at the end of the economic year.
What are the major causes of forex shortage?
A lot of factors could lead to a forex shortage within the country. The first important factor is whether the country is largely dependent on imports. When the importation rate is high it increases the demand for forex thereby resulting in a forex shortage.
Another factor that could lead to forex scarcity is the production rate within the country. When the country is productive, then less demand will be made for forex. It will further increase the demand for its indigenous currency too.
Furthermore, another important factor that could lead to a forex shortage is the interest rate. Investors are often attracted to countries with higher interest rates. Hence, many convert their indigenous currency into such currency resulting in a forex shortage.
Finally, the central bank policies as well as government fiscal policies could scar investors from the country resulting in a forex shortage.