What Is a Dollar Shortage?
The term dollar shortage is a situation that occurs when a country has a very low supply of U.S. dollars in its reserves needed to effectively conduct international trade. A dollar shortage happens when a country's net outflows of USD outweigh its net inflows. This can happen when it has to pay more USD for its imports than it receives for its exports or when its international dollar obligations are higher. Dollar shortages are measured in USD because of its status as the currency of the world's largest and strongest economy.
- A dollar shortage occurs when a country spends more U.S. dollars on imports or other international dollar obligations than it receives on exports or dollars from other international financial transactions.
- The term is derived from the fact that the USD is used to price many goods globally and is used in many international trade transactions
- A dollar shortage can limit a country's ability to grow or trade effectively.
- Shortages can also occur when one or more country imposes economic sanctions on another.
- Most countries try to maintain currency reserves to import goods, manage exchange rates, pay international debts, or make international transactions or investments.
How Dollar Shortages Work
A reserve currency is a large quantity of currency maintained by central banks and other major financial institutions to be used for investments, transactions, international debt obligations, or to influence their domestic exchange rate. Because the USD is the world’s most widely traded currency, many nations must hold assets in dollars to maintain a steadily growing economy and to trade effectively with other countries that use the currency.
Dollar shortages have a big impact on global trade. As the currency of the world’s largest economy, the USD acts as a peg for the value of many other currencies. Even when two countries other than the United States engage in foreign trade, the status of the dollar as a reserve currency (with a reputation for stability) makes it widely used for pricing assets. For example, oil is typically priced in USD, even if two countries engaged in an import/export oil deal don't use the USD as their domestic currency.
Shortages can often begin when countries become more isolated from others. This is especially true when they are the subject of economic sanctions by other nations. These and other political issues can impact international trade and reduce demand for exported goods in exchange for dollars.
Although the current global economy is not nearly as reliant on the United States for assistance, international organizations such as the International Monetary Fund (IMF) may assist nations facing dollar shortages.
The term dollar shortage was coined after World War II when the world’s economies were struggling to recover, yet stable currencies were in short supply. Part of the U.S.-sponsored Marshall Plan that began just after the war helped European countries rebuild their economies by providing enough USD to relieve that shortage.
Countries may accumulate USD in their reserves when their balance of trade (BOT) indicates they receive more dollars for exported goods compared to dollars spent on the goods imported. These countries are known as net exporters.
Countries are known as net importers when they do not accumulate sufficient dollars through their BOT. When the value of imported products and services is higher than the cost of those exported, a nation becomes a net importer. If a dollar shortage becomes too severe, a country may ask for assistance from other countries or international organizations to maintain liquidity and improve its economy.
Examples of Dollar Shortages
There are many examples of dollar shortages throughout recent history. The following are just a few examples of dollar shortages that have occurred in different countries.
Experts in Nigeria blamed a national dollar shortage for certain economic problems. In September 2022, the value of the Nigerian naira (NGN) dropped against the U.S. dollar. According to reports, demand for USD increased, pushing the national currency's value down. This was caused by a shortfall in dollar reserves.
Nigerian drugmaker Fidson Healthcare Plc blamed the dollar shortage for the high cost of raw materials needed to manufacture by the pharmaceutical industry. Bloomberg reported that companies like Fidson import virtually all of their raw materials. But because of the dollar shortage, the company could only access roughly "30% of its foreign currency requirements from the central bank" to fulfill its orders.
In 2017, Qatar suffered a dollar shortage when other Arab nations accused the country's banks of supporting blacklisted terrorist groups. Although the country already accumulated substantial financial reserves, it was forced to access more than $30 billion of those reserves to compensate for a net outflow of USD.
In another incident, a shortage of dollars in Sudan caused that nation’s currency to weaken between late 2017 and early 2018. The situation resulted in rapidly climbing prices. Bread prices doubled in a week, causing protests and riots in a country whose economy was already subject to disruption caused in part by new economic reform measures.
At the start of 2019, the situation hadn't improved, with the Sudanese pound (SDP) falling to record lows as people were willing to spend more and more SDP in order to buy the more stable USD.