You can only have a shortage if you’ve fixed prices

Well done to The Guardian for telling us about the problems in Malawi without telling us the reason for the problems in Malawi:

‘This petrol station is my home now’: Malawi’s fuel crisis forces desperate drivers to queue for days

Shortages caused by the country’s lack of hard currency have escalated into a national emergency, with drivers waiting for a fuel tanker that may never arrive

People waiting for days for a fuel tanker that never does arrive. Clearly, non-optimal. The reason, in the first instance, is as described. The country does not have enough foreign exchange to pay for deliveries of fuel therefore there are few to no deliveries of fuel into the country. Distinctly non-optimal.

But you can only have a shortage of foreign exchange if you’ve tried to fix the price of foreign exchange. Which is indeed what Malawi has done. The official rate is some 1,750 kwacha per US dollar. The varied unofficial - for which read illegal or black market - rates converge upon 4,000. The government has decided that the kwacha should have a nice high price and others don’t like that nice high price therefore they do not buy kwacha. As the foreign currency that others use to buy kwacha is the FX then used to buy imports like oil products it is this high price of the kwacha causing the lack of foreign exchange and thus oil products.

The whole thing is the result of price fixing. Therefore do not fix prices and the problem will disappear. A truly floating exchange rate will be lower than 1,750 but almost certainly higher than 4,000. Which will mean that petrol and other imports become more expensive when denominated in kwacha, most certainly they will. On the other hand there will not be week-long queues to try to fill up the minibus.

You can only have a shortage of foreign exchange if you’ve tried to fix, set, the currency price. Therefore do not fix, set, the currency price and you will not have a shortage of foreign exchange.

Simples.

Tim Worstall