Tuesday, March 29, 2011

The Dollar Shortage

It has been widely recognized that Maldives is facing a 'shortage' of US Dollars. The official pegged rate of MVR 12.85 to the dollar has been there for quite a while. However, it has become very difficult to buy USD for 12.85 anymore, atleast in significant quantities (if you call 500 dollars significant).

Ordinary citizens have to queue at BML to obtain USD at $100 per person per day (at $1 or $10 denominations). This is in no way adequate for most people. Ofcourse, there is a different class of people who do get thousands in $100 denominations from the same bank. The only alternative to ordinary people and businesses is to find another seller. Sure we could get USD for 12.85, but usually the going rate is 13 or even above 14 rf for the dollar.

Now the government has started cracking down on people who sell US Dollars at a rate higher than MVR 12.85. Unfortunately, this will result in even more shortage of dollars and will affect the ordinary people most. Government is shutting down the only other avenue available for ordinary people to get USD. Those who have good connections can get plenty even now.

As I mentioned in an earlier post, shortages are created precisely by price fixing. No harsh penalties or crackdowns can fundamentally solve the problem. People go to blackmarket and buy at high prices not because they like it, but because thats their only choice.

If the argument is that there is enough dollars, and that the resort owners are hoarding it, then what makes sure that they will sell even now? How is government going to force them to sell at 12.85? How does penalizing ordinary people engaging in voluntary trade help to solve the problem at all?

Even worse, from what I hear, it will become illegal to trade foreign currency if you are not licensed. This means I cannot sell say $200 to a friend of mine even at 12.85! How ridiculous is that? Isn't that curtailing economic freedom?