Weak shilling: not so much of a losing game, BoT says
Written by YAKOBE CHIWAMBO
Friday, 14 October 2011 13:14
YAKOBE CHIWAMBO
THE continuing weakening of the Tanzania shilling against the US
dollar and other world currencies would be good news only if Tanzania
was a major exporter, economic and other experts affirm. In the event,
Tanzania imports far more in value terms t han it exports as a matter
of course – thereby being a loser not only at the international trade
level, but also in the money markets.
As to what should be done to avert a possible crisis, there are two
distinct schools of thought on that. One group is of the definitive
view that the central Bank of Tanzania (BoT) should intervene every
now and then, while another believes that BoT does not have the
capacity needed to make interventions particularly effective in the
obtaining circumstances.
This latter group calls instead for increased exports, a development
which would make it possible for Tanzania to take full advantage of
the relentlessly depreciation national currency by selling more abroad
– thus earning foreign exchange – than it imports, this latter
depleting the scarce foreign exchange the country comes by! Defending
their skepticism about the lack of capacity in redressing the
situation, the critics say that, even if BoT set out to intervene,
this would be a most ephemeral measure that would just as soon peter
out after a short period of time…
“If the BoT intervenes, it will not take long before it runs out of
the foreign currency needed in interventions, since the problem (of
the depreciating shilling) seems to be profound and continuing,” says
Hussein Kamote, the director of Research & Policy with the
Confederation of Tanzania Industries (CTI).
Kamote further states that we should all carefully examine the scope
of the problem with a view to coming out with strategies that are both
effective and lasting.
Speaking “strictly as an economist,” Kamote said, “Tanzania needs to
accept that there is no quick solution to the weakening shilling but,
instead, a number of things should be done to strengthen its economic
framework.
“Tanzania should ensure that it is widening its exports, since it is
through exports that the country can benefit from the weak currency,”
he explained.
Apart from increasing exports, Kamote also strongly proposed that
Tanzania should control – and even prohibit – some imports which
unnecessarily consume the country’s otherwise hard-earned foreign
currency as a way of conserving, increasing and stabilizing the
nation’s foreign currency reserves.
Tanzania continues to import all sorts of frivolous goods ranging from
confectioneries to plastic toys, dolls, bags and similar bric-a-brac
which are of little or no economic value, expending hard currency on
them!
Kamote also suggested that, as the major regulator of foreign exchange
bureaux, BoT should ensure that foreign exchange shops issue receipts
for all the transactions they conduct. This should make it that much
easier to restrain unnecessary conversion of shillings to dollars in
particular.
Indeed, the forex bureaux need to be made responsible and accountable
to remove artificial demand for the dollar. A Business Times survey a
fortnight back of some of the bureaux de change in Dar es Salaam
revealed that most of them continue to conduct transactions without
issuing receipts as a matter of course. This is despite the fact that
BoT regulations on forex bureaux operations unequivocally require that
receipts be issued for all exchange transactions.
The ‘interventionists’ argue that, since Tanzania is mainly an
importer rather than an exporter, the relentless weakening of the
shilling is doubtless a burden on ordinary Tanzanians, mainly low
income earners.
Therefore, they argue, there is a need for the central bank to
intervene by releasing some of the country’s forex reserves…
Mohamed Khalfan, a Zanzibar-based economist, said in an interview that
there is a need for the central bank to intervene so as to strengthen
the shilling – and, in a way, relieve common Tanzanians of the rising
cost of living.
“You can check with the central bank if they have the ability to
intervene, although I doubt this, because some of the factors leading
to the weakening of the shilling against the (US) dollar are
external,” said
Khalfan.
According to Khalfan, “some of the issues that lead to the continuing
weakening of the national currency against the dollar include (of
course) low level of exports; uncertainties in the euro-zone; fuel
prices in the world’s markets, and many more. Intervention can only be
effective in the short-term as, later the dollar would resume its trail!”
The US dollar was selling at around Tsh1,700+ at various bureaux de
change in Dar es Salaam this week.
The National Bureau of Statistics (NBS) indicated in a report that the
purchase value of the dollar went up by 16 per cent from September
2010 to September 2011.
What does the central bank say on all this?
According to the BoT, depreciation of the Tanzania shilling against
the US dollar that has been observed in the recent past has been
driven predominantly by factors outside the country’s control. First
the weak euro due to uncertainties surrounding the Greek debt crisis
has caused investors to flee from the euro to the US dollar.
Secondly, BoT says, there has been an increase in petrodollar private
funds seeking investments in the global financial market, the sheer
size of which could only be absorbed by financial assets denominated
in currencies backed by large economies like the US, Europe and Japan.
In the event, it turns out that the euro is less attractive right now
and, therefore, petrodollar investments remain firmly anchored in the
dollar.
“As a result, the demand for US dollars has increased across the
world, causing the dollar to strengthen against all major currencies –
with the
exception of the yen and the yuan. Between April 2011 and the first
week of October 2011, the euro and the pound sterling depreciated at
roughly the same rate against the US dollar – just like the Tanzania
shilling,” wrote Dr Joseph Massawe, the BoT director of Policy, in his
October 07 response to this paper.
While the price of one US dollar in Tanzania shillings on October 6,
2011 was 9.9 per cent higher than it was at the end of April 2011, it
was nonetheless 8.1 per cent higher in terms of the pound sterling;
10.4 per cent higher in terms of euro, and 10.9 per cent higher in
terms of the Indian rupee!
The situation was much worse in the case of other currencies. Measured
the same way, the price of one US dollar was 22.4 per cent higher in
terms of the Kenya shilling; 19.1 per cent higher in terms of the
Uganda shilling, and 20.6 per cent higher in terms of the South Africa
rand.
In other words, while the Tanzania shilling has depreciated against
the US dollar, it has all the same slightly appreciated against the
euro, the India rupee, the Kenya shilling, the Uganda shilling and the
South Africa rand!
Any hope of the shilling gaining against the $ soon?
Dr. Massawe underscores the fact that values of currencies against
each other in the markets move in cycles, and the US dollar is not an
exception.
“The US dollar should be expected to weaken for a while; but, for how
long, it is not easy to predict. As long as the confidence in the euro
remains weak, chances are that the US dollar will continue to be
strong,” he asserted.
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