Monday, May 4, 2015

How constant depreciation of Tanzania shilling hurts consumers

The exchange rate of the Tanzanian shilling against the US dollar has recorded a mixed trend since 2005, but on average it has been gradually depreciating at a rate of 3.9 percent per annum from December 2004 to January 2015. In 2005, the exchange rate of the shilling to one US dollar was 1,169 and by December 2014 the rate had changed to Sh. 1,716.  This means that, the shilling has depreciated by 31.9 percent against the US dollar for the period of 10 years, says an official of ten Ban k of Tanzania (BOT). BOT Director of Economy and Research Policy Dr. Joseph Massawe said this week in Dar es Salaam that, the trend translates to an average rate of depreciation of 4.2 per year since 2006. However, Dr. Massawe further noted that between July 2007 and October 2008, the shilling appreciated due to a change in monetary policy implementation strategy by the BOT which was reviewed to improve the mix of instruments used to manage liquidity.  Before 2007, the BOT relied more on government securities to manage liquidity, but before that, the BOT changed the strategy with a view to balance the use of government securities and foreign exchange an aspect that led to the supply of US dollars in the market and subsequently appreciation of the shilling. The depreciation of the shilling that began in the second half of 2014 has been caused by the strengthening of the US dollar because of the good performance of the US economy. Asked why shilling has been loosing value, Dr.Massawe noted that, the exchange rate in Tanzania is freely determined by the market forces a policy that was adopted as part of economic reforms in early 1990s with a view to prevent the value of the shilling from being misaligned with the real economic conditions. He further noted that, before this was adopted the shilling exchange rate was administratively by the government a practice that had led to severe shortage of foreign exchange in the 1980s. Cornered for comments over the matter, economists say there are many reasons why the Tanzania shilling has been depreciating relentlessly over the ten past years. 

Twin Towers of Central Bank of Tanzania in Dar es Salaam.

Economists who spoke to Guardian over the matter said that one of the main reasons for the depreciating national currency is an unfavorable balance of trade. Beginning with the proclamation of the Arusha Declaration on Socialism and Self-reliance in 1967, Tanzania has been importing goods valued more than the value of its exports down the years! “Generally, the depreciation implies that the country is importing a lot more than it is exporting,” said Adam Mwakangale a city based economist.  “This is dangerous for the economy, as some of our trading partners may in the foreseeable future refuse to accept the shilling if its fluctuation trend continues.” Another economist, Rebecca Thomas who works with Akiba Commercial Bank noted that, “what is happening in Tanzania today is that businessmen are importing almost everything for which they pay in US dollars. However, she continued noting that, inevitably, this translates into a high demand for foreign currency at the local markets an aspect that leads to inflation. A quick survey of the famous Kariakoo shopping area in Dar es Salaam showed that imported goods, ranging from sweets, toys, clothes, plastic bags and shoes to electronic goods, foodstuffs and construction materials dominated the domestic market at the expense of locally manufactured ones. According to statistics gathered by the Guardian mid this week from various Bureau De Changes located at the Dar es Salaam city centre shows that, the shilling was trading at between Sh. 1,870/- and Sh. 1,900/- against the US dollar, Analysts who spoke on condition of anonymity predict that if intervention isn’t done to save the ‘ailing shilling’ by the end of the year, there is likelihood to be traded at Sh. 2,000/- against the US dollar. Exchange rates take into account not only current inflation, but anticipated increases. Devaluation can also lead to inflation by forcing up the price locals would pay for imported goods. According to analysts, at the domestic market, it’s a pinch to all Tanzanians who at the end of the day bear the brunt of surging consumable food products prices caused by among other things, the weakening Shilling. The same trend is reflected in all other imported goods and raw materials, which are purchased using foreign currencies, mainly the US dollar. As the Shilling continues to depreciate, so does the purchasing power of millions of consumers, whose power to buy is dented by the skyrocketing retails prices at the local market.

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