Shilling falls, prices rise: the Tanzanian currency is depreciating inexorably, weakening against all its major trading partners. Can Tanzania get to grips with its underlying economic problems? Herald Tagama reports.

Author:Tagama, Herald
Position:Tanzania

Tanzania's Central Bank--The Bank of Tanzania (BoT)--reported that in October 2003 the country's export earnings amounted to just $122.4m while imports declined to $202.6m, down from $216.2m the previous month. That meant government revenue, from import tax, of Tsh47.4bn fell from the projected Tsh49.8bn anticipated. In September, revenue from import taxes was Tsh50.6bn, appreciably higher than the Tsh45.2bn forecasted.

However, this figure does not indicate a higher level of imports--it only demonstrates the falling value of the Tanzania shilling. An African Business survey of various bureaux de change in the country's commercial capital, Dar es Salaam, shows that the local currency has depreciated by at least 4% against the US dollar in the last three months alone, despite the dollars' fall in value against all major world currencies.

The British pound sterling, for example, was valued at around Tsh2,060 in early February 2004, up from a value of Tsh1,750 last December. The Euro's value has shown a similar appreciation. Even against regional currencies such as the Kenya shilling, the Tanzania shilling has experienced a period of weakness.

Bureaux owners attribute the Tanzania shilling depreciation to the high demand for foreign currencies in the market. They blame the BoT for accumulating too much in terms of hard currencies, instead of releasing a sensible proportion of foreign currency, i.e. buying the Tanzania shilling, to support the local currency.

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Because importers are paying more Tanzania shillings for fewer US dollars, pounds, euros, rands or Kenya shillings, they are importing less. For its part, the BoT says it has increased foreign currency reserves to provide cover for about nine months of imports. However, many local economists believe a four-month reserve, which used to be the level of foreign currency reserves the bank employed, to be sufficient for any realistic contingency.

As the Tanzania shilling keeps depreciating, many commitments involving foreign exchange are being trimmed--but what really concerns local economists is that low export volumes and poor commodity prices on international markets will mean that Tanzania will continue to experience declining foreign exchange earnings.

Continuing reductions in import volumes will slash the government's revenues if import duty rates remain at the current levels. The dilemma is that raising import taxes will fuel domestic inflation.

However, Professor...

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