Dar es Salaam: In the recent past, we have observed a number of changes in Tanzania that should be troubling and disturbing anyone who cares about the economic and business development of this poor republic. Among these is the issue of dollarisation of the Tanzanian economy.
Dollarisation is an economic and business practice in which residents of a sovereign country with its own currency use the US dollar in their daily transactions. Dollarisation can be seen in several forms. The first one is in price tags of goods and services on the market. This is observed in the form of having such prices tagged (marked) in dollars instead of the local currency of the country in question. Examples are the Tanzania shilling, Kenya shilling, Zambia kwacha or Norwegian kronor as the case may be.
The second variant of dollarization is having prices tagged in both dollars and in local currency. Sellers may demand that buyers settle their transactions in dollars or be at liberty to do so with the local currency at the sellers’ predetermined exchange rate. Where dollarisation is formal - as in some Latin American countries - the two modes of carrying out transactions as outlined above are legal. Where dollarization is informal, as in Tanzania, the former mode of settlement is illegal and the latter legal. As it will be clarified on the impact of dollarisation elsewhere in this article, dollarization is an economic problem. Extent of the problem - selected pieces of evidence Dollarization is an international economic, political and social issue spread across geography and time.
It has been seen some Latin American countries, including Panama since 1904 where its currency (sucre) was officially replaced by the US dollar and in Argentina where the peso did the same. It has also been in action in the former Soviet States. In this part of the world (Africa), dollarization has been seen in relation to the Zimbabwe dollar, Zambia kwacha, Southern Sudan pound and Tanzania shilling, inter alia. In Tanzania dollarization is seen in many forms - including dollar price-tagged air tickets even for domestic flights; hotel services, especially accommodation; various fees, including school fees, those for consultancy and other services. Arguably these include fees payable to various government ministries, departments and agencies (MDAs).
Another area in which dollarization is vivid in Tanzania is in the real estate industry, including plots, prices of farms and houses as well as house rents. In the interest of evidence and research-based discourse, the author of this article conducted a small, simple, innovative, important and informative research in August 2010. He made a rapid survey of the extent of dollarization in the real estate industry in Tanzania. He analyzed some real estate business announcements published in the Daily News on Saturday, August 14, 2010. Under the advertisement categories ‘Plots/farms and premises’ of the newspaper, the author identified - through a head count - a total of 56 announcements.
Out of all of them, only 29 or 51.8 per cent had price tags on them. Out of these, a total of 21 or 72.4 per cent were dollarized in that the prices were in dollars. Only eight or 27.6 per cent of the announcements were priced in local currency. This is by no way a representative sample of the total population from which one can study dollarization. However, it is a strong piece of quantitative evidence that dollarization is real in Tanzania. The author’s prophesy is that a similar survey in ‘large/tourist’ hotels and apartments, travel agents/airlines, international schools, consultancy firms, airport shops and similar business outfits would give more or less similar results. Researchers are challenged and welcome to take this research into higher and newer levels, expand it across sectors, geography and time. There are many closely interlinked causes of dollarization There is a somewhat long litany behind dollarization in an economy like Tanzania’s.
The crux of the matter is the weak and rapidly depreciating Tanzanian shilling. In an absolutely short period the shilling has lost value from one dollar to Sh1200 to the current (third week of August 2010) rate of one dollar to about Sh1540. In the author’s other article 'The economics of the free-falling shilling' and his book on 'International Trade Finance - 2006, the depreciation of the shilling is mainly attributed to a shortfall in the supply of the greenback in relation to the demand for the same. The depreciation leads to loss of faith in the Tanzania shilling. Because the economic agents are rational and ‘homoeconomicus’, they protect the value of their assets by storing them in the form of the dollar which is the world’s reserve and vehicle currency.
This is despite the fact that it may be changed in the new normal, ever unfolding from the impacts of the current global financial and economic crisis. Dollarization has many far-reaching impacts Dollarisation of the economy has many and far-reaching direct and indirect, short term and long term negative impacts on an economy like Tanzania’s. Although dollarisation can be partly understood when wearing the shoes of the captains of the industry who decide to dollarize, it is not acceptable when thinking of a country’s currency sovereignty, dignity, pride and economic independence and emancipation.
It is a huge challenge and delicate balancing act in the none-liner equations of broader economic policy planning and implementation, but especially so in the monetary policy and its instruments part of it. To those forced to transact in a dollarized economy, it is among the last choices they would have made had there been options. Solution is with the government and captains and titans of the industry The burden and solutions lie on the shoulders of the government as well as on those of titans and captains of the industry who are supposed to be the industry’s movers and shakers.
They are supposed to be moving and shaking major economic and business magnitudes including, but not limited to, foreign exchange movements through their different roles of increasing the supply of dollars in the economy and reducing the demand of the same.
* The author, Honest Ngowi, is a senior lecturer, researcher and consultant in Economics and Business, Mzumbe University Dar es Salaam Business School firstname.lastname@example.org