This is why shilling remains stable

Dar es Salaam. The local currency has exhibited profound resilience against the United States dollar during the past two years, thanks to a drop in imports.

The local currency has been relatively stable against the greenback since it fell to a record level of Sh2,400 towards the end of June 2015.

But since the Bank of Tanzania (BoT) intervened and brought it down to manageable levels, it has remained quite stable, reaching Sh2213/2231 against the greenback in October 2015 when to the polls.

Two years later (October 2017), it remains with the Sh2240/2253 range. This suggests that on average, the Tanzania Shilling has fallen by a measly one per cent in two years, a very rare occurrence in a period of not less than ten years.

Analysts say the value has little for the country to celebrate at, considering that it comes as a result of a drop in economic activities by the private sector.

“Nothing explains this than the fact that there is a drop in economic activities across the country. Importers have cut on imports. With a drop in imports, demand for the greenback has gone down and that is what you see in the market,”

BoT explains

According to the BoT’s manager for research department, Dr Wilfred Mbowe, the drop in imports is basically a result of a shift from the use of oil in electricity production to one whereby the country now uses natural gas in power production.

This is also supported by the fact that major imports also on the decline.

“Demand for the dollar to import oil has gone down…similarly, demand for the dollar to be used in payment of certain services has also gone down while earning from tourism are on the increase,” Dr Mbowe told The Citizen on Friday.

BoT data show that major imports – including capital goods - have gone down during the past two years or so.

For instance, the value of capital goods importation dropped by 23.1 per cent during the year ending May 2017, with decreases being registered across all the three main categories, statistics show. A total of capital goods worth $2.886 billion was imported into the country during the year ending May 2017, down from $3.7 billion during the year ending May 2016.

The country registered decreases in all major categories of capital goods’ importation including transport equipment, building and construction materials and machineries.

Similarly, the value of imported intermediary good (oil, fertilizer and industrial raw materials) fell to $2.763 billion during the year ending May 2017 from $3.2 billion during the preceding year.

According to Dr Mbowe, a reduction in foreign trips by senior government officials has also reduced the demand for the vehicle currency.

As a result of the cost-cutting measures, coupled with an overall drop in various imports at a time when tourism earnings have been rising, the BoT held $5.021 billion in gross official reserves as of June 2017, a massive leap from the $3.87 billion at the end of June 2016.

Basically, BoT’s position has been that of intervening in the money market through tightening the monetary policy.

Analysts are of the view that a consistent drop in imports of goods that are used in industrial production locally may not help the country to attain its industrialisation goals.

“That may indicate a slowdown of investment especially in the industries,” Prof Honest Ngowi of Mzumbe University’s School of Business told The Citizen earlier this year.

“And if the trend is sustained, it raises a concern on the dream of industrialization which Tanzania has,” he said.

Tanzania eyes becoming a middle income country come 2025 but the fifth phase government wants to make it industrial economy by 2020.

Economist Prof Samuel Wangwe shared similar sentiments when he discussed the topic with The Citizen early this year. He said if declining imports of capital goods became a trend, then it could affect the economic growth.

“What the government can do now is to come out clearly and create confidence to the investors who might have been holding investment since the general election,” Prof Wangwe told The Citizen early this year.

Reported by Rosemary Mirondo and Tumsifu Sanga

WHY CAPITAL GOODS MATTER

Capital goods are tangible assets such as buildings, machinery, equipment, vehicles and tools that an organization uses to produce goods or services in order to produce consumer goods and goods for other businesses. Manufacturers of automobiles, aircraft, and machinery fall within the capital goods sector because their products are used by companies involved in manufacturing, shipping and providing other services. An increase in capital goods imports suggest that the economy is attracting more and more new investments that create jobs for its people. Conversely, a drop in importation of capital goods, in an economy that is not yet industrialised, means that the country is not attracting new investment project, suggesting that it (the economy) does not create new jobs.