ECONOMICS MADE SIMPLE: Is dollarisation a necessary evil in Tanzania’s context?

Dollarisation of the Tanzanian economy has been observed over the years and should be a matter of concern and discourse. Dollarisation is an economic and business practice in which residents of a sovereign country with its own currency uses the United States of America’s dollar extensively in their daily transactions. Dollarisation can be seen in several forms.

The first one is in price tags of goods and services in the market. This is observed in form of having such prices tagged in the US dollar instead of being tagged in the local currency of the country in question. Local currencies can be Tanzania, Kenyan or Ugandan Shilling, Zambian Kwacha or Norwegian Kronor as the case may be. The second variant of dollarisation is having prices tagged in both the US dollar and in local currency.

Legality of dollarisation

Sellers of goods and services may demand that buyers settle their transactions in the US dollar or be at liberty to do so with the local currency at the sellers’ predetermined exchange rate. In some countries, including some in Latin America, dollarisation is formal.

In this case, the two modes of settling transactions as outlined above are legal. Where dollarisation is informal as in the case of Tanzania, the former mode of settlement is illegal and the latter is legal. As it will be clarified in the impacts of dollarisation elsewhere in this article, dollarisation is an economic problem.

Extent of the problem

Dollarisation is an international economic, political and social issue spread across geography and time. It has been seen in some Latin American countries, including Panama since 1904. Panama’s currency (Sucre) was officially replaced by the US dollar and in Argentina the Peso did the same. It has also been in action in the former Soviet States.

In Africa, dollarisation has been seen in relation to the Zimbabwean Dollar, Zambia Kwacha, Southern Sudan’s Pound and Tanzanian Shilling, inter alia.

In Tanzania, dollarisation is seen in many forms. These include dollar price-tagged air tickets even for some domestic flights, hotel services especially accommodation, various fees, including school fees, consultancy and other service fees and even fees payable to various government ministries, departments and agencies (MDAs).

Another area in which dollarisation is vivid in Tanzania is in the real estate industry including plots, farms and houses. It has also been observed in some airport shops, some sections of some supermarkets and similar business outfits.

Why dollarisation

There is a somewhat long litany of reasons for dollarisation in Tanzania’s type of economy. The kernel of the matter is weak and depreciating local currency. In the case of Tanzanian, the local currency has lost value over time. For example, it has depreciated from $1 to about Sh1,540 in the third week of August 2010 to about Sh2,200 for a greenback in November 2016.

This is a depreciation of about 42.9 per cent for six years or 7.1 per cent annual depreciation, which translates into 0.2 per cent monthly depreciation of the local currency. Depreciation of the Tanzanian Shilling is mainly attributed to shortfall in supply side of the greenback in relation to the demand for the same. The depreciation leads to, inter alia, loss of faith in the local currency. Because the economic agents are rational and ‘homoeconomicus’, they protect the value of their assets by storing them in form of the US dollar, which is among the world’s reserve and vehicle currencies.

Dollarisation as bad economics

Dollarisation of the economy has many and far-reaching direct and indirect, short-term and long-term negative impacts for Tanzania’s type of economy. Dollarisation can be partly understood, when wearing the shoes of captains and captains of the industry.

They decide to dollarise to protect the value of their businesses especially, when engaged in import businesses. However, dollarisation is not acceptable, when thinking of a country’s currency sovereignty, dignity, pride and economic independence.

It is a huge challenge and a delicate balancing act in the non-linear and dynamic equations of broader economic policy planning and implementation. Specifically, dollarisation is a big challenge implementing and managing a country’s monetary policy using various monetary policy instruments. To those forced to transact in a dollarised economy, it is among the last choices they would have made had there been options.

Fixing dollarisation

Dollaralisation is not desirable in the Tanzanian type of economy. However, it seems to be a necessary evil given its causes. This does not imply that it should be accepted. It has to be fixed.

The burden of fixing what is broken in the context of dollarisation lies in many shoulders. These include the shoulders of the government as well as those of titans and captains of the industry.

These are supposed to be the economy’s movers and shakers in general and in generating foreign currency that would keep dollarisation at bay in particular.

Whereas the private sector has the role to increase exports, foreign investors, tourists, development partners and diasporeans have the role to bring in foreign currency that will strengthen the local currency and make dollarisation irrelevant. The government has the role of ensuring friendly policy, legal and regulatory frameworks for each of the above groups to play their roles.

The author is professor, researcher and consultant of economics and business at Mzumbe University Dar es Salaam Business School.