ECONOMICS MADE SIMPLE : Selected reflections on dollarisation of economies

Dollarisation of various economies has been observed over years and has been a matter of concern. Among other things in December 2017, President John Magufuli directed the Bank of Tanzania (BoT) to address this challenge.

A year after the President’s directive, this article dwells on some reflections on dollarisation of economies in general and in Tanzanian context in particular.

Understanding dollarisation

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. They include in price tags in markets in form of having prices tagged in USD instead of being tagged in the local currency of the country in question.

The second variant of dollarisation is having prices tagged in both USD and in local currencies.

Is it Legal in Tanzania?

Sellers of goods and services may demand that buyers settle their transactions in USD 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 dollarisation globally

dollarisation is an international economic, business, political and social issue that is 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 USD and in Argentina the Peso did the same.

It has also been in action in the former Soviet States. In Africa, dollarization has been seen in relation to the Zimbabwean Dollar, Zambia Kwacha, Southern Sudan’s Pound and Tanzanian Shilling among others.

Extent in Tanzania

In Tanzania dollarisation is seen in dollar price-tagged air tickets even for some domestic flights; hotel services and various fees even those payable to the government.

Dollarisation is also vivid 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.

Reasons for dollarisation

There is a somewhat long litany of reasons behind dollarisation in Tanzanian-type economies.

The kernel of the matter is weak and depreciating local currency. Depreciation of the Shilling is mainly attributed to shortfall in supply side of the USD in relation to the demand for the same.

Depreciation leads to loss of faith and confidence by users in the Shilling. Because the economic agents are rational, they protect the value of their assets by storing them in form of the greenback which is among the world’s reserve and vehicle currencies.

Effects of dollarisation

Dollarisation can be partly understood when wearing the shoes of the captains and titans of the industry. They decide to dollarize to protect the value of their businesses especially when engaged in import business. However, dollarisation is not acceptable when thinking of a country’s currency sovereignty, dignity, pride and economic independence. It is a huge challenge and delicate balancing act in the non-linear and dynamic equations of broader economic policy planning and implementation.

Specifically, dollarisation is a big challenge in implementing and managing a country’s monetary policy. To those forced to transact in a dollarised economy, it is among the last choices they would have made had there been options.

Fixing it

The burden of fixing what is broken in dollarisation space 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.