Tanzania to feel pinch of US monetary policy

Dar es Salaam. Economic experts have expressed worries over the US decision to tighten its monetary policy, saying the move will accelerate shortages of dollar and put more pressure on the exchange rates with other currencies.

The US Federal Reserve raised its benchmark lending rate on Wednesday by 0.25 percentage points to the highest level since 2001 to tackle above-target inflation, and signaled it could hike again later this year amid improving economic prospects.

"So we intend, again, to keep policy restrictive until we're confident that inflation is coming down sustainably toward our two percent target -- and we're prepared to further tighten if that is appropriate," Fed Chair Jerome Powell told reporters.

The increase, after a brief pause in June, brings the Fed's key lending rate to a range between 5.25 percent and 5.5 percent.

Experts say the move will attract more investments to the US while Tanzania, like the rest of the world, will continue to face shortages of the widely traded currency.

Tanzania is already hit by the shortages of the US dollar supply and recently, oil importers raised the alarm over the same issue.

“This move will cause a huge shortage of the greenback and affect economies, including Tanzania, that depends on imports in a majority of its productive goods like machineries that need forex and cooking oil that has a very huge bill. That will derail development activities,” said Prof Abel Kinyondo who is expert in development economics, at the University of Dar es Salaam (UDSM).

He said the best way to deal with such a situation was to increase domestic production because the more the country imports the more demand for the dollar, a move that causes the shilling to depreciate against the dollar.

“The government needs to beef up its domestic production by reviving its domestic industries for clothes and cooking oil that will use local raw materials because Tanzania is endowed with crops like cotton, sunflower, groundnuts, among others, that will reduce the dependency on dollar for imports,” he said.

He noted that the country has gas reserves which should be rolled out and used in local vehicles and reduce dependency on imported fuel.

UDSM senior lecturer and head of the Department of Finance, Tobias Swai said the rise in interest is aimed to make more demand for dollars and therefore will create more dollar shortage.

“This will make US dollar strong and weaken other currencies including the shilling,” he said.

Forex trading expert, Christopher Makombe said higher interest in the US will have impact on developing countries as cost for servicing debts will increase, thus negatively affect debt sustainability.

He explained further that countries looking to raise finances via Eurobonds in international markets will be charged with higher interest rates as market respond to Federal Reserve decision.

“Higher interest rates may also negatively impact future economic growth as businesses will have to reduce borrowing,” he said.

BoT allays fears

The Bank of Tanzania (BoT) governor, Emmanuel Tutuba said it’s prepared to handle the situation by mobilising more foreign currencies using different approaches including loans, swaps, exports of goods and services, tourism, remittances and profits or individuals from foreign investments.

“This is not the first time because US has been tightening monetary policy for more than a year now.

“We continue to intervene the market where necessary by monitoring exports to enable all US dollars are deposited in the country,” he said.

He said the central bank started purchasing gold and has set aside funds to support export promotion projects and import substitution initiatives via Export Credit Guarantee Scheme which will be implemented through commercial banks.

Capital outflow

Other experts expects the capital to flow to the US where the interest is high.

“When interest rates rise in the United States, it becomes more attractive for investors to invest their money in the US assets such as bonds and stocks, seeking higher returns,” said the head of research and analytics from Alpha Capital, Mr Imani Muhingo

“The impact may come slowly but because of its influence in the global economy, the US monetary changes may affect exchange rates and eventual prices especially from commodities traded in international markets such as oil,” said Dr Lutengano Mwinuka of the University of Dodoma.

(Additional reporting by Josephine Christopher)