RUCCI
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- Oct 6, 2011
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The shilling has tumbled to a record low, with analysts and dealers predicting a freefall that could see the local currency trade at an average of Sh2,000 against the dollar during the campaign period.
The shilling weakened further this week, trading at Sh1,900 to the dollar--down from Sh1,820 recorded last month.
Following the freefall, Bloomberg newswire named the Tanzania shilling the second-worst performer against the dollar after Nigeria's naira.
According to a survey by The Citizen, the shilling has in the past five days traded at between Sh1,835 and Sh1,900 against the dollar, casting a bleak shadow on a country that relies heavily on imports to drive the economy. Though the weak shilling is a blessing for exporters, it is a big blow for a country that imports virtually everything.
Random surveys show that currency dealers, including commercial banks and the bureaux de change, are exchanging the dollar for Sh1,835 to Sh1,900 in the wake of rising demand from importers of oil in particular.
The shilling was trading at Sh1,550 to Sh1,660 in January last year but dropped to Sh1,900 at the beginning of this month. Between January last year and February this year, the shilling has lost its value against the dollar by 17 percent--the highest in two decades.
But the reasons dealers give for this state of affairs leave in limbo the man on the street, whose livelihood will be deeply affected by the weakening shilling.
To curb the impact of the tumbling shilling, importers always pass the burden to the final user--the man/woman on the street.
This means prices will surge dramatically this year as importers seek to rein in losses resulting from the weak shilling.
What dealers, analysts say
December-February is the tourism low season while imports come at high cost. "The local currency will obviously fall," says Mr Hamis Mwakibete, head of trading at the Commercial Bank of Africa.
Tourism is Tanzania's largest foreign exchange earner and brought in $1.95 billion last year, according to a Bank of Tanzania (BoT) report. In reality, though, half of the billions from the tourism sector do not come to the country as major tour operators market and sell their package globally.
It is the same situation with gold, which is one of Tanzania's top exports. It is mined and processed here but sold on the global market, which means only a small fraction of the sales returns to the country.
Global trend, local impacts
According to Mr Mwakibete, the general fall of the shilling is the result of global gains for the dollar that have been stimulated by the economic growth in the US. "The best way to make the local currency strong in the long run is increasing production for exports," he said. "We import too many things, including food and oil, and export less."
The shilling stabilised last week as the Bank of Tanzania reportedly intervened amid slowdown of oil importers. But the BoT says the sale of dollars witnessed in the past few days is normal intervention in the market by the Central Bank that is aimed at managing liquidity in the economy.
"Our foreign exchange policy is built on the foundation that the value of the shilling is market determined," said Dr Joseph Masawe, BoT's director of economic research and policy.
"The Bank participates in the foreign exchange market for liquidity management purposes to build foreign exchange reserves and smooth out short term volatility in the exchange, which is inconsistent with economic fundamentals."
He stresses that the recent depreciation of the shilling has been driven by external factors, including the strengthening of the US dollar against all major currencies, including other East African currencies, and a decline in global market prices of major traditional exports. "Given that these shocks originate from the supply side," Dr Masawe explained, "it is unlikely that Central Bank intervention will solve the problem."
Tanzania exports traditional products such as tobacco, coffee, cotton, cashew nuts, tea, cloves and sisal--whose export value declined by 10.8 per cent to $791.7 million in the year ending December 2014, driven by a decrease in both export volume and prices on the world market, according to BoT.
Given the supply-demand trend, experts believe the local currency will tumble some more this year. "There is a lot of importation of machinery and equipment used in the oil and gas exploration," said Dr Honest Ngowi, a senior lecturer in economics at the Dar es Salaam-based business school of Mzumbe University. "I would not be surprised to see a dollar sold at Sh2,000 towards the end of this year."
And with 2015 an election year, importing of election and campaign materials is likely to fuel more demand for the dollar. The fall of the shilling has also affected the magnitude of fuel prices even as the cost of oil dipped on the world market.
While petrol, diesel and kerosene dropped by 44 per cent, 35 per cent and 35 per cent on the world market between July and December 2014, the shilling weakened by about six per cent, according to the Energy and Water Utilities Regulatory Authority (Ewura).
Source:The Citizen
