Tanzania: The economy is highly dollarised, say economists

Dar es Salaam. The use of dollars is higher in Tanzania than in Kenya, a report says. According to the report by the International Growth Centre, the percentage share of Tanzania’s bank deposits that are denominated in US dollars is higher than that of Kenya despite the latter being the biggest economy in the East African Community.

Kenya’s financial sector is also the most developed one in the region.According to the report, Tanzania is highly dollarised, meaning the US currency is widely used parallel to or instead of the shilling.

Foreign currency deposits in December 2009 were about 30 per cent of total bank deposits and the ratio of foreign currency deposits to broad money was 25 per cent. Kenya held less than 15 per cent of bank deposits in foreign currencies and the ratio of foreign currencies to broad money was 13 per cent.

In the report titled ‘Dollarisation in Tanzania: Empirical Evidence and Cross-Country Experience’, the centre urges Tanzania to limit the use of the foreign currency as a medium of exchange for goods and services in its economy.
“A more direct intervention would be for authorities to impose a regulation that requires that only the Tanzania shilling used as a medium of exchange in domestic transactions,” the report noted.

Financial gurus say the dollar is widely used in Tanzania partly because many public and policy makers focus on increasing the volume of money paid to them instead of raising the shilling value.

“This is not a good thing at all since it has a direct link to inflation,” warned Dr Elisante ole Gabriel, a marketing lecturer with Mzumbe University. “The country should concentrate on the maximum use of economic activities requiring less inputs such as tourism and recreation to raise the shilling value.”

However, Tanzania’s ratio of foreign currency deposits to total deposits declined from 39 per cent in July 2007 to about 30 per cent in December 2009.In Kenya, the ratio of dollar deposits to total deposits has generally been stable (in the range of 10 to 15 percent) throughout the sample period.

In Burundi, the ratio of dollar deposits has been somewhat volatile and rapidly rising.The trend however, was reversed in July 2008 presumably due to the impact of global financial crisis, only recently, has the ratio started to rise again.

However, the report says policy measures should generally aim to enhance the attractiveness of Tanzanian currency rather than seeking to outlaw the use of foreign currencies, but a minimum amount of direct intervention such as instituting certain laws may also be warranted.

Measures to improve the attractiveness of the domestic currency, in addition to maintaining stable exchange rate, could include increasing the denomination of Tanzanian banknotes, it said.The largest denomination of Tanzanian shilling is currently the equivalent of about $7.5, which is the smallest in EAC.