The Fall of Tanzania Currency has consequences to the Tanzanian Business Community and Entrepreneurs ??

The value of the Tanzania shilling has been experiencing a persistent decline against the value of the US dollar in recent months. The slide downward in the value of the Tanzania shilling against the US dollar which is our trading currency has caused a debate as to whether what is happening should be     allowed to continue.

The Governor of the Bank of Tanzania in particular is reported to have said that  the drop of gold price in the world market, donors withholding aid funds and business loans are to blame for the fall of shilling against the US dollar. He also added that the US dollar’s strengthening was another factor which saw not only the shilling tumbling, but other currencies around the world as well. On the other hand, some members of the business community(Entrepreneurs) are reported to have argued that what is happening to the Tanzania shilling is harmful to the economy. 

Hence,there have been two blocks of businessmen/entrepreneurs,of those who supports the fall of Tanzania Shilling as a beneficial point of view and those who are seen it as is harmful to the economy.

The main argument of the Entrepreneurs who are Supporting the decline in the value of the Tanzania shilling against the US dollar ; is that Tanzania exports is cheaper in the foreign markets. In simple terms a weaker Tanzania shilling promotes our exports. It does so in two senses.

  v   In the first sense foreigners will find that our exports are getting cheaper with the decline in the value of our shilling. This means that they will be paying fewer dollars after the fall of the value of the shilling than before the fall of the value of the shilling for the same quantity. Under such a situation foreigners are supposed to be encouraged to buy more of our exports. If this happens we are supposed to export more and earn more dollars.

  v   In the second sense, the fall in the value of our shilling promotes exports in that it encourages more domestic production of exportable goods. A domestic producer of exportable goods will be earning more Tanzania shillings after the fall of the value of the shilling than before for the same amount of exportable goods. The domestic producer of exportable goods is assumed to be able to increase the production of the exportable goods. This is supposed to happen because of the price incentive. The prices of the exportable goods per unit will be higher after the fall of the shilling than before. Why? Because the same dollar price per unit will earn more Tanzania shillings after the fall of the shilling. The Tanzania producer of exportable goods will definitely want to take advantage of good prices and will increase production of exportable goods. This will be very good for the Tanzania economy.
While in theory things look very good for domestic producers of exportable goods what happens to domestic consumers of imported goods?

The main argument of the Entrepreneurs who are against the decline in the value of the Tanzania shilling against the US dollar, is the domestic consumers of imported goods will have to pay more in shillings for the same quantity of imported goods after the fall of the value of the shilling than before. This is what caused some members of the business community to argue that the fall of the Tanzania shilling is not beneficial to the economy.

  v   With the fall of the Tanzania shilling prices of machinery and other equipment that are necessary for industrial production will go up. Ultimately the prices of the goods that will be produced by using imported machinery will have to go up. We might end up with cost push inflation. Certainly that will not be good for the economy. Inflation will hurt badly the poor who will have to consume the products that will be made using imported machinery.

  v   Imported consumer goods will be affected directly. Prices of imported consumer goods will go up after the fall of the value of the shilling. Domestic consumers of imported consumer goods will have to pay more per unit in shillings after the fall of the value of the shilling. If these domestic consumers of imported goods happen to be poor people they will definitely be hurt. Thus we find that while potential benefits seem to be substantial for the domestic producers of exportable goods there are no benefits for domestic consumers of imported goods. So what can we say about he two sides of the debate on the fall of the value of the shilling? Both sides seem to be wrong and right at the same time?!.

An exchange rate policy when deliberately put in place is expected to achieve one overall objective – to correct balance of payments imbalance. This objective is achieved by doing two things. It discourages imports and encourages exports. It discourages imports by making them expensive in local currency. According to market principles domestic consumers are supposed to naturally avoid consuming imported goods. The reaction to imported goods is expected to be natural in the sense that imported goods will be more expensive after the fall of the value of the shilling and therefore beyond the price reach for the majority of the people. Importers will find that there is no market for their imported goods and they will stop importing them. Thus the outflow of dollars will be reduced and foreign exchange will be saved.
The problem that arises is what happens in the case of essential goods like drugs that are not produced in the country? What happens in the case of industrial machinery and other equipment that are necessary to boost the productive capacity of the economy? In all probability they will have to be imported at those high prices in Tanzania shillings. A developing country like Tanzania faces such a challenge when invoking the exchange rate policy in order to deal with the balance of payments imbalance. So the Entrepreneurs who argued against the fall of the value of the shilling have probably a point.

An exchange rate policy encourages exports by making exports cheaper in foreign markets in dollar terms and by making domestic production of exportable goods more profitable in shilling terms. Again according to market principles foreign importers of our goods will find them cheaper than before and will naturally buy more of our cheaper products. Domestic producers of exportable goods will find production of exportable goods more profitable and therefore will produce more. More domestically produced goods will be exported and more dollars will be earned. That will be very good for the economy.

This rosy scenario is not without shortcomings though. Our products may indeed be cheaper in the foreign markets but what happens if we cannot expand our productive capacity in order to meet the increase in demand? We will definitely not be able to increase our dollar earnings. Moreover, most of the producers of exportable goods particularly from the agriculture sector are small scale farmers. They have no direct link with the export markets. How will they profit from the increase in prices in shilling terms? The middlemen who buy agricultural crops from the small scale farmers for export will likely benefit from the increase in prices in shilling terms. Where will the incentive for small scale farmers to produce more come from? These are the challenges facing our policy makers with regard to the use of the exchange rate policy in tackling the balance of payments imbalance.