Tanzania: Reasons for Prolonged Use of Dollar in Tz Is an Inadequate Approach

As an expert and economist, I have chosen to take this opportunity to discuss the effects of using the dollar as a currency to pay for various goods and services in the country, since the Central Bank of Tanzania’s banned their use has begun to spark a discussion among users.

Given that this restriction and observation are not new, the time has come to consider why the first observation, which was issued in August 2007, the second in December 2017 and the third on June 20, 2023, all have every indication of violating the central bank law of 2006?

For Tanzanians to understand one another and if possible, assist the central bank team in better understanding the effects so that they can design the proper way to do it, users should not continue to violate the 2006 law, I want to be clear that it is not my intention to point the finger at any individual or institution. Rather, it is a way of attempting to show the effects of using the dollar.

Increased difficulty for monetary authorities to use monetary policy to stabilise the economy is one of the many potential effects of the dollarisation of the economy. Other potential effects involve the potential for destabilising effects on the economy through exchange rate depreciation or, in a fixed exchange rate regime, a run on the nation’s foreign exchange reserves.

Although it does not appear that the degree of dollarisation in Tanzania has reached massive proportions, it is substantial and needs to be factored into the formulation of economic policy what is going on needs serious action to ensure we don’t dollarize our economy from encouraging full dollarisation to intervening directly to discourage any dollarisation.

This is critical because the obvious solution to dollarisation is to maintain low inflation so that the incentive to use foreign exchange is reduced for things that are unnecessary and not beneficial to the overall economy. Apart from trying to maintain fiscal discipline the government should monitor closely the level of dollarisation through incentives that will discourage the usage.

Currency substitution, also known as dollarisation, has a number of negative effects on the economy, especially on the government’s ability to control it. The process of dollarisation, which involves converting domestic currency into foreign currency, could cause the economy to become unstable in the short term. For example, it frequently results in a decline in the currency rate or, in the case of a fixed exchange rate regime, a run on the nation’s foreign exchange reserves. This could lead to a liquidity crisis and an increase in domestic interest rates, which could have a recessionary impact on economic output and employment creation opportunities.

There are further long-term effects if a certain amount of dollarisation has taken place. One of these effects is a reduction in the government’s capacity to seize power over resources through non-inflationary seigniorage, or the running of a non-inflationary deficit that raises the amount of money available in proportion to the rise in demand for it.

Two, it restricts the government’s ability to levy an inflation tax as a result of a deficit that exceeds the level of public support for extra cash reserves or lending to the government to cover the deficit and this ultimately makes it harder for the monetary authority to utilise monetary policy to stabilise the economy. Three, this situation will unquestionably raise the likelihood that the government will intervene to stop dollarisation by banning foreign exchange accounts and taking other necessary actions that if not thought through properly could make financial markets less efficient.

The implication of not being able to raise enough taxes will mean the following. One, the government will run into a fiscal deficit, which means it will finance its expenditure through an increase in the money supply. In this case, if GDP is expanding and the desire of the public to hold real money balances is constant in relation to GDP, there will be an increase in the public’s demand for money. If the growth of the money supply in this case will not exceed the increase in demand for it, the fiscal deficit will not be inflationary, because the government will benefit from an excess of expenditures over revenue.