DAR ES SALAAM: FINANCIAL dollarisation in Tanzania is declining to ease US dollar pressure on the shilling thanks to measures taken to improve the forex market and enhance foreign exchange inflows.
Last year’s ratio of foreign currency deposits to broad money (M3), a measure of financial dollarisation, slowed and remained below levels reached in 2021.
According to the central bank’s latest monetary report, the ratio throughout last year was between 21 and 23 per cent compared to 21 and 24 in 2021.
Since December 2020, the highest dollarisation was recorded in January 2021 at 24 per cent and the lowest in July 2022 at 21 per cent. Likewise, last year, the lowest dollarisation was slightly above 22 per cent in January and the highest was slightly above 23 per cent in November.
“The degree of dollarisation is expected to be subdued, owing to the measures taken to improve the forex market and enhance foreign exchange inflows complemented by the monetary policy stance,” the report said.
Bank of Tanzania (BoT) termed dollarisation as the share of foreign currency deposit to M3. Last year the holding of foreign currency deposits increased moderately by between 3.5 billion US dollars and 4.2 billion US dollars which was an all time high range from 3.0 billion US dollars to 3.6 billion US dollars between 2021 and 2022.
“This phenomenon reflects hedging behaviour against exchange rate depreciation and future forex requirements was observed through an increase in foreign currency deposits,” the BoT report said.
Meanwhile, the report showed that the external sector of the economy continued to experience challenges from global shocks, particularly geopolitical tension and tightening of mon etary policy in advanced economies.
However, owing to an increase in foreign exchange flows from tourism, traditional export crops particularly cashew nuts, coffee and tobacco gold and grants, the current account position narrowed to a deficit of 1,010.7 million US dollars in last year’s fourth quarter compared with a deficit of 1,415.3 million US dollars the corresponding quarter.
In Zanzibar, the current account was 82.2 million US dollars from a deficit of 88 million US dollars. “Owing to the liquidity conditions and increase in foreign exchange inflows from tourism, traditional crops, gold and loans and grants, the depreciation of the exchange rate moderated.
“As a result, the BoT did not participate in the IFEM to support the importation of goods,” BoT said.
Specifically, the official exchange rate (IFEM rate) depreciated by 3.14 per cent in the fourth quarter last year, compared with 4.27 per cent in the preceding quarter, while the retail market exchange rate depre- ciated by 1.16 per cent compared with 4.71 per cent.
“The spread between the IFEM and retail market exchange rates narrowed. The real effective exchange rate moved close to its long-run trend, indicating no major misalignment,” the report said.