The fiscal measures heavily assisted the shilling to rebound and saw it steadily trading between 1584/- and 1,590/- against the dollar since January. But economists say the level is still high to warrant a steady growth. Towards the last quarter of last year, the shilling had tumbled to over 1,800/- against the dollar and made even ordinary people extremely worried.
Higher exchange rates have a direct negative impact on imports and trigger fuel inflation as the country is net importer. Monthly consumer price Index stands at 19.4 per cent. The Mzumbe University’s Dar es Salaam Business School Lecturer, Dr Honest Ngowi said the central bank managed to stabilise the exchange rate fluctuations, but are still higher to facilitate good business.
“The exchange rate is still bad(and) not good for economy. The current shilling exchange rate is like a patient who is critically ill but in stable condition,” said Dr Ngowi a seasoned economist. The lecturer said “though it’s not easy to predict nor to target the exchange rate, the rates are still higher compared to 1,300/- or 1,400/- or even 1,500/- levels of the previous years...but, the lower the better.”
The BoT intervened in the market last October after the shilling dropped to its lowest level in 45 years to exchange at 1,870/- a US dollar, while inflation dipped to almost 20 per cent—a decade high. The central bank said predicting or targeting the shilling is difficult, but were working around the clock to stabilise the exchange rate to a level that warranted market equilibrium.
“We have to balance between intervention and Treasury Bills interest rates to avoid distortions in the market,” BoT Director of Economic Research and Policy, Dr Joe Masawe said: “Our policy is not to target the exchange rate but to stabilise the shilling by maintaining circulation of money.”
The measures that BoT took included the reduction of the core capital of foreign exchange dealers from 20 per cent to 10 per cent, plus increasing cash reserve requirements on government deposits from 20 per cent to 30 per cent and raised discount rate by 200 basis points to 9.58 per cent. Five months down the line the measures seem to have saved the pillars of macroeconomic stability from causing unrest on monetary policy thus affecting growth.
“As a result of the intervention, we have seen encouraging business growth in areas where we operate, that is Dar es Salaam, Mwanza and Arusha,” said National Insurance Corporation (NIC) Chief Executive officer, James Muchiri. Before the intervention, the CEO told the ‘Daily News’ that they had witnessed a slow start in business in the first half of last year, while the second half was characterised by exchange rate fluctuations and rising interest rates to affect financial intermediation adversely.
Since January, Standard Chartered Bank reports show that the shilling was almost always trading relatively flat against the dollar as demand continued to be well matched by supply in the interbank as well as corporate markets. “Today we expect similar trend with low level of volatility,” Standard Chartered said in its money market report, which was almost what it said in reports, since January.
However, the tight liquidity measures have side effects as well. They need a well balanced market to avert the distortion of the equilibrium. The measure reduced money in circulation, pushing interest rates up on government securities and commercial loans. In January, the overnight rates jumped sky high to reach 35 per cent, pushing up the costs of lending.
The government securities also went up to between 15 and 19 per cent, depending on the type of the debt instrument. Tanzania Securities Business Analyst Joel Nkya said the high coupon rate for government securities are affecting the equity market dearly because on average dividend rates are around 10 per cent compared to over 15 per cent of debt instruments.
“Investors will migrate to bonds and fixed security incomes because of the high yields and the fact that they are risk-free instruments”, Mr Nkya said. Despite high exchange rates, stabilising the money market remains important to guarantee businesses
to function at full potential and get closer to the anticipated 6.0 per cent economic growth rate.