Weaker currency theory useless

Weaker currency theory useless

What the professor says is that a strong shilling is good for consumption but bad for production. It is a classical lesson from classical textbooks and arguably correct in that context. But in the case of Tanzania, where are the exports? All commodity exports have since slumped because of bad marketing and failure to pay farmers just reward for their sweat.

As a result, coffee growers in Kilimanjaro region turned to tomato farming, which gave them higher earnings. Cotton farming too shrunk to a percentage of its former glory because of abused marketing practices that disadvantaged farmers. Mineral exports are a different story altogether.

In any case, the price of gold and diamonds is not determined by the strict rules of demand and supply but controlled release into the market in order to always keep their prices up, a luxury that gold and diamond producers can afford but not the producers of cowpeas, whose price is set by the buyers! Furthermore, the skewed ownership of mining concerns in Tanzania does not allow the country to optimise revenue from the ventures as most of what is realised goes to the foreign owners of capital or investors who dominate the sector.

Like mining, tourism also benefits foreigners more than the locals due to a combination of historical and policy factors. In domestic terms, a weak shilling means higher factor costs, the biggest enemy of increased production. A weak shilling means spiraling inflation, which in real terms is a scenario that robs workers of their just reward for labour and therefore a serious cog in efforts for further production.

Thus, to defend a weak shilling in a case like Tanzania’s is hard to justify except a person be miserably divorced from reality. Professor Ndulu could have Tanzanians great service if he came up with suggestions on how to increase exports given the country’s rather hopeless situation rather defending the non-defendable. Apart from being a medium of exchange, money is defined as a commodity that retains its own value. The Tanzania shilling is perhaps the world’s worst rogue currency.

It is almost impossible to predict its value with a good measure of educated guess as it keeps on sliding with supersonic speed. It is for that reason that most businesses have unilaterally dollarised the economy. Tanzania is probably the only country where the people are happier to be in possession of dollars than their own shilling not because they don’t like their currency but as a “vote of no thanks” in its intangible value.

It is very difficult to plan when you cannot peg values on a certain financial constant, which is what all the other central banks in the world do except our BoT, which prefers a weak currency to help others consume our sweat cheaply. All prices are nominal values based on fair consideration of what amounts to obtaining cost of production. Because of a weak currency, the real cost of production in Tanzania is highly understated in two ways, which are all injurious to overall economic performance.

Either, the workers are paid too little, which is a disincentive for production and productivity or are paid high wages – still peanuts in real income terms, that tend to push the cost of production up, making whatever is produced hard to compete in the market. Failure to sell of course means economic death. If Tanzania had many goods to export, then a lower value currency would indeed make a lot of economic sense.

That is what the Chinese are doing and making the Americans cry foul play in international trade. But the Chinese made sure that their currency was both low value and stable so that the people could produce without having to suffer the pain of eroded real income too much. In any case, a lower import bill helps no one if consumption costs at home shoot through the roof. That is why affordable living is only possible for those with their fingers on extra free income.

And, that “free income” comes nowhere else other than from state coffers. That is why corruption is a glorified enterprise for those in positions with the highest opportunities and chances to practice it with dignified ambivalence. Admittedly, a central ban governor alone has almost no powers to influence a country’s fiscal policy but my argument against Professor Ndulu is his defence of what weakens us all.

He kind of lives in an ivory tower knowing not that there are literally no exports to speak of, which is strange because BoT keeps the national account. A few years ago, it was predicted that China’s economy would surpass America’s by 2020 but the International Monetary Fund (IMF) has now brought forward that date to 2016. China has long since dethroned Japan as the world’s second largest economy.

The US accounts for about 25 per cent of the global economy while number two China is only six per cent. It means China is still just a quarter of the American economy but in the next four short years, China will account for more than 25 per cent of the created new global wealth!

Will America’s share of global wealth then be only six per cent because it will obviously be the next number two economy? If such is the possible scenario then we can only imagine where Tanzania’s position will be. Unfortunately, for Tanzania, a country that its founder Mwalimu Julius Nyerere wanted to run while others walked, that means even deeper poverty, especially if we continue to entertain useless theories on the advantages of a weaker currency.



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