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How dollar crunch has affected manufacturers in Tanzania
Tanzania has in recent months been grappling with a shortage of US dollars that has largely been blamed on external factors. PHOTO | FILE
What you need to know:
- From paying foreign debts to importing essential raw materials and industrial inputs, local manufacturers have had a tough time in recent months
Dar es Salaam. The availability of the US dollar has been improving in recent months, but manufacturers say their operating costs rose during the time the country has been facing a shortage of the currency.
From paying foreign debts to importing essential raw materials and industrial inputs, local manufacturers have had a tough ride during the past months.
Highlighting the gravity of the situation, the Confederation of Tanzania Industries (CTI) revealed that an online survey shows that a single company typically requires between $100,000 and $2 million on various transactions per month.
Yet, they are currently only able to access an average of 30 percent of their monthly dollar needs on official channels.
This shortfall is impacting production and driving up overhead costs.
Speaking to The Citizen, a representative of a major manufacturer, who asked not to be named, said, “The big issue is the huge difference between the official exchange rates set by the government and the rates charged in the market. This has encouraged the black market”.
Though he agreed that the situation is slightly improving, he confirmed that for manufacturers, the disparity between official and street rates, coupled with increased demand for dollars, has driven up the cost of raw materials.
“Unlike small traders, manufacturers can’t change prices quickly, so we have to absorb the loss caused by rising costs and price fluctuations in the dollar,” he said.
Another source from the soap and detergent manufacturing industry echoed similar concerns, “Due to the dollar shortage, we’ve been incurring high costs just to acquire the currency for imports. Nearly 90 percent of our ingredients are imported, but paying suppliers who require dollars has become a major challenge”.
He added, “Even when we negotiate to pay in local currency, suppliers convert it at higher-than-normal rates, meaning we end up paying much more.”
CTI has offered several recommendations to the government and key industry stakeholders to develop a comprehensive and viable action plan to address the forex shortage and revitalize the manufacturing sector.
“Given the vital role the manufacturing sector plays in Tanzania’s economy and its potential for job creation, it is imperative to collaborate with the government to find effective solutions to mitigate the adverse effects of the forex shortage,” said CTI policy and advocacy director Akida Mnyenyelwa.
One of the most immediate actions suggested is for the government to intervene and inject more dollars into the market, particularly ensuring that manufacturers with proof of production need to receive the foreign currency they require.
In a document shared to the paper CTI has also proposed a temporary restriction on the importation of non-essential goods during the current dollar shortage.
Prioritizing essential imports, such as raw materials for production, could alleviate some of the pressure on the market.
“Encourage more exports from the country by providing export incentives to exporters. Impose restrictions or higher levies on the importation of goods which are locally manufactured,” the CTI stated.
“Reduce reliance on USD-based invoicing, to mitigate the impact of currency fluctuations and reduce the requirement for USD in our trade relationships and encourage businesses to conduct transactions strictly in Tanzanian Shillings within the country,” the shared document stated in part.
While the current situation is dire for many manufacturers, there is hope that these recommendations, if adopted, could provide some relief.
However, as one industry professional noted, “With the fluctuating price of the dollar, we can’t change prices every day, so the losses we’re experiencing are unavoidable.”
What caused the shortage
The United States of America (USA) Federal Reserve in July 2023 raised interest rates to a 23-year high to a range of 5.25 percent to 5.5 percent.
The decision significantly reduced liquidity in global financial markets, strengthening the dollar and exerting downward pressure on currencies like the shilling.
The shilling has been downward over the past year, depreciating by more than 14 percent against the US dollar.
The shilling was traded at an average of Sh2,365.38 per dollar according to the Bank of Tanzania, but by Wednesday, September 18 the rate had fallen to Sh2,703.69.
However, in commercial banks rates are a little bit higher and it is very hard to find a branch or bureau that will be able to exchange above $1,000 in a single transaction.
