ECONOMICS MADE SIMPLE: US dollar in TZ: Dollarisation, old notes, small denominations

Scholars of economics in general and its international economics branch in particular will recognise that Tanzania, as is the case in many other countries, is not a country in autarky. To the contrary, it is an open economy that transacts with the rest of the world (ROW).

It imports and exports goods and services from and to the rest of the world. This has been so since the major and far-reaching reforms in the management of the country’s economy that were witnessed from the mid-1980s.  This has resulted in an inflow of multiple currencies in Tanzania’s economy. Naturally, the major and vehicle global currencies such as the US dollar dominate these foreign currencies. The greenback has posed a number of challenges to the country’s economy. Some of these challenges are outlined in what follows with a view to challenging the Bank of Tanzania (BoT) which is the country’s leading monetary authority to address them.

Dollarisation challenges

Dollarisation as an economy challenge has been addressed by the author of this article way back in 2011 in this column and in a policy brief in 2013. Dollarisation is an economic and business practice in which residents of a sovereign country with its own currency uses the United States of America’s dollar (USD) extensively in their daily transactions.

Sellers may demand that buyers settle their transactions in the USD or be at liberty to do so with the local currency at the sellers’ predetermined exchange rate. Contrary to some countries, dollarisation is informal in Tanzania. Buyers should not be forced to settle their transations in the greenback.

Faces of dollarisation in Tanzania

In Tanzania dollarisation is seen in many forms, including dollar price-tagged air tickets, some hotel services, various fees even those payable to the government as well as in the real estate industry, including plots, farms and house prices and house rent as found out by the article’s author in August 2010.

Old dollar notes challenges

It is unfortunate that the challenges of old US dollar notes that various economic agents in Tanzania confront are yet to be brought to the fore adequately. These economic agents include some individuals, households and institutions.

The situation on the ground is one in which some old US dollar notes are rejected by foreign currency traders in the shapes of Bureau De Change and banks. Evidence exists, where $100 notes dating 1999 and beyond have been rejected within some foreign exchange transaction outlets in Tanzania. In some instances, economic agents have been informed to exchange the old notes at a lower exchange rate than the prevailing market rates for that particular denomination. All these pose challenges and frustrations to economic agents bearing such currencies.

For guests holding only such cash, their visit to the country may become a nightmare. Although not widely spoken, this practice is among examples of a bad business environment for those holding these old notes. For a tourism-dependent economy like Tanzania’s, this should be a matter of great concern.

The author of this article has been advised by some banks to take such notes to the BoT. Maybe this is the required procedure, but transaction costs involved for time-minded people may tempt them to expatriate the notes to other more ‘old dollar-friendly economies’.

One would suggest that it is long overdue for the BoT to intervene in its capacity. Needless to say, understanding why traders do avoid these old US dollar notes would add much value in addressing the challenge.

Small denominations challenges

Observant visitors to foreign exchange transaction points such as Bureaux De Change and foreign sections of banks in Tanzania would see multiple exchange rates for various denominations of the same currency. It is more of a norm than an exception to see lower exchange rates (price of US dollars in shilling terms) for such denominations as five, ten and even twenty US dollar and much higher rate for $50  notes and best rates for $100 notes.

There may be explanation to that, but it is contrary to indicative exchange rates that the BoT gives for each trading day where the unit of measure is $1 to a shilling.

A way forward

Whereas the challenges posed by foreign currencies in Tanzania have been largely associated with dollarisation of the economy, there has recently been issues around ‘poundrisation’ of the economy in the stickers on such artistes’ works as CDs.

Causes for these are at times justified – mainly rational economic behaviour to protect one’s business against a weak currency – but the negative impacts of the same should be recognised too and by extension come up with measures that will address the kernel of the matter.

Issues around the rejection of old dollar denominations as well as low exchange rates for low denominations need attention of the BoT too.

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