Beating the addiction to dollars: policy options for Tanzania

“The use of the US dollar as a unit of account, medium of exchange and store of value in Tanzania has raised concerns among policymakers and the general public

Transaction Dollarization in Tanzania

Some observers in Tanzania have suggested that a significant portion of Tanzania’s businesses and service providers are using the U.S. dollar for pricing purposes as well as carrying out transactions.  However, very little evidence has been put forward to support these claims.  This study examines the evidence of dollarization in Tanzania, focusing mainly on the use of U.S. dollar as a medium of exchange and unit of account.  The evidence presented in this study suggests that many of the concerns that have been expressed by some observers about significant use of the U.S. dollar as a medium of exchange in Tanzania are not well founded.  The findings indicate that about 3.2 percent of the businesses in Mainland Tanzania and 4.5 percent in Zanzibar quote prices in U.S. dollar, but most of these businesses were willing to accept payments in Tanzanian shilling.  Only 0.1 percent of the businesses in the Mainland and none in Zanzibar indicated that they would prefer payments exclusively in U.S. dollar.  The findings also indicate that quotation of prices in U.S. dollar is limited to specific locations and applies to specific products/services, and in most cases is done for bona fide reasons.  It is important to appreciate the influence of increased trade openness on demand for and attitude towards U.S. dollar, which is the dominant currency of foreign trade. The fact that Tanzanians hold a small portion of their wealth in U.S. dollar and insignificant number of prices are quoted in foreign currency may not be surprising in an economy where foreign goods and services account for a significant portion of what a typical household consumes.  This may simply be a natural phenomenon resulting from the fact that Tanzanian economy has become much more open and outward oriented than it was some 20 years ago. In addition, this experience is not unique to Tanzania.  Many countries in the region and across the world are experiencing a similar situation. We urge the authorities to avoid the use of direct measures in their quest for limiting dollarization in the economy because international evidence suggests that enforcing de-dollarization can potentially be counter-productive. Instead, we recommend the use of gradual market-oriented measures aimed at enhancing the attractiveness of the domestic currency

Dollarization in Tanzania: empirical evidence and cross-country experience

The use of U.S dollar as unit of account, medium of exchange and store of value in Tanzania has raised concerns among policy makers and the general public. This paper attempts to shed some light on the key stylized facts of dollarization in Tanzania and the EAC region. We show that compared to other EAC countries, financial dollarization in Tanzania is high, but steadily declining. We also present some evidence of creeping transaction dollarization particularly in the education sector, apartment rentals in some parts of major cities and a few imported consumer goods such as laptops and pay TV services. An empirical analysis of the determinants of financial dollarization is provided for the period 2001 to 2009. Based on the findings and drawing from the experience of other countries around the world, we propose some policy measures to deal with prevalence of dollarization in the country

Assessing the stability and predictability of the money multiplier in the EAC: the case of Tanzania

This paper was commissioned by the Economic Affairs sub-committee of the East African Community Monetary Affairs Committee. The paper offers a template for Partner State central banks to employ in developing common operational and analytical approaches to understanding the evolution and behaviour of the money multiplier in the context of reserve money-based monetary programmes

The demand for money in Tanzania

We develop an econometric model of the demand for M2 in Tanzania, using quarterly data from 1998 to the present. The continuous decline in velocity since the late 1990s is associated with a transformation of economic activity that has cumulatively increased the monetary intensity of GDP. Portfolio behavior also responds to expected inflation and to exchange rate depreciation, with weaker effects from interest rates. The components of M2 respond to opportunity costs as expected, with currency more sensitive to expected inflation and deposits more sensitive to the interest rate on government securities. We discuss the policy implications of our results, including their relevance to the velocity-forecasting exercise that plays a key role in the Central Bank of Tanzania‟s policy framework

Exchange Rate Arrangements in the Transition to East African Monetary Union.

paper is the outcome of research collaboration between staff of the Directorate of Economic Research an