DEVALUATION

On November 4th 1988 the value of the Tanzanian shilling was reduced from Shs 98 to Shs 120 to the dollar or about Shs 220 to the pound and further creeping downward adjustment was envisaged in subsequent months down to the end of the financial year in June 1989. This adjustment was made with the agreement of all concerned, including the government and the Party, following a review of the developments in the economy resulting from the Economic Recovery Programme. It was not an easy decision to take (President Mwinyi, speaking to the Zanzibar House of Representatives on November 10th 1988 described it as ‘very bitter but inevitable’ – Editor), nor was the extent of the planned devaluation easy to determine. Even at 8hs 120 to the dollar, the latter still appeared to be exchanged at a value below the informal market rate in shilling terms, but the market rate probably includes a premium reflecting the intensity of desire to obtain dollars not otherwise obtainable through legal channels in order to gain access to foreign markets; moreover, open market transactions in currency, being strictly illegal, are clandestine and accordingly difficult to evaluate with precision.

There were a number of reasons for the difficulty in deciding on the new value. Exporters always obtain an advantage from devaluation because it reduces the cost of their wares, without cost to them, in foreign markets. On the other hand the dramatic rise in the shilling price of the dollar since the middle of 1986 has confronted importers with a serious problem in financing their purchases of foreign exchange, which has become increasingly expensive in shilling terms. Al though importers can expect to get their money back when they sell their imports, their purchases have to be financed in the meantime and sales may be slow. Where resort to a bank loan becomes necessary, they are likely to be confronted with a demand for interest in the region of 30% This problem of interim financing also confronts exporters where imports are necessary for the production of their export commodities.

The government therefore finds itself navigating between Scilla and Charibdis. If exchange rate adjustment is abandoned, or slowed down, Tanzania will be progressively priced out of foreign markets, while import pressures will increase, leading to chaos in the country’s foreign exchange account. On the other hand, excessive depreciation of the shilling will impose impossible burdens on Tanzanian industry, including that part of it catering for the foreign market. Between these two policies resides the fact that there is no single objectively correct rate of exchange, but rather a range of values which maintains an equitable balance between the interests of exporters and importers and broadly corresponds with relative price levels in Tanzania and abroad. Within this range the fixing of a rate is a matter for political and administrative judgement and it was the difficult task of arriving at such a conclusion that underlay the choice of shillings 120 to the dollar in November 1988. Not everybody will agree with this choice, but the fact has emerged that it is nevertheless acceptable to the World Bank, the IH and other donors, including the United Kingdom, as a valid basis for continued support of the government’s Economic Recovery Programme. The result has been a commitment of Bank money on soft (IDA) terms of US$ 135 million, supported by the African Development Fund in the sum of US$ 24 million and co-financing from Switzerland of 14 million, the Netherlands of 10 million and the United Kingdom of 15 million dollars.

Exchange rate adjustment, by increasing the cost of imports in shilling terms, is also a contributor to inflationary pressures. At the same time it is the rate at which Tanzanian prices are rising in comparison with the rate of inflation of Tanzania’ s trading partners that largely determines the need of exchange rate adjustment. If inflation in Tanzania can be brought down to a low figure, comparable, let us say, to the present rate of inflation in the United Kingdom, the need for further exchange rate adjustment in Tanzania will largely disappear. Moreover, the inordinately high nominal rates of interest now chargeable on bank loans, themselves a severe burden on industry, will be considerably reduced. The movement of the exchange rate that we have been witnessing – technically known as ‘exchange rate management’ – can thus be seen as a way of adjusting to the consequences of high inflation, though a medicine with unfortunate side effects.

Exchange rate adjustment is thus seen as a necessary though uncomfortable feature of economic policy. It is probable, therefore, that the reduction of the rate of inflation, itself a cause of impoverishment and potential social unrest, will now become a major object of government policy. There are already signs that inflation is beginning to slow down and it is clear from the budget speech of June 1988 that the fight against it will from now on be intensified.
J. Roger Carter

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