Until the middle eighties, importers and others requiring foreign exchange had to apply to the Bank of Tanzania and to make out a case for an allocation in competition with other applicants. In practice this procedure had two main disadvantages in conditions of extreme foreign exchange shortage delays were inevitable and widespread and foreign trade was severely hampered; and, centralised allocation was not always found to be an appropriate mechanism for adjudicating between rival claims. With minor exceptions, all foreign exchange holdings had to be surrendered to the Central Bank, or to the National Bank of Commerce, in exchange for local currency.
In 1985 the central control of foreign exchange allocation was breached by removing the legal bar on the possession of foreign exchange in certain circumstances (‘own funds scheme’) and allowing exporters to retain a proportion of their foreign exchange earnings (‘retention scheme’) to meet the cost of importing machinery and raw materials and to import certain consumer items within a specified list deemed to raise public morale and offer an incentive for greater production (‘ incentive goods’) . The combined effect of these measures was to fill the shelves of the shops with goods, albeit generally at a higher retail price in shilling terms, and to raise spirits and expectations.
While these measures bypassed the bureaucratic process for the procurement of some of the imports needed to sustain industrial production, they were not sufficiently wide-ranging to deal with all urgent requirements of foreign exchange. Furthermore, black market dealings , though they provided an informal means of access to foreign exchange, were nevertheless illegal and were depriving the established channels of scarce foreign exchange.
Early in 1992 a new Foreign Exchange Act vested responsibility for management of the country’s foreign exchange in the Bank of Tanzania , including the power to make regulations. It became legal for any person to hold any amount of foreign exchange and to buy and sell it in the open market. In March 1992 the Foreign Exchange Regulations and the Foreign Exchange Bureau de Change Regulations were published in the Official Gazette. Bureaux de Change were set up in Dar es Salaam thus providing a legal basis for most of the transactions hitherto performed illegally. The device was not new, having been tried in a number of countries including Ghana and Uganda to good effect. It was hoped that this mechanism would go far towards undermining the black market and would draw into the public domain resources hitherto sidetracked into black market obscurity.
The rate of exchange is determined solely on a market basis at weekly auctions. As foreign exchange remains a scarce commodity, it is expensive and figures in excess of Shs 700 to the £1 have been quoted. Such figures reflect not only the scarcity of foreign currencies, but also provide holders of foreign currency with a strong motive for selling it to the Bureaux. At the same time, the official rate of exchange fixed from time to time by the Bank of Tanzania continues to govern applications for normal trade purposes through the banking system. This rate is in the region of Shs 500 to £1, revealing a substantial gap between the two rates. The official rate, which, under present policy, is moving slowly upwards in accordance with the rate of inflation, will tend towards stability as inflation is reduced to a figure comparable with that of Tanzania’s main trading partners. The Bureau rate, however, will continue to be the value at which supply is in equilibrium with demand in the Bureau market and in the immediate future is likely to remain well above the official rate.
It would be a mistake to designate either rate as the ‘right’ one as they are the result of different mechanisms and serve differing purposes. The Bureau rate reflects the extreme scarcity of foreign exchange and depends solely on the interplay of supply and demand. Under the present policy, on the other hand, the official rate is much nearer to the value at which the purchasing power of the shilling is in approximate equilibrium with the purchasing power of the dollar. It is the official rate that governs most commercial transactions, while the Bureau rote provides a useful safety valve in cases that cannot command commercial priority, such as international travel costs and overseas purchases for non-commercial purposes, It is, however, the Bureau rate that has less claim to underlying validity , as it is inflated by the present scarcity of foreign exchange.
With the expansion of Tanzanian exports and the progressive narrowing of the unfavourable balance of overseas payments, the difference between the official and the Bureau rates will diminish. Ultimately, when Tanzania’s foreign payments account reaches equilibrium, the exchange rate gap will disappear and present arrangements for the publication of an official rate will be discontinued. As scarcity of foreign exchange will no longer influence dealings, the market rate, as determined by auction, will fall to meet the official rate and thenceforth all dealings, apart from minor adjustments to different transaction costs for different sizes of transaction , will be based on the interaction of supply and demand .
J Roger Carter
(Eight Bureaux de Change now advertise their services in the Dar es Salaam press – Editor)