Report: Why forex deposits in Tanzania increased over the past year

However, around 30 percent of the money was held in foreign currency, a rise from 26 percent in September 2023.

In addition, BoT revealed that the ratio of foreign currency deposits to broad money supply (M3) climbed to 25.2 percent in September 2024 from 22.8 percent a year earlier.

“The two ratios indicate an increase in the degree of financial dollarisation in the economy, which reduces the effectiveness of monetary policy,” the report says in part.

The BoT attributed the rising dollarisation to businesses hedging against foreign exchange risks, following a shortage of foreign currency liquidity in 2022-2023 and ongoing exchange rate speculation.

 In a bid to curb the trend, the Bank of Tanzania Act was amended in June 2024, criminalising the use of foreign currency in domestic transactions.

Furthermore Finance minister Mwigulu Nchemba issued a decisive directive on June 13, 2024, aimed at curbing the widespread use of the US dollar within the country in a bid to address a critical challenge impacting the economy.

In his budget speech to the national assembly, Dr Nchemba highlighted the detrimental effects of dollarisation, where both public and private institutions demand payments in foreign currency for goods and services provided domestically, exacerbating the shortage of dollars and hindering economic progress.

The directive mandates that all transactions be conducted and advertised in Tanzanian shillings, aligning with the legal framework of the country and promoting financial stability.

Speaking to The Citizen, economists offer differing views on the drivers and implications of this shift toward dollarisation.

Dr Daudi Ndaki of Mzumbe University explained that businesses open foreign currency accounts to facilitate smoother cross-border transactions.

“Many businesses maintain these accounts to swiftly make or receive payments without the inconvenience of currency conversion. This is especially useful for businesses dealing with foreign currencies, as a stronger dollar enables them to buy more goods,” he said.

Dr Ndaki said however that quoting prices for domestic products or services in foreign currency is not ideal, as it increases the demand for foreign currency over the local currency.

“When foreign currency supply becomes tight, businesses operating in domestic markets face significant challenges,” he said.

Dr Ndaki’s view aligns with the notion that while holding foreign currency can mitigate certain risks for businesses, it could inadvertently destabilise the local economy if misused.

Prof Humphrey Moshi of the University of Dar es Salaam, highlighted that the dollar’s strength is largely influenced by the United States monetary policy, which has raised inflation and import costs globally.

“The strong dollar has made production costs and import expenses soar, and this has forced countries to rethink their trade strategies. Some major economies, like China, are now opting to trade in their own currencies,” he said

Prof Moshi suggested that Tanzania should explore local currency trading arrangements to reduce its dependence on the US dollar.

“This is an opportune time for countries like Tanzania to enter trading treaties based on local currencies. Joining frameworks such as BRICS, which already promotes local currency trade among its members, would be advantageous. With members like Saudi Arabia, it could also ease the burden of fuel costs,” he said.

BRICS is a group of 10 states including Brazil, China, Egypt, Ethiopia, India, Iran, Russian Federation, Saudi Arabia, South Africa, and United Arab Emirates. Saudi Arabia, too, has been invited to join.