Will BoT’s steps on dollarisation have the desired impact?

Will BoT’s steps on dollarisation have the desired impact?

The US dollar (USD) scarcity in Tanzania has been a persistent issue since 2022, leading to significant economic and financial challenges.

The scarcity is instigated by various global economic factors such as shifts in international trade dynamics, price fluctuations, and geopolitical tensions. The Covid-19 pandemic further exacerbated the problem by disrupting supply chains and affecting overall economic activity.

In response to the decline in foreign exchange reserves—from $5.5 billion in April 2022 to $4.9 billion in April 2023—the Monetary Policy Committee announced that, despite the reserves still being sufficient to cover four months of imports (a standard performance requirement), the Bank of Tanzania (BoT) was implementing several measures to address the dollar scarcity. These measures included stringent regulations on foreign currency transactions and increasing monitoring of forex bureaus.

The BOT has previously attempted to mitigate dollarization through various decrees, with mixed results. These decrees aimed to limit the use of the USD in local transactions, promote the Tanzanian shilling (TZS), and stabilize the currency. However, the ongoing reliance on USD in the local economy has continued to undermine these measures.

In a budget speech for the fiscal year 2024/25 delivered to the National Assembly on June 13, 2024, the budget unveiled the Government’s proposal to address the persisting USD scarcity vide bolstering the nation’s domestic currency i.e., a ban on the use of the United States Dollar (USD) in local transactions, effective July 1, 2024.

According to the Minister’s speech, all stakeholders, including public institutions, businesses, civil societies, international organizations, and citizens, will be required to conduct transactions and quote prices for goods and services exclusively in TZS. This directive, firmly rooted in existing legislation, aims to enforce section 26 of the Bank of Tanzania Act of 2006, which designates the TZS as the sole legal tender in the country.

The Minister’s budget speech shed light on the rationale behind the ban, emphasizing that the unrestricted use of foreign currencies for local transactions has long been deemed unlawful under Tanzanian law. Despite this, enforcement has been sporadic, prompting the government to take a decisive action to reinforce existing regulations.

Addressing concerns about the implications of the ban, experts highlight potential impacts on the economy. The move is expected to drive an increased demand for Tanzanian shillings, thereby bolstering the domestic currency.

Additionally, conducting more transactions in TZS will afford the Bank of Tanzania (BOT) better control over monetary policy, enabling more effective management of money supply and inflation.

“The value of a currency is determined in part by the forces of supply and demand. Domestic use of USD for locally supplied goods and services adds to the demand for USD in addition to that needed for imports, thus putting pressure on the local currency, especially when dollar inflows from exports, Foreign Direct Investments (FDIs), and Official Development Assistance (ODA) are scarce.

Thus, the measure will reduce pressure to some extent,” noted an economic expert, shedding light on the rationale behind the government’s decision.

The move is poised to contribute to stabilized exchange rates by reducing volatility stemming from fluctuations in foreign currency demand. Moreover, limiting the use of USD domestically is projected to bolster the country’s foreign currency reserves, as fewer dollars will be required for local transactions.

However, some nuances remain, particularly regarding regulations that mandate the payment of levies in USD. Until these regulations are amended, experts argue that invoices raised in USD will continue to hold validity.

Moreover, while stakeholders anticipate some initial disruptions as businesses and individuals adjust to the new regulations, the long-term benefits of strengthening the Tanzanian shilling and enhancing monetary sovereignty are expected to outweigh these short-term challenges.

The Finance Act of 2024, recently endorsed by the Parliament, includes several amendments to support this initiative. Key among these amendments is the imposition of stricter penalties for non-compliance and enhanced monitoring mechanisms to ensure adherence to the new rules.

The potential tax impacts of these provisions are significant, particularly in the mining sector. The requirement for transactions to be conducted in TZS could increase operational costs for mining companies accustomed to dealing in USD.

However, it is argued that sectors heavily reliant on foreign exchange, such as mining, should be considered for exemptions or special provisions to balance regulatory compliance with operational feasibility.

In my opinion, while the new provisions are a step in the right direction toward stabilizing the Tanzanian shilling and improving monetary policy effectiveness, their success will largely depend on consistent and rigorous enforcement.

Additionally, the Government should consider complementary efforts such as incentivizing exports, attracting more FDIs, and enhancing financial literacy among businesses and the general populace to ensure a smooth transition.

Overall, for these provisions to have the desired impact, the Government needs to maintain a balanced approach, ensuring that while the TZS is strengthened, critical sectors like mining are not unduly burdened, thereby supporting sustainable economic growth.

In conclusion, it might be a critical to assess the regulations to provide clarity on this new requirement in areas including but not limited to, technical interpretation of the term “transaction”, relevancy on international related transactions and the practicality engulfing the realization of this requirement. It will also be important to engage all stakeholders and obtain their wholistic views on the matter.

Josephine Masalu is a Tax Advisor with KPMG in Tanzania ([email protected]). The views and opinions are those of the author and do not necessarily represent the views and opinions of KPMG.

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Africa: Rwanda Gets a Grip Of Marburg, But Mpox ‘Not Yet Under Control’
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Africa: Rwanda Gets a Grip Of Marburg, But Mpox ‘Not Yet Under Control’

Africa: Rwanda Gets a Grip Of Marburg, But Mpox ‘Not Yet Under Control’

Monrovia — The Rwanda Minister of State responsible for Health, Dr. Yvan Butera, cautioned that while the country is beginning to see positive signals in its fight against the Marburg virus, the outbreak is “not yet over”. He, however, expressed hope that  “we are headed in that direction”. The minister said the epidemiology trend, since the disease was first discovered in the country more than a month ago, is moving towards fewer cases.

Dr. Butera, who was giving updates during an online briefing yesterday, said in the past two weeks, only two deaths were recorded while 14 people recovered from the disease. He said Rwanda was expanding its testing capacity with 16,000 people already inoculated against the disease.

The priority right now, Butera said, is “rapid testing and detection”.

Marburg is a highly virulent disease transmitted through human-to-human contact or contact with an infected animal. The fatality rate of cases, which has varied over the period, is more than 50%, according to the World Health Organization.  WHO said the highest number of new confirmed cases in Rwanda were reported in the first two weeks of the outbreak. There’s been a “sharp decline” in the last few weeks, with the country now tackling over 60 cases.

At Thursday’s briefing, a senior official of the Africa Centers for Disease Control, Dr. Ngashi Ngongo, said mpox – the other infectious disease outbreak that countries in the region are fighting – was been reported in 19 countries, with Mauritius being the latest country to confirm a case. He said although no new cases have been recorded in recent weeks in several countries where outbreaks occurred previously –  including Cameroon, South Africa, Guinea, and Gabon – Uganda confirmed its first Mpox death. This, he said, is one of two fatalities reported outside Central Africa.

Dr. Ngashi revealed that there was an increase in cases in Liberia and Uganda. He said mpox cases were still on an upward trend.

“The situation is not yet under control.”

Source: allafrica.com

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