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Shilling Fluctuation, a seasonal phenomenon?

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The debates about the depreciation of shilling against the US dollar are unprofessional, as the fluctuating dollar exchange rates are global and seasonal.

Contrary to what analysts and a section of the media argue or wish the public to believe, experts in economics and financial matters hint that there are well balanced reasons to that.

Having analyzed such baseless debates, I argue that this situation needs to be explained scientifically and economically rather than being blown up unnecessarily.

It should be noted that not only the Tanzanian shilling has slightly depreciated against the US dollar but also other currencies in the world.

Why? Did they fail to export cashew nut as some would argue here? Why the US dollar outperforms other currencies?

According to the ET Markets (2018), in this year (2019), the US dollar was forecasted to outperform many other currencies because of the interest hike.

The ET Markets report which is also supported by the Bank of Tanzania (BOT), states that last year, the US economy continued to strengthen.

This strength caused the US Federal Reserve to increase interest rate in December 2018. The US Fed increased 25 basis point hikes in December, so interest rate differential widened further to 2.65-2.90 per cent.

Euro and US inflation stabilized nearly 2 per cent, but there was a difference in GDP growth and unemployment rate.

GDP growth is higher in the US and unemployment rate is lower compared with the euro, which naturally makes the dollar stronger against the euro and other currencies in the world, including Tanzania.

Economically and financially, this development has contributed to rise in demand for the US dollar from investment side, consequently causing the US dollar to appreciate against most currencies, including the Tanzanian shilling.

The US Dollar is the benchmark pricing mechanism for most commodities which are global assets.

Base Metals that trade on the LME and precious metals such as gold, silver and energy including oil and natural gas use the dollar to price.

The rising dollar has significant consequences on commodities, as higher dollar tends to weigh on commodity prices.

Production cost of raw material in other countries, including Tanzania rise because of a strong dollar and weighs negative on demand.

In the stock market, a higher US dollar weighs on US multinational companies, as they have to compete globally with strong currency.

According to the latest forecasts from Barclays (2019), the dollar will remain the dominant force in the currency market this year and the pound sterling will succumb to another dose of ‘Brexit uncertainty’ while the euro will reach new lows.

Barclays says in its 2019 outlook that as the Fed drives the dollar to new levels of overvaluation and political factors keep Sterling and the Euro on the proverbial back foot, the Fed will go on raising its interest rate in a sustained manner this year, contrary to what other forecasters have begun to anticipate.

The strength of the US dollar against others as said above, the interest hike by FED has depreciated other currencies in the world, including the Tanzanian shilling.

The Bank of Tanzania (BoT) report indicates that from 22nd February 2018 to 21st February 2019 (one year period), the value of the shilling against the US dollar declined by 3.8 percent.

The BOT reports that the value of the US dollar on Developed Market currencies was also put in pressure in the same period.

The British Pound against the US dollar declined by 6.7 percent, the euro by 8.1 percent, the Australian dollar by 9.6 percent and the Chinese Yuan by 6.4 percent.

Moreover, the emerging markets (EM) have been badly affected by the strength of the US dollar. the Brazilian Real is down 18.4 percent, the Russian Ruble is down 14.75 percent, the Pakistan Rupee is 9.7 percent and the Indian Rupee by 8.9 percent year-to-date (YTD) against the dollar.

The Turkish Lira and Argentinian Peso have been the biggest losers, both down close to 40 percent since the beginning of the year.

Comparative analysis in the African region also provides a gloomy picture. Are measures taken by BOT commendable?

Despite the FED factor, I agree with BoT report (2019) indicating that the current movement in the exchange rate in Tanzania is a seasonal phenomenon related to low foreign exchange earnings from tourism and export crops.

This is true because currency hike may be mitigated by a number of facts. “Customarily, from January to May each year, it is a low tourist season and export crops where the country receives low exchange earnings. This is a common trend that usually normalizes in the second half of the year when earnings from tourism and exports pick-up,” states the report.

I commend BOT, for among other things, implementing monetary policy aimed at maintaining price stability and ensures that inflation remains within the target of single digit intended at stabilizing the value of the shilling.

This can be achieved through maintaining the appropriate level of liquidity in the economy. I understand that BOT is also participating in the interbank foreign exchange market (IFEM), in order to smoothen excessive volatility of the exchange rate.

In doing that, the Bank of Tanzania sold USD 528.6 million in 2018, which is more than double the amount sold in 2017.

In 2019, the Bank of Tanzania continued to sell the foreign exchange in order to reduce its shortage in the economy.

Moreover, the BOT must monitor foreign exchange business in order to ensure that rules and regulations are adhered to, including maintaining foreign currency Net Open Position of commercial banks equivalent to 7.5 percent of core capital.

Factors that could lead the dollar to collapse/depreciate more so to what BoT is mitigating, two conditions must be in place before the dollar could collapse.

First, there must be an underlying weakness. Between 2002 and 2018, the dollar has declined 6 percent according to the U.S. Dollar Index.

This is because the U.S. debt almost more than tripled during that period, from $6 trillion to $22 trillion.

The debt-to-GDP ratio is now more than 100 percent. That increases the chance the United States will let the dollar’s value slide as it would be easier to repay its debt with cheaper money.

Second, there must be a currency alternative for everyone to buy. The dollar’s strength is based on its use as the world’s reserve currency.

The dollar became the reserve currency in 1973 when President Nixon abandoned the gold standard.

As a global currency, the dollar is used for half of all cross-border transactions. That means central banks must hold the dollar in their reserves to pay for these transactions.

As a result, 61 percent of these foreign currency reserves are in dollars. The two situations above make a collapse possible.

But, it won’t occur without a third condition. That’s a huge economic triggering event that destroys confidence in the dollar.

Altogether, foreign countries own more than $6 trillion in U.S. debt. If China, Japan or other major holders started dumping these holdings of Treasury notes on the secondary market, this could cause a panic leading to collapse.

China owns $1 trillion in U.S. Treasury’s. That’s because China pegs the Yuan to the dollar.

This keeps the prices of its exports to the United States relatively cheap. Japan also owns more than $1 trillion in Treasury’s.

It also wants to keep the yen low to stimulate exports to the United States. These facts considered, I reiterate the possibility of a conspiracy theory on the dollar-shilling debate in Tanzania.

The hikes are normal and seasonal, but you still find some people raising unnecessary alarm into markets.

 

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Tanzania

Tanzania, Now Under Repression?

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John Magufuli began shaking things up on his first full day in office. On November 6, 2015, the newly elected president walked unannounced into Tanzania’s Ministry of Finance, peering into empty offices and interrogating frightened staff—letting it be known that a government long characterized by laxity was in for a major change. He later canceled Independence Day celebrations and redirected the funding to fight cholera, purged more than 10, 000 so-called ghost workers from the public-sector payroll, and initiated a crackdown on corruption and underperformance that saw numerous senior officials sacked, some following scoldings on live television.

Africa took notice: Twitter users across the continent adopted the hashtag #WhatWouldMagufuliDo to speculate how he might clean up their own governments. Ten months into his first term, polling by Twaweza, a regional civil-society group, found that 96 percent of Tanzanians approved of his performance. In a country that has long been one of the continent’s most stable democracies, where freedom of expression has historically been protected, that near-unanimous level of approval was astounding.

Since then, a more troubling pattern has set in: In its three and a half years in power, Magufuli’s government has jailed rival politicians, pop stars, and journalists; prevented teenage mothers from returning to school; and threatened mass arrests of LGBTQ Tanzanians. New regulations severely restrict social-media critics and criminalize the publication of data not endorsed by the government. Tundu Lissu, an outspoken opposition member of Parliament, barely survived an attempted assassination in 2017, and last October, Mohammed Dewji, Tanzania’s only billionaire, was kidnapped for 10 days. Mdude Nyagali, a young opposition activist, was abducted by gunmen on May 4; he was discovered last week dumped in a bush and showing signs of torture. Critics say that none of these acts have been thoroughly investigated by the authorities.

Now Tanzania’s 60 million people are beginning to realize that the honeymoon period is over, and that their country is more and more being governed by repression.

“There’s been a big shift to a much more constricted, constrained environment,” Aidan Eyakuze, Twaweza’s executive director, revealed. “People are scared to say what they used to be able to say.” Eyakuze’s own passport was seized by the authorities after his organization reported last July that support for the president had plummeted to 55 percent.

In some ways, the 59-year-old Magufuli is hardly an anomaly in a region dominated by strongmen. Though much of sub-Saharan Africa saw sweeping democratic gains after the Cold War, political and civil rights have remained stagnant in West Africa, declined moderately in southern Africa, and fallen precipitously in the East and Central sub regions since the mid-2000s, according to the think tank Freedom House. While new leaders in Ethiopia and Angola have made notable recent strides toward openness, democracy in Tanzania’s neighborhood is hardly robust. Leaders of three of its immediate neighbors—Uganda, Rwanda, and Burundi—have clung to power beyond their original legal mandates and preside over some of the world’s worst human-rights records. In the Democratic Republic of Congo, former President Joseph Kabila has positioned himself to rule by proxy in retirement. Although Kenya, East Africa’s economic powerhouse, has avoided the “presidents for life” syndrome, its elections are regularly disputed.

Tanzania long stood out as an exception. A single party, known today as Chama Cha Mapinduzi (CCM), has ruled the country since Tanzania’s 1964 creation as a merger between the former British colony of Tanganyika and the British protectorate of Zanzibar. But Tanzania’s leaders have respected term limits, and tolerated a vibrant opposition since the adoption of a multiparty system in 1992. The country has never experienced major civil conflict. Many credit Tanzania’s first president, Julius Nyerere, with forging a strong sense of national identity, which minimized the ethnic divisions that continue to plague many countries in the region.

Yet Nyerere’s economic policies, including a failed scheme that resettled millions of people into planned villages, also left a legacy of underdevelopment. Even as economic growth accelerated over the past decade, Tanzania remained notorious for its slow pace of life and a government often paralyzed by waste and dysfunction. Hassan Abbas, the chief government spokesman, says superfluous trips and unnecessary workshops—frequently at beachside resorts—were rife.

Magufuli, the son of peasant farmers who earned the nickname “The Bulldozer” during his road-building tenure as minister of works, changed all that. He greatly restricted civil-servant travel and has yet to leave the continent as head of state. Few would dispute that accountability under his rule has risen—Abbas boasts that Magufuli has “relieved” more than half of his cabinet ministers. While some question the lack of due process, many Tanzanians support this drive against impunity. Twaweza polling in November 2017 found 85 percent of citizens believed that corruption had declined from five years prior. Felista Mauya, an attorney with the Legal and Human Rights Centre in Dar es Salaam, says stronger oversight has led to notable improvements in key public services, such as health care.

“This president came into power with a certain vigor and zeal to make sure things are happening,” Abbas says. “We want to see a Tanzania that is running.”

At the same time, Mauya and other civil-society activists say the assault on civic space has been sustained and vigorous—a result of both top-down decrees and legislation written by the CCM-dominated Parliament. Magufuli’s government has banned the live broadcast of debates in Parliament and enacted regulations imposing hefty fees on bloggers. It has also actively enforced a 2015 “cyber-crimes” law, signed by his predecessor, Jakaya Kikwete, that was intended to combat the spread of false information but also designates jail time for “insulting” the president and has been used as part of a wider campaign against dissent. And it has severely restricted opposition rallies, despite the fact that they are allowed by law; several opposition politicians, including Freeman Mbowe, leader of the main opposition party, Chadema, face charges of sedition.

Magufuli’s “muscular nationalism,” as Eyakuze calls it, includes an intensifying war on information. In February, authorities suspended The Citizen, a leading English-language daily, for a week after it reported a decline in the value of the Tanzanian shilling and a slight discrepancy between rates on the street and at commercial banks. Amendments to the national statistics act passed by Parliament in September prescribe jail time for communicating or disseminating any data “intended to invalidate, distort, or discredit official statistics.” Critics fear that this will stifle independent research, like the polls carried out by Twaweza—which now has to seek permission to conduct its next round of surveys—and outlaw third-party oversight of crucial government data.

“Economic management in a democracy means that people need to have a shared understanding of reality,” says Justin Sandefur, a senior fellow at the Washington, D.C.–based Center for Global Development, who formerly advised Tanzania’s National Bureau of Statistics. “The government is working really hard to make sure it has a monopoly on that shared understanding.”

Coincidentally or not, these amendments come amid growing evidence that Magufuli’s top-down economic management has led to unintended consequences. Although the World Bank forecasts 2019 GDP growth to exceed 6 percent, Tanzanians from various walks of life report that money is tighter—in Twaweza’s July poll, 72 percent of respondents mentioned poverty as a major challenge for the country, compared with 34 percent before Magufuli took office.

Restrictions on the export of grain and a bizarre plan to cut out middlemen from the cashew industry have rankled farmers. Businesspeople say the crackdown on corruption has had the unintended consequence of making it harder to do deals, and rising policy uncertainty has compelled banks to withhold lending. Acts of resource nationalism—such as the levying of an extraordinary $190 billion tax bill on London-based Acacia Mining, initially met with praise at home—are making foreign investors wary. Last month, the Tanzanian government blocked publication of an IMF report that warned of “unpredictable and interventionist policies” it deems likely to significantly hinder economic growth. The suppression of civil liberties has caused some development partners to withhold funding, while a drive to collect taxes, including from petty traders who have long operated outside the formal economic system, has further squeezed the poor. Richard Fabian, who sells kingfish, barracuda, and red snapper along the bustling Dar es Salaam waterfront, says the economic situation now is the worst he’s experienced in his 15 years on the job. Sales have been so poor that his wife and children have returned to their home village because he had to downsize his rental from a family house to a single room.

Fabian, like 58 percent of the electorate, voted for Magufuli in 2015, and despite his predicament says he appreciates his cleaning up of government and may support him for reelection next year—particularly if the economy begins to rebound. He may not have a choice: Newly passed legislation gives a state-appointed registrar sweeping powers over internal political-party matters, which opposition leaders say puts the country on a path toward becoming a de facto one-party state. Hashim Rungwe, an attorney and the chairman of the Chaumma Party who finished fifth in the 2015 presidential election and is considering running again, says the prospect of a free and fair vote next year is highly dubious. And democratic space, he fears, will only continue to decline thereafter.

“We are going backwards,” the 70-year-old says from his Dar es Salaam office. “Only one person is giving orders. And when he orders, you comply.”

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