Shilling Fluctuation, a seasonal phenomenon?
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.