The shilling’s depreciation, to historical lows, has raised a heated debate from money market experts and analysts to create two schools of thought.
The two schools, economically, are right. But users or consumers want a better value of their purchasing power to improve their standard of living.
The shilling in this year’s first four months sank to its lowest level in history since the local currency was introduced in 1966 after crossing a 2,000/- mark for the US dollar.
Nevertheless, those who are pro depreciation argued that when the currency slid exports are sold at discount thus favouring those in that particular sector to increase productivity.
“This is good for the economy as exporters gain more, therefore depreciation acts as incentive to increase productivity,” said Dr Charles Kimei, Managing Director of CRDB Bank.
Despite the fact that Tanzania is a net-importer, he urged that, when the shilling goes down it is the time to take that opportunity to increase export output and elevate the country to net-exporter.
“If the shilling appreciates or stops fluctuating, exporters are discouraged to produce more as their goods become relatively expensive in relation to similar products at world market,” Dr Kimei, an economist, said.
Depreciation, they argued, also increase foreign direct investments as an investor needs less foreign currency -- in this case US dollar -- for investing in a certain project, that include salaries. “Going by PPP (purchasing power parity), a dollar in Tanzania buys a meal, but not in developed world,” Dr Kimei said.
He said when a shilling depreciates on other hand is a blessing for exporters so long as inflation is kept at steady level in single digit. Cumulatively, because of two digit inflation, production costs in Tanzania in the last decade reached 40 per cent compared to 20 per cent of first world.
Dr Kimei said thus cost of production in Tanzania, cumulatively has reached 20 per cent high than those of developed economy, hence depreciation reduces prices of goods. “ÉIt’s a time to move from import based economy dependency to exportÉ it will not be an overnight thing but if the players are recognized we will be there,” Dr Kimei, said.
The shilling depreciation has favoured foreign investors’ participation on Dar es Salaam Stock Exchange (DSE), who are buying more shares as their involvement has increased by 91.35 per cent in the first quarter.
Market analysts have it that the shilling’s depreciation works in favour of foreign buyers who now get more shillings when changing their dollars to have more purchasing power. On the other hand, foreigners get little when selling their shares at the current exchange rate thus holding their sales.
The DSE Chief Executive Officer, Mr Moremi Marwa, said the fall and rise of shilling against major currency has an effect to stock players, especially foreign investors whose returns have to be converted into hard currencies.
“Obviously this brings into the fore the issue of foreign currency risk, which is one of the key risk considerations for any investor,” Mr Marwa said, “hence, stability of the local currency is preferred than otherwise.”
Zan Securities CEO Raphael Masumbuko said there are a lot of factors surrounding trading, but shilling depreciation is among them, as it favours foreigners on buying but goes against selling.
The Zan CEO said the depreciation makes foreigners to hold their share anticipating the shilling will appreciate in the coming future, as gains on share sell is eaten by currency fluctuation.
Mzumbe University Senior Economics Lecturer, Prof Honest Ngowi, said shilling depreciation has farreaching effect on the economy as whole since the country is a net importer. “If the shilling goes down, imported goods automatically becomes expensive to push inflation up,” Prof Ngowi said.
In May inflation has climbed some 0.2 percentage points to 4.5 per cent, though the shilling was not blamed for the effect. But in April, the price of fuel on average jumped by 7.0 per cent mainly caused by world price changes and shilling depreciation, according to Ewura.
Market analysts also urged on either central bank intervention or left the market forces to correct shilling depreciation. A research conducted by Open University of Tanzania master student, shows BoT intervention in short term correct the market slowly as the disequilibrium perfection is merely 0.22 per cent a week.
“This is indicating that the Interbank Foreign Exchange Market to return to equilibrium, given the percentage of correcting the disequilibrium shown, will take longer time if intervention method is deployed,” the study, Impact of Foreign Exchange Intervention on Shilling in Tanzania of 2012, indicates.
Though the value of exports in January increased by 3.8 per cent to 8.85 billion US dollars, failed to cover the imports gap that shrank by 3.0 per cent to 10.82 billion US dollars in the same month.
The two schools, economically, are right. But users or consumers want a better value of their purchasing power to improve their standard of living.
The shilling in this year’s first four months sank to its lowest level in history since the local currency was introduced in 1966 after crossing a 2,000/- mark for the US dollar.
Nevertheless, those who are pro depreciation argued that when the currency slid exports are sold at discount thus favouring those in that particular sector to increase productivity.
“This is good for the economy as exporters gain more, therefore depreciation acts as incentive to increase productivity,” said Dr Charles Kimei, Managing Director of CRDB Bank.
Despite the fact that Tanzania is a net-importer, he urged that, when the shilling goes down it is the time to take that opportunity to increase export output and elevate the country to net-exporter.
“If the shilling appreciates or stops fluctuating, exporters are discouraged to produce more as their goods become relatively expensive in relation to similar products at world market,” Dr Kimei, an economist, said.
Depreciation, they argued, also increase foreign direct investments as an investor needs less foreign currency -- in this case US dollar -- for investing in a certain project, that include salaries. “Going by PPP (purchasing power parity), a dollar in Tanzania buys a meal, but not in developed world,” Dr Kimei said.
He said when a shilling depreciates on other hand is a blessing for exporters so long as inflation is kept at steady level in single digit. Cumulatively, because of two digit inflation, production costs in Tanzania in the last decade reached 40 per cent compared to 20 per cent of first world.
Dr Kimei said thus cost of production in Tanzania, cumulatively has reached 20 per cent high than those of developed economy, hence depreciation reduces prices of goods. “ÉIt’s a time to move from import based economy dependency to exportÉ it will not be an overnight thing but if the players are recognized we will be there,” Dr Kimei, said.
The shilling depreciation has favoured foreign investors’ participation on Dar es Salaam Stock Exchange (DSE), who are buying more shares as their involvement has increased by 91.35 per cent in the first quarter.
Market analysts have it that the shilling’s depreciation works in favour of foreign buyers who now get more shillings when changing their dollars to have more purchasing power. On the other hand, foreigners get little when selling their shares at the current exchange rate thus holding their sales.
The DSE Chief Executive Officer, Mr Moremi Marwa, said the fall and rise of shilling against major currency has an effect to stock players, especially foreign investors whose returns have to be converted into hard currencies.
“Obviously this brings into the fore the issue of foreign currency risk, which is one of the key risk considerations for any investor,” Mr Marwa said, “hence, stability of the local currency is preferred than otherwise.”
Zan Securities CEO Raphael Masumbuko said there are a lot of factors surrounding trading, but shilling depreciation is among them, as it favours foreigners on buying but goes against selling.
The Zan CEO said the depreciation makes foreigners to hold their share anticipating the shilling will appreciate in the coming future, as gains on share sell is eaten by currency fluctuation.
Mzumbe University Senior Economics Lecturer, Prof Honest Ngowi, said shilling depreciation has farreaching effect on the economy as whole since the country is a net importer. “If the shilling goes down, imported goods automatically becomes expensive to push inflation up,” Prof Ngowi said.
In May inflation has climbed some 0.2 percentage points to 4.5 per cent, though the shilling was not blamed for the effect. But in April, the price of fuel on average jumped by 7.0 per cent mainly caused by world price changes and shilling depreciation, according to Ewura.
Market analysts also urged on either central bank intervention or left the market forces to correct shilling depreciation. A research conducted by Open University of Tanzania master student, shows BoT intervention in short term correct the market slowly as the disequilibrium perfection is merely 0.22 per cent a week.
“This is indicating that the Interbank Foreign Exchange Market to return to equilibrium, given the percentage of correcting the disequilibrium shown, will take longer time if intervention method is deployed,” the study, Impact of Foreign Exchange Intervention on Shilling in Tanzania of 2012, indicates.
Though the value of exports in January increased by 3.8 per cent to 8.85 billion US dollars, failed to cover the imports gap that shrank by 3.0 per cent to 10.82 billion US dollars in the same month.
Source: Daily News, reported by Abduel Elinaza, from Dar es Salaam, Tanzania
0 comments :
Post a Comment