BoT intervenes to save shilling from sinking on

The Central Bank of Tanzania (BoT) has timely chipped into the turbulent financial market armed with a strategy aiming to prevent the home currency from further depreciation against hard currencies, especially the US-dollar.

BoT is legally entitled to participate in the foreign exchange market mainly by implementing domestic monetary policy responsibilities.

One of such duties is to curb inflation, especially that caused by excessive availability of shillings in the economy.

A statement by the BoT released yesterday shows that it has periodically been selling foreign exchange to withdraw excess liquidity from circulation, as the latest action was taken in August this year when USD45.7m was sold to domestic financial institutions.

Again, in the following month of September, another USD65m was traded, in combination with the selling of government papers.

Often times, the shilling comes under intense pressure from foreign hard currencies, especially the USD during the period February-July due to decreasing traditional exports, when the shilling depreciates.

The shilling swings upwards again during September-January as it gains strength from increased inflows of foreign exchange from traditional exports such as coffee, cotton, tobacco and cashew-nuts. Incidentally, this period sees the release of most donors funding.

Excessive volatility in the exchange rate movements fixes both exporters and importers, and the health of the economy in general.

The BoT statement, as duly endorsed by Deputy Governor Benno Ndulu claims that by the year ending September this year, ``the shilling strengthened from the average of Tsh.1, 313.06 per USD in September 2006, to Tsh.1, 257.27 for a dollar in September 2007.

Additionally, the BoT monitors exchange rate movements, and intervenes if necessary to contain excessive volatility in the exchange rate movements.

In the coming months, according to the statement, the Bank will maintain its presence in the foreign exchange market ``largely on the selling side to complement the other market instruments used in liquidity management operations in the economy``.

However, some experts interviewed yesterday faulted the traditional BoT foreign exchange intervention strategy and excessive dependency on donor funds to stabilize the T-shilling and the economy generally, as unviable over the long run.

Timothy Nyoni, Research fellow at the University of Dar es Salaam�s Economic Research Bureau, said in an interview: �Depreciation of the shilling is not caused by excessive scarcity of dollars in the economy only�there are many contributing economic forces which the government needs to address.�

``The BoT strategy (selling foreign currency) cannot work unless the country puts in place practical and results-oriented strategies to increase exports. No country in the world could manage to stabilize its currency and economy without proper export strategies,``

An economist from the Confederation of Tanzania Industries (CTI), Hussein Kamote, was equally critical at the idea of selling foreign currency to stabilize exchange rate, calling the strategy ``a short-term one which cannot be effective in the long-run``.

``My concern is the financial strength of the BoT in sustaining the strategy. For how long could the Bank sell out foreign currency to the money markets?

I doubt if the Bank has sufficient foreign exchange reserves to accommodate sales lasting for long durations. BoT is not capable enough to sustain such approach,`` said Kamote.

However, over the last three years, the BoT foreign exchange reserves have leveled at around USD 2 billion.

This amount, according to BoT, is ``high`` and equivalent to five months exports, and exceeds reserves held by most of the neighbouring countries.

Kamote was of the view that the government come up with permanent and long-term strategies by encouraging an export-oriented economy of finished goods and services.

``I am not impressed by the current dependency on donor funds in the form of development assistance as a strategy to stabilize T-shilling against UD dollar.

In my view, this is again a short-term and impractical strategy, as anything could happen - donors may for instance cut on funds etc,`` said Kamote.

Ali Mufuruki, a prominent businessman, said: ``Export-oriented strategies could boost up exports and country`s foreign earnings�the country`s economy becomes stronger, and T-shilling will stabilize automatically.``

Economic experts suggested to the government to review mining policies to ensure what investors earn from the activities were injected into the country`s economy-thus stabilizing the country`s economy and check the depreciation of T-shilling at the same time.