Wilfred Edwin
2 November 2008
Speculation by banks and currency dealers has created artificially high demand for the US dollar in Tanzania's financial markets, driving the country's currency to record low levels.
The artificial shortage has triggered a spike in the price of the dollar. At the end of last week, the greenback was going for Tsh1,310, up from Tsh1,160 barely four weeks ago.
This state of affairs has come about despite the fact that the country has foreign reserves amounting to $2.7 billion, a position that has been maintained for the past 18 months -- and which is enough to cater for five months of imports.
Last week, the Bank of Tanzania (BoT) moved to warn that it would not sell dollars to speculators. In a statement, the BoT said it would only sell dollars to priority sectors.
It said priority in buying the foreign currency will be given to importers in sectors vital for the economy -- such as oil, telecommunications and energy.
Professor Benno Ndulu, Governor of BoT, said the new arrangement was temporary and does not preclude importers from buying foreign exchange from commercial banks.
Prof Ndulu said that importers would now have to submit their foreign-exchange purchase requirements together with documents to substantiate their demand and the name of their bank to the director of financial markets at BoT.
In a strongly worded directive to the banks, Professor Ndulu warned that foreign banks operating in the country are required to operate under its laws and regulations, while their financial relationships with parent institutions in foreign countries have to be approved by the respective countries in which they currently operate.
"Liquidity is high, thus leaving no concern over the ability of banks to meet maturing obligations. Up to now, most African countries have to a large extent not been directly affected by the ongoing crisis," he said, adding that this is explained by the fact that despite growing globalisation, and even with recent liberalisation of financial markets in African countries, including Tanzania, most have no strong linkages to global financial markets.
However, the BoT directives came two days after it had sought to allay fears of dollar shortages hitting the financial markets. The governor said speculative demand for foreign exchange in the country was partly driven by people who were anxious about foreign-exchange availability in the light of ongoing global crisis.
Sources in the financial markets told The EastAfrican last week that Tanzanian residents have almost $1.6 billion of foreign currency deposited in banks, while the commercial banks themselves have another $600 million in bank deposits.
Several banks are known to have been severely affected by the dollar shortage, to the extent of failing to meet their customers' demands for foreign currency as anxious institutions buy and hoard for future.
A source in the banking sector told The EastAfrican last week that some financial institutions were buying dollars and exporting them out of the country.
Owing to the relaxed foreign-exchange control regime in Tanzania, it is possible for one to buy large quantities of foreign currency in forex bureaux without any questions being asked. Only banks have formal procedures where reasons for such forex demand and supporting evidence must be produced before one is allowed to buy hard currency.
While the BoT says its forex reserve is at comfortable levels, it however warns: "The robustness of the foreign reserve is important for the stability of the Tanzanian shilling and confidence in the economy."
Although the central bank says it intervenes in the market to contain the short-term volatility in the exchange rate that may appear to be inconsistent with economic fundamentals, the current exchange rate of the Tanzanian shilling to the US dollar continues to rise.
But Gothalm Mbele, an independent financial analyst in Dar es Salaam, told The EastAfrican that hoarding of foreign currencies could be a result of the high demand for the currency when the supply is low, particularly towards the Christmas season, where suppliers need cash for imports during the holiday season.
"The spillover effect of the global financial crisis in Tanzania is still minimal owing to our relatively small financial sector," he said.
The central bank regulations for foreign banks operating in the country that have parent banks abroad requires such banks to have multiple foreign corresponding banks in order to spread risk and safeguard deposits in case a serious problem occurs.
Barclays Bank and Citibank are among the international banks operating in the country.
Financial analysts had expected that in this month of November, local markets would be experiencing improved liquidity as refunds to applicants for the highly successful initial public offering of the National Microfinance Bank -- to the tune of $190 million -- started to enter circulation.
The IPO had caused a financial crunch in the markets, forcing banks to eat into their foreign reserves. This happened even after the BoT had tried to avert the situation by barring commercial banks from extending loans to customers for purchasing NMB shares using the depository receipts as collateral.
Had the BoT not acted, the oversubscription would have gone way over the $190 million that NMB experienced.
But the central bank is confident that on the basis of financial indicators, the sector is resilient enough to withstand the current shocks emanating from the global financial crisis.
The central bank said last week that the BoT would maintain its foreign-exchange policy, including its presence in the foreign-exchange market aimed at not only complementing the other market instruments used in liquidity management operations, but also ensuring orderly developments in the market.
In a note to commercial banks operating in Tanzania, the central bank said it will "face head-on any disruptive speculative behaviour in the market, including ensuring that the code of conduct of the Interbank Foreign Exchange Market is strictly adhered to by all participants."
Measures will also be taken to ensure the maintenance of an orderly payments system, so as to protect the market from possible contagion transmitted to the country through a weakly regulated national payments system.
The recent turmoil in global financial markets has generated growing fear, anxiety and lack of confidence among financial institutions. This has severely curtailed credit in global markets.
The BoT internal memo to the foreign and commercial banks said that in Tanzania, despite the ongoing global financial crisis, the banking sector continues to be safe, stable and sound. The sector is adequately capitalised and profitable. On the basis of financial indicators, the sector is considered resilient to the current shocks emanating from the global financial crisis. Liquidity is high, thus leaving no concern on the ability of banks to meet maturing obligations.
Despite the continuing financial crisis in the country, the bank said credit to the private sector has continued to grow rapidly, reaching a staggering growth rate of 48 per cent in September 2008.
The banks continue to lend to each other at a reasonable rate of about 5 per cent in the daily interbank cash market, in contrast to the freezing of credit in the developed countries.
"On the other hand, foreign borrowing by Tanzanian banks and holding of foreign securities affected by the crisis is very low, thus, limiting the exposure of our banks to this crisis," said the memo signed by Professor Ndulu.
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