Tanzania - Free Essay Example

1.0. INTRODUCTION Tanzania is an sovereign state and is among the Sub Saharan African countries situated in Central East Africa. Neighboring countries are including Kenya and Uganda to the north, while Rwanda, Burundi, and Democratic Republic of the Congo the west, to the southern part bordered by Zambia, Malawi and Mozambique. The country also bordered by Zanzibar and lie on Indian Ocean to the eastern side. Tanzania is still among the developing countries in the world in which its economy based predominantly on agriculture. More than ten years ago, more than 80% people earning their income through agricultural activities and accounts for almost half of the GDP for the nation. However on the side of industries still mainly limited to the processing agricultural products and light consumer goods. In 2008 the gross domestic product growth rate realized to 7.4% and per capita income estimated to 4%. Among other things Tanzania has giant amounts of natural resources including gold, diamonds, coal, iron ore, tanzanite and other minerals. In comparison, Tanzania is ranked to the 3rd largest producer of gold within the African countries after the South Africa and Ghana. Tanzania population up to July 2008 estimated approximately 40,213,160 million. Out of that, 44.3% were the age group from 0-14 years old, 53. 1% aged from 15-64 years and 65 years and above accounted for 2.6%. Even though popular of population which almost 77% of all Tanzanians still live in rural areas. Based on religions, 35% are Muslims, indigenous belief accounted for 35% and the remaining 30% are Christians. Swahili is the mother tongue of the Bantu speaking people living in Tanzania up today, while English is an official, primary language of commerce, administration and higher learning education. Apart from that it has been shown that males have achieved more education than females. As far as employment is concerned, more than 20 million people were active labor force. Unemployment still is the major serious problem particularly facing the youth in a nation. But young females were more affected to this problem than young males. 2.0. ECONOMIC OVERVIEW Tanzania is among the developing countries in the world with the GDP per capita of US$ 300 or US$ 780 in terms of purchasing power parity. In 2008 the GDP growth rate realized to US$ 20,630 and per capita income accounted to US$ 515 (https://www.imf.org/external/data.htm#data). Although agriculture remains the leading sector in the economy which accounting for now under 50% of GDP. With regard to the contribution to employment, this sector generates just about 70% employment of the total national labor force. However, there has been powerful growth in tourism, mining, telecommunications and construction in recent years. Even though the mining sector accounts for only around 3% of GDP, gold has become by far Tanzanias largest export commodity with a share of almost 50% of total export in 2006 (37% in 2005). Due to the fact that Tanzania is still largely focused on particularly exporting primary products, it is highly vulnerable to undesirable weather conditions and world market pric e shocks. Nevertheless high commodity prices in grouping with a relatively successful diversification of the economy have brought Tanzania a relative wealth over the past few years. The economy has developed consistently since the country abolished its heritage of socialist planning in 1986, thus since 2001 Tanzania experience an annual growth rate ranging 6-7%. The real GDP growth of a nation slowed down up to 5.8% in 2006. The main reason for this GDP slowed down was the severe drought which was further affected even for food security. Fortunately enough in 2007 GDP growth picked up again to 6.7% determined by a more enabling environment. Therefore the mining, manufacturing and construction sectors are probably showed strong performance, supported by increased demand and improved electricity supplies. Through the magnetism of foreign direct investment the macroeconomic environment continue to be stable. Most foreign direct investment, however, have little influence on emp loyment, as it concentrate mainly in capital-intensive sectors, such as mining. This sector also has the most potential for economic diversification for instance in oil and gas exploration. Still, despite a strengthening economy, and stronger government institutions and policies, there are significant issues that continue to threaten the countrys performance. The energy sector remains highly underdeveloped and vulnerable to weather conditions, physical infrastructural capacity remains weak, and business regulation bottlenecks continue to suppress private investment. 3.0. BANK OF TANZANIA (BOT) Bank of Tanzania was established after the decision taken by three governments including Kenya, Uganda and Tanzania to dissolve the East African Currency Board (EACB). From that sense each government established its own bank. The bank of Tanzania Act, 1965 was passed by the national assembly in December 1965 and the bank was opened on June 1966 by the first president of that time (Julius K. Nyerere). The Act empowered the bank of Tanzania to perform all the tradition central banking functions. The Bank also reoriented its policies within the eight months since it was launched, that is in February 1967. Most of the traditional instruments of indirect monetary policy stipulated in the Act became inoperative, as there was no longer an environment of the type which exists in a competitive system, where indirect instruments are effective. In 1971/72 foreign exchange plan developed to control the use of foreign exchange in accordance with national priorities. In addition to that in 1978 the Bank of Tanzania Act was amended and came out with four special funds together with the Rural Finance Fund; the Industrial Finance Fund; the Export Credit Guarantee Fund; and the Capital and Interest Subsidy Fund (https://www.bot-tz.org/AboutBOT/BOTHistory.asp). Among other equipment Bank of Tanzania like other banks in the world has its objectives and functions. The primary function first, the Importance of Price Stability, which implies that the rate of inflation measured by the rate of increase of the national consumer price index must be kept as low as possible on average of 0-5%. This will in turn to be the most significant donation to achieving maximum growth for a nations economic wealth. However if the nation experience a higher inflation, wages and salaries might not be increased hurriedly. Resulting to erosion of purchasing power, and finally decrease in real income for large part of population. Further consequences will be corruption, expansion of the informal sect ors, social friction, increased crime and finally economic in-efficiency. Second objective is prerequisites and limits of an effective monetary policy. In order to achieve this objective the bank has to formulate and implement monetary policy by using instruments like Refinancing Policy, Minimum Reserve Policy, Open Market Policy, Foreign Exchange Interventions, and other instruments. Furthermore, the success of the Monetary Policy Objectives has to be facilitated by a continued application of market-oriented policies in the financial sector, the public sector, the industrial sector, the agricultural sector, and the external payments area. Other auxiliary functions of the Bank of Tanzania including Bank of Issue, Bankers Bank, the Governments Bank, Advisor to the Governments, the Guardian of the countrys International Reserves, Supervision of Banks and Financial institutions and endorsement of Financial Development (https://www.bot-tz.org/AboutBOT/BOTFunction.asp). 4.0. EXCHANGE RATE SYSTEM According to https://en.wikipedia.org/wiki/Exchange_rate infinance, theexchange rates(also known as theforeign-exchange rate,forex rateorFX rate) between twocurrenciesspecify how much one currency is worth in terms of the other. It is the value of a foreign nations currency in terms of the home nations currency.For example an exchange rate of 91Japanese yen(JPY, yen;) to theUnited States dollar(USD, $) means that JPY 91 is worth the same as USD 1. Theforeign exchange marketis one of the largest markets in the world. By some estimates, about 3.2 trillion USD worth of currency changes hands every day. Based on Tanzanias figure below, from the end of 2000 up to the mid of 2006 the exchange rate depreciated significantly. However, after that real exchange rate started to appreciate moderately for the twelve months period. In the course of end-2001 from the figure two, it was reported that, the real exchange rate movements were large. That was due to Tanzanias higher inflation relati ve to its trading partners but, with inflation falling to single digits, they have since reflected mainly trends in the nominal effective exchange rate. Following the pointed real appreciation of the shilling in the second half of the 1990s, the Bank of Tanzania (BOT) reduced aid absorption in 2001, while the government continued to fully spend increasing levels of aid. This contributed to a rapid increase in international reserves, and also encouraged depreciation of the nominal exchange rate, particularly during 2002/03 (Berg et. al., 2007). Also according to Tanzanian authorities and IMF staff calculations, since 2003/04, aid has been fully absorbed, and the coverage of reserves has gradually declined (text Table 1). The current account deficit (net of official transfers) has widened, rising to 14 percent of GDP in 2006/07, but remains largely financed by highly concessional donor assistance (8frac12; percent of GDP) and FDI (4frac12; percent of GDP). During April-July 2 007, Tanzania experienced significant portfolio inflows, estimated at about US$200-250 million (equivalent to about 1frac12; percent of GDP). The BOT responded by purchasing most of these additional inflows, resisting nominal appreciation pressures, and sold T-bills to mop up liquidity (Figure 3). Source: Bank of Tanzania In addition to that, in recent years share of goods and services have increased relative to global export. This is more than getting better from the considerable decline of the late 1990s. From the period of the last five years the exports of goods and services have grown for on an average 20%. While in the second half of 2007 the growth rate has speed up sharply in particular manufacturing segment. Due to the depreciation of exchange rate since at the end of 2000 and higher product export prices since 2000/2001, in recent years the export of traditional goods including cotton, coffee, tea and cashew nuts, are remained the same in the nominal US dollar. Th is poor presentation caused by weak supporting financial and transport infrastructure for the sector. On the other hand the sharp go up oil prices in recent years is also having played an important function. 5.0. EXCHANGE RATE INDICATORS In supporting to the https://economics.about.com/cs/economicsglossary/g/exchange_rate.htm in exchange rate indicator, meaning that the current market price for which one currency can be exchanged for another. For instance if the U.S. exchange rate for the Canadian Dollar is $1.60, this means that 1 American Dollar can be exchanged for 1.6 Canadian dollars. From this logic through Bank of Tanzania the exchange rate for the period of December 2009 of buying and selling in difference currencies in terms of 100 units can be shown as: Foreign exchange rate for 11/December /2009 Currency in 100 units Buying Selling USD 130,215.54 132,873.00 EURO 191,807.49 195,761.79 GBP 212,381.55 216,795.59 KES (Kenya Shillings) 1,717.41 1,747.33 Source: https://www.bot-tz.org/ From the table it shows that for example USD 100 can be exchanged for 130,215.54 Tanzania shillings as far as the remaining currencies are concerned. 6.0. TANZANIA EXCHANGE RATE FLUCTUATION on the other hand the economic development can take a major part in making the exchange rate strong. Thus stable exchange rate is very central element for improving economic performance. But because most developing countries and Tanzania is among of them, exchange rate is not aligned to the side of economic behavior. This is due to the fact that its economy still depending on import goods and area in exports produce. For instance on June this year Tanzania government was looking for financial and technological support from China in order to complete the expansion of Tanzania Agricultural Development Bank. Where also lack of ease of access to world financial market which resulted in to lower level of agricultural outputs i.e reducing domestic food supply and more trade inequality. Even though some researchers argued that exchange rate fluctuation is very important for companies mostly concerned in global trade. Therefore the Tanzania shillings fluctuate in accordance to the other cu rrencies. For example Tanzania shilling (TZS) to US dollar as it shows in the graph below between the 6/11/2009 and 12/7/2009 fluctuate in every short period of time. That was mainly since the last year of global financial crises up to this moment the economy does not receiving better. But government try to take action by developing a plan to encourage its economy in allocate more resources specifically on agriculture. This will in turn to improved food exports, increased domestic returns, increased income to local farmers and finally enhanced foreign exchange reserves. Source: https://www.exchange-rates.org/history/TZS/USD/G 7.0. CONLUSION Booming development always results in a currency appreciation in the company of an improvement in the standard of livelihood. Alternatively, a malfunction in economic development results in a quick currency depreciation. In such a way that rapid economic growth is accompanied by real exchange rate appreciation because of differential productivity growth between tradable and non-tradable sectors (Balassa-Samulson hypothesis (1963)). Thus in order to make exchange rate appreciation Tanzania government has to ensure the GDP growth and improvement particularly on the side of trade for the year ahead. In addition to that, resistance in the past to market-driven nominal exchange rate appreciation pressures has contributed to either faster growth, and ultimately inflation, or to a significant increase in interests when the Bank of Tanzania (BOT) intervened to sterilize the liquidity impact of its foreign exchange rates purchases, and proved too costly to maintain on a sustained basis ( as acknowledged in Berg et. Al, 2007). As a result Tanzania policy makers should provide a frame work for making the exchange rate on stability well-matched with economic stability, together with the policy tool that is required to approve the potential differences. References https://www.bot-tz.org/ https://www.bot-tz.org/FinancialMarkets/ExchangeRates/ShowExchangeRates.asp https://economics.about.com/cs/economicsglossary/g/exchange_rate.htm https://www.tanzaniainvest.com/tanzania-economy/news/35-news/299-plans-to-stimulate-tanzania-economy-during-global-crisis https://www.exchange-rates.org/history/TZS/USD/G https://en.wikipedia.org/wiki/Exchange_rate https://www.bot-tz.org/AboutBOT/BOTFunction.asp https://www.bot-tz.org/AboutBOT/BOTHistory.asp https://www.imf.org/external/data.htm#data