By aligning more closely with the Eurozone, Tanzania might open up new avenues for trade. Photo: Courtesy
Tanzania’s Shift to Euro Due to Dollar Shortage Affects Fuel Prices
By Adonis Byemelwa
Dar es Salaam – Importers in Tanzania, particularly those dealing in petroleum products, are increasingly adopting the euro due to a persistent shortage of US dollars. However, this shift comes at a cost, as the euro remains an expensive alternative and the dollar is still preferred as the vehicle currency in international trade.
Traders began adopting the euro after noting its long-term stability and broad acceptance. Raphael Mgaya, the Executive Director of the Tanzania Association of Oil Marketing Companies (Taomac), reported that the forex required for June’s petroleum imports included $86.7 million and 43.8 million euros from the official market, excluding dollars obtained from the black market. The global dollar crisis has compelled Tanzania to rely more on the euro for imports, affecting fuel prices.
“Over a third of the petroleum products imported in June were paid for in euros. This partially explains the current fuel prices in the country,” Mgaya stated, noting that dollars are now more accessible in the black market but at higher rates than the official ones.
The Energy and Water Utilities Regulatory Authority (Ewura) announced a slight relief in fuel prices but highlighted that the use of euros limited the decrease. Ewura Director General James Mwainyekule attributed the price changes to exchange rate fluctuations and the increasing use of euros for petroleum payments.
The Bank of Tanzania (BoT) acknowledged the business community’s gradual shift to the euro and other currencies. However, BoT noted that these alternatives remain costly due to the international preference for the dollar. In early 2023, the government confirmed the dollar shortage affecting several African nations, including Tanzania.
Edward Urio, President of the Tanzania Freight Forwarders Association (Taffa), described the situation as critical. Many members lack dollar accounts, and despite the dollar’s scarcity, they have not switched to the euro due to its higher costs. Freight, demurrage, and deposit charges require dollar payments, and commercial banks’ limited daily dollar issuance has increased operational costs.
Tanzania traders’ chairman Hamisi Lizembe reported that commercial banks now offer only $500 daily, forcing businesses needing $50,000 to $100,000 to wait up to three months to accumulate enough for imports.
As a result, businesses have opened dollar accounts to mitigate the crisis, but international transactions still often require converting euros back to dollars, adding to costs. The dollar shortage has led to increased prices for goods, including food, hardware, and vehicles.
BoT Governor Emmanuel Tutuba explained that high US inflation and interest rates have impacted Tanzania. While various currencies circulate, their exchange rates remain high due to the dollar’s dominance. He expressed optimism that the situation would improve with the start of the export season for traditional crops, the reopening of mines after the rainy season, and the onset of the tourism high season.
The scarcity of US dollars in Tanzania has been exacerbated by several global financial dynamics, including persistent inflationary pressures, tightening monetary policies in developed economies, and geopolitical tensions that have disrupted supply chains and strained currency reserves.
For Tanzania, an economy heavily reliant on imported fuel, the dollar shortage posed a substantial risk to its energy security and economic stability. The government’s decision to adopt the euro is seen as a pragmatic response to circumvent these challenges and ensure a steady flow of fuel into the country.
This transition is not without its complications. The immediate impact on fuel prices is palpable. As Tanzania navigates the complexities of trading in euros, the initial phase has seen fluctuations in fuel costs, attributed to the differences in currency exchange rates and transaction fees.
The euro, while more stable in certain contexts, introduces a new set of variables for the Tanzanian economy, which has long been calibrated to the dollar-dominated global market.
The shift also underscores a broader trend among developing nations seeking to diversify their foreign currency reserves. By reducing reliance on the US dollar, countries like Tanzania aim to mitigate the risks associated with dollar shortages and enhance their economic resilience. This move could potentially pave the way for more stable and diversified economic interactions on the global stage.
The implications for the Tanzanian economy extend beyond just fuel prices. Importers and fuel distributors are now faced with the task of adjusting to the new currency framework, which involves renegotiating contracts, recalibrating pricing strategies, and navigating the intricacies of euro-based transactions.
This adjustment period is critical, as it will determine the efficiency and effectiveness of the transition. The government is likely to play a crucial role in facilitating this process, providing guidance, support, and possibly incentives to ensure a smooth adaptation.
Moreover, the switch to the euro could influence Tanzania’s broader economic policies and its relationships with international trading partners.
By aligning more closely with the Eurozone, Tanzania might open up new avenues for trade, investment, and financial cooperation.
This realignment could also attract Eurozone investors looking for new opportunities in African markets, thereby fostering economic growth and diversification.
In the long term, if managed effectively, this shift could fortify Tanzania’s economic position, reducing vulnerability to global dollar fluctuations and fostering stronger ties with the Eurozone.
It also positions Tanzania as a case study for other developing nations grappling with similar challenges. As the nation navigates this significant economic shift, the eyes of the world will be on Tanzania, observing how it balances the immediate challenges with potential long-term gains.
However, the success of this strategy will depend on multiple factors, including global economic conditions, the stability of the euro, and the ability of Tanzanian institutions to manage and sustain the transition.
The government’s role will be crucial in maintaining market confidence and ensuring that the benefits of this shift are realized across the economy.
In addressing the dollar shortage, Dr. Bravious Kahyoza, an economics expert from the University of Dar es Salaam, suggests several strategies.
He emphasizes the need for the government and the Bank of Tanzania (BoT) to enhance forex reserve management by diversifying the currency composition of reserves, including increasing holdings of euros, pounds, and other stable currencies.
“Enhancing forex reserve management by diversifying our currency composition is critical,” Dr. Kahyoza stated. “We need to increase our holdings of euros, pounds, and other stable currencies to better manage our reserves.”
Promoting export-oriented industries can significantly increase foreign exchange earnings. By investing in agriculture, mining, and tourism, Tanzania can boost dollar inflows.
Encouraging value addition in agricultural exports and expanding mining operations could generate substantial forex revenue.
“We must invest in agriculture, mining, and tourism to boost our foreign exchange earnings,” Dr. Kahyoza explained. “Value addition in agricultural exports and expanding mining operations can generate significant forex revenue.”
An economics expert from the University Dr. Bravious Kahyoza: Photo: Courtesy
Establishing bilateral currency swap agreements with major trading partners could also reduce reliance on the dollar. These agreements allow countries to trade in their local currencies, bypassing the need for dollars and reducing exchange rate volatility.
“Establishing bilateral currency swap agreements with our major trading partners is essential,” said Dr. Kahyoza. “These agreements allow us to trade in local currencies, reducing our reliance on the dollar and minimizing exchange rate volatility.”
Enhancing financial infrastructure to support digital transactions and remittances is another critical strategy. Streamlining remittance processes and offering competitive exchange rates could increase diaspora contributions.
“We need to enhance our financial infrastructure to support digital transactions and remittances,” Dr. Kahyoza emphasized. “Streamlining remittance processes and offering competitive exchange rates will attract more foreign currency inflows from our diaspora.”
Dr. Kahyoza was quoted in an exclusive interview with one of the leading online television channels in the recent past, emphasizing that by implementing these measures, Tanzania can mitigate the impact of the dollar shortage, stabilize its currency market, and support sustainable economic growth.
