Transaction Dollarization in Tanzania

Abstract

Some observers in Tanzania have suggested that a significant portion of Tanzania’s businesses and service providers are using the U.S. dollar for pricing purposes as well as carrying out transactions.  However, very little evidence has been put forward to support these claims.  This study examines the evidence of dollarization in Tanzania, focusing mainly on the use of U.S. dollar as a medium of exchange and unit of account.  The evidence presented in this study suggests that many of the concerns that have been expressed by some observers about significant use of the U.S. dollar as a medium of exchange in Tanzania are not well founded.  The findings indicate that about 3.2 percent of the businesses in Mainland Tanzania and 4.5 percent in Zanzibar quote prices in U.S. dollar, but most of these businesses were willing to accept payments in Tanzanian shilling.  Only 0.1 percent of the businesses in the Mainland and none in Zanzibar indicated that they would prefer payments exclusively in U.S. dollar.  The findings also indicate that quotation of prices in U.S. dollar is limited to specific locations and applies to specific products/services, and in most cases is done for bona fide reasons.  It is important to appreciate the influence of increased trade openness on demand for and attitude towards U.S. dollar, which is the dominant currency of foreign trade. The fact that Tanzanians hold a small portion of their wealth in U.S. dollar and insignificant number of prices are quoted in foreign currency may not be surprising in an economy where foreign goods and services account for a significant portion of what a typical household consumes.  This may simply be a natural phenomenon resulting from the fact that Tanzanian economy has become much more open and outward oriented than it was some 20 years ago. In addition, this experience is not unique to Tanzania.  Many countries in the region and across the world are experiencing a similar situation. We urge the authorities to avoid the use of direct measures in their quest for limiting dollarization in the economy because international evidence suggests that enforcing de-dollarization can potentially be counter-productive. Instead, we recommend the use of gradual market-oriented measures aimed at enhancing the attractiveness of the domestic currency.