DAR ES SALAAM: The Tanzanian central bank governor said he would not step in to support the country's falling currency, comments which sent the shilling to an all-time low against the dollar on Friday.
Governor Benno Ndulu said although the currency had hit a low on increased importers' demand for the dollar, the bank would not move to defend the shilling. Analysts warned a further depreciation would hurt the import-dependent economy.
"It won't be to our benefit if we decide to artificially stabilise our currency.
We would rather continue to deal with the main economic fundamentals," Ndulu told The Citizen newspaper in an interview published late on Thursday.
The newspaper report said Ndulu refused to move to stabilise the shilling because it would reduce Tanzania's competitiveness.
Tanzania's shilling breached the psychological 1,700 level against the dollar on Friday and traded at a record low of 1706.0, Thomson Reuters data showed.
Traders said market players moved quickly to cover their long positions on expectations the shilling could fall further.
"Traders have quickly reacted to media comments made by the governor. Everyone was looking to cover their long positions following speculation that the shilling would continue to slide in the absence of any intervention from the central bank," said Hakim Sheikh, a trader at Commercial Bank of Africa, Tanzania.
"We reached actual trading of 1,705/1,715 today. These are unprecedented levels, the shilling could fall to 1,720 in the coming days if corporate customers come in with their demand."
"FROM BAD TO WORSE"
Ndulu said the central bank had been selling about $100 million a month for the last three months to try to control inflation, which rose for the 10th straight month in August to 14.1 percent. Analysts expect consumer prices to rise further.
Unlike neighbouring Kenya, east Africa's economic powerhouse, whose central bank has been actively supporting its currency, Tanzania has adopted a less hands-on approach, saying a weak shilling was good for exports and the country was not willing to deplete its foreign exchange reserves for the sake of a stronger shilling.
One analyst said the central bank needed to take a more aggressive approach to prevent a further slide.
"The central bank cannot just sit there and do nothing because it is itself an active participant in the market since it has (forex) funds from export earnings, foreign loans and grants," Haji Semboja, a research fellow at the University of Dar es Salaam's Economic Research Bureau, said.
"We are moving from bad to worse a macro-economic imbalance in foreign exchange movement has led to the depreciation of the shilling, the inflation rate is rising, we have low economic growth and problems in the balance of payments."
Traders said corporate customers were staying away from the market in the hope that the shilling would rebound.
"But if things remain the same, corporate customers will be forced to pick up dollars and the shilling will further decline."
Market players said the shilling might test 1,720 next week having broken the 1,700 barrier.
"The government's capacity to finance its activities is limited. The economic outlook is not good.
we haven't reached a negative growth rate, but the government is also struggling with a power crisis, youth unemployment and food shortages," said Semboja.
Copyright Reuters, 2011
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