Tanzania’s de-dollarisation strategy: Strengthening the shilling for economic stability

Tanzania is finalising new guidelines to enforce the exclusive use of the Tanzanian shilling for all domestic transactions, as mandated by the Bank of Tanzania Act (2006). While the law has existed for years, enforcement has been weak, allowing foreign currencies, particularly the U.S. dollar, to remain dominant in key sectors such as real estate, tourism, and high-value transactions. The initiative, led by the Ministry of Finance and the Bank of Tanzania (BoT), aims to strengthen the local currency, enhance monetary sovereignty and curb the unnecessary demand for foreign exchange.

Tanzania has experienced significant dollarisation, where foreign currencies are used alongside or instead of the shilling. According to the Bank of Tanzania’s Monetary Policy Report from April 2024, the ratio of foreign currency deposits to the broad money supply (M3) increased to 25.2% in September 2024, up from 22.8% in September 2023. This rise indicates an increased preference for holding foreign currencies, which can weaken the Tanzanian shilling and limit the Bank of Tanzania’s ability to regulate monetary policy effectively.

This latest push follows years of government efforts to combat the widespread use of foreign currencies. Past attempts, including public notices in 2007 and 2017 that prohibited domestic payments in foreign currencies between Tanzanian residents, had minimal impact. However, mounting public concern over currency instability and economic pressure prompted the enactment of the Finance Act 2024, which mandates the exclusive use of the shilling for all domestic transactions, with only a few exceptions to be prescribed by the Minister of Finance. 

The new regulations will criminalise transactions conducted in foreign currency, reinforcing the government’s broader economic strategy, which also includes a gold-buying program to bolster the country’s foreign exchange reserves and strengthen the Tanzanian shilling.

The implications of these new guidelines are significant. A stronger and more stable shilling will help reduce dependence on foreign currencies, giving the Bank of Tanzania greater control over inflation, interest rates, and liquidity. However, businesses that rely heavily on the U.S. dollar, particularly those in hospitality and import/export, may face difficulties in adjusting. Non-compliance could result in penalties, but enforcement remains a challenge, raising concerns over how the government will monitor and regulate these transactions effectively.

To ensure compliance, Tanzania will need to implement strict regulatory oversight, ensuring that banks and businesses transact exclusively in shillings. Public awareness campaigns will be essential in educating citizens and businesses about the benefits of using the local currency. Incentives for businesses that comply with the new rules could help ease the transition, while clear penalties for violators will serve as a deterrent against continued use of foreign currencies.

Tanzania can learn from other countries that have attempted similar policies. Nigeria enforced the exclusive use of the naira but struggled with black market currency exchanges, which undermined the policy. Zimbabwe attempted to de-dollarize but faced policy inconsistencies that led to the development of a parallel foreign currency market. Tanzania’s success will depend on consistent enforcement, clear communication, and measures to prevent capital flight or economic disruptions. By addressing these challenges, the country stands a better chance of reducing dollarisation and strengthening its monetary system.