TANZANIA IS VULNERABLE TO DUTCH DISEASE

Posted by data tz on Saturday, August 13, 2016 0

TANZANIA IS VULNERABLE TO DUTCH DISEASE 

In economics, the Dutch disease is the apparent causal relationship between the increase in the economic development of a specific sector (for example natural resources) and a decline in other sectors (like the manufacturing sector or agriculture). The putative mechanism is that as revenues increase in the growing sector (or inflows of foreign aid), the given nation's currency becomes stronger (appreciates) compared to currencies of other nations (manifest in an exchange rate). This results exports becoming more expensive for other countries to buy, and imports becoming cheaper, making those sectors less competitive.

For the case of Tanzania, Natural gas discovery in Mtwara, will lead to appreciation of Tsh due to high supply of foreign currency after high exportation of gas, this will lead to a country to be more competitive than other countries which make agriculture and manufacture products to be more expensive in term of foreign currency (discourage agriculture & manufacture sector production). Decline in agriculture and manufacture sector is called Dutch disease

Also due to high need of labour in gas sector (boom sector) lead to high movement of both skilled and unskilled labour from agriculture and manufacture sector in Morogoro, Mbeya, Iringa, Rukwa and Dar es salaam respectively to Mtwara, this will lead to low production in agriculture and manufacture sector. 

What is needed? Government need to intervene this by both monetary and fiscal policy:

By monetary policy: Government need to buy excess foreign currency so as to reduce its supply in the market so as to maintain exchange rate. This will make price of agriculture and manufacture sector to remain unchanged in term of foreign currency after gas discovery in Mtwara. 

By fiscal policy: Government have to use revenue (tax) and expenditure to rescue the situation; government should subsides both agriculture and manufacture sector so as to boost production also should reduce export tariff in both two sector to make price unchanged after appreciation of currency due to gas discovery.

@ Data Tz

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