Question

With examples, Discuss bases for deficit Balance of Payments (BoP) in Tanzania and possible measures

Answer 1

Answer-The balance of payments (BOP) is a statement of all transactions made between entities in one country and the rest of the world over a defined period of time, such as a quarter or a year.

Tanzania’s overall balance of payments swung to a deficit of $25.7 million in the year to September from a surplus of $619.8 million a year ago. The various causes for this deficit are summarised below-

1. The increased imports of goods and services, mainly those related to infrastructure project has widened the country’s current account, which has overturned the Balance of Payment (BoP) into a deficit for two consecutive months, from a surplus

2. The east African country’s current account deficit widened by 13.2 percent to $2.57 billion following a significant decline in official current transfers.

3. The International Monetary Fund (IMF) reports that in 2000 Tanzania had exports of goods totaling $666 million and imports totaling $1.34 billion. The services credit totaled $615 million and debit $670 million. In September, gross official foreign exchange reserves held by the central bank reached $3.58 billion, or 5.1 months of import cover, up from $3.56 billion a year earlier.

4. The average deposit rate stood at 2.57 percent in September, down from 2.58 percent in August, while lending rates were at 14.34 percent, down from 14.41 percent a month earlier.

5. Tanzania’s national debt reached $10.685 billion at the end of September, up 14.5 percent from a year earlier. Gold exports rose by 59.2 percent in the year to September to $1.48 billion, due to an increase in both export volumes and gold prices on the world market.

6. Revenue collection in the month of September was 502.5 billion Tanzanian shillings, against a target of 562.2 billion shillings.

Some possible measures are-

a.Import Substitution:

The policy of im­port substitution has also been in operation for a long time. It refers to growing substitution of im­ported goods by encouraging domestic produc­tion of such goods. The adoption of this policy has enabled the country to save a considerable amount of foreign exchange.

Due to the success of this policy, the import of capital goods is, at present, much less (e.g., around 16% total imports). A large number of industrial products are now be­ing produced domestically. Imports of non-essential items have been reduced considerably.

b. Export Promotion:

Another important measure is export promotion. Incentives to exporters such as various types of encouragements, concessions and facilities in the form of cash subsidies, duty-free import of capital goods, raw materials, exemption from union excise duty, exemption of export in­come from income tax, special import licences for raw materials required for export, bank loans at low rates of interest to exporters and so on; and organisational efforts such as creation of Ex­port Promotion Councils for promoting exports of various goods; creation of specialised institutions for export promotion.

c. Cost Reduction:

One of the important conditions for the expansion of exports is the re­duction in production costs and, hence, prices, to make India’s products competitive in the interna­tional market. Despite the use of a package of meas­ures to contain inflationary tendencies, inflation is continuing. As a result, India’s export products have become less competitive in the international markets.