The relationship between foreign exchange and capacity utilization in Tanzania with reference to foreign exchange allocation to the industry sector

This study addresses itself to the relationship between foreign exchange and capacity utilization in Tanzania with particular reference to the industrial sector. It sets out to investigate how the shortage of foreign exchange has acted as a constraint to the development of the economy. The pattern of industrialization undertaken in Tanzania tends to put pressure on the balance of payments position since it hardly contributes to foreign exchange earnings or saving. The study attempts to show that the chief proximate cause of Tanzania's payments problems has been the poor performance of her exports. Export prospects have seemed to be so poor and this has tended to exacerbate the country's economic problems. If her exports could improve in the near future and become dynamic then the current economic crisis would be reduced. Although we have argued that the export failure lies at the root of the current economic problems, import policies, especially those affecting relative prices of imports and domestically produced goods have had an aggravating effect, The most serious thing in Tanzania industrialization has been the absence of export producing industries since the existing ones were established to cater for the domestic market. Shortages of foreign exchange have a critical' effect on the performance of the economy i.e. by creating shortages of raw materials and spare parts which in turn contribute to large scale capacity underutilization in the industrial sector, The study shows that while capacity use could be improved to some level by a fair distribution system of import licenses foreign exchange allocation mechanism is defective. The norms under which foreign exchange allocation is done by the Bank of Tanzania to determine import priorities leaves much to be desired. There is almost lack of published principles according to which the Central Bank could base its foreign exchange allocation for imports. This shows the arbitrary nature of such a system. Priorities for foreign exchange allocation are influenced by import planners and this sounds basically as a function of administrative discretion due to lack of a rational basis. Investment policies have been faulty in the choice of products and technique. Sectors such as agriculture, manufacturing and services which generate foreign exchange have been neglected. Local firms have not been utilized in areas where foreign exchange could be saved. Instead, foreign firms have been used e.g. in construction, consultancy, research and development centres. Some of the major recommendations of the study are that the industrial sector should be concentrated on the production of the most, basic consumer goods necessary for survival and which serve as incentive goods to agriculture and also to the government revenue earning industries, and those generating foreign exchange. This should be done through an appropriate allocation of the scarce foreign exchange resources, together with a strong emphasis on the production patterns leading to more basic, less foreign exchange demanding products. The study further recommends that Tanzania should establish a direct 'link between export performance and import licensing for some selected industries. The study cautions that because of the weak statistical base in the country coupled with poor planning methods, the Structural Adjustment Programme (SAP), which has come as a Consolidation to the National Economic Survival Programme (NESP) may fail due to unrealistic export targets. In this framework, the study sees SAP as a declaration of Biblical intentions which cannot be achieved if the financial assistance required to implement the programme does not come in larger quantities