Despite the emergence of financial technology, especially mobile money in East Africa, Tanzania still uses cash in most of the payments. The then-governor of the Bank of Tanzania, Florens Luoga, mentioned cash payment as a challenge to a monetary policy.
The problem of cash payments is not only an issue for the monetary policy but also for the people, especially consumers. On JamiiForums, the Swahili discussion forum in Tanzania, people complain about the big problem of small change in some services, especially the Rapid Bus Transport.
All these issues motivated me to research more on the issue, where I came up with the concept of “Denominational inflation” or “Cash inflation.” This research paper was published in the Advanced Research in Economics and Business Strategy Journal (Vol. 6, No. 1, 2025).
After the publication, I have decided to write concisely about the issue to the general audience, more like presenting what the study found. As for start, when small bills or coins are missing, businesses round up prices to the nearest amount they can make change for—this is called Denominational Inflation.
Tanzania now has Sh10,000 as its biggest denomination, and one cent as its smallest denomination. However, in circulation, the smallest unit now is Sh50. It is logical for the Bank of Tanzania not to mint the coins below Sh50, as they are costly. The minting cost will be greater than the extrinsic value of the coin minted.
This makes sense for the economy, but it leaves sellers with few pricing options—they can’t charge amounts that can’t be paid with the cash people carry. And in the published study, Sh50 is now on its way not to be cited in the market that relies on cash. When producers set the price with an additional unit to make the price payable, it is where the problem arises.
Bus fares
For example, the Land Transport Regulatory Authority (LATRA) sets bus fares based on precise per-kilometre calculations. The distance from Dar es Salaam to Dodoma, for example, is 424km. And the price per kilometre is Sh48.47 for ordinary and Sh67.84 for semi-luxury buses.
This makes the calculated price from Dar to Dodoma Sh20,551.28 for an ordinary bus and Sh28,764.16 for semi semi-luxury bus. However, the cited price is Sh21,000 for ordinary and Sh29,000 for semi-luxury. The calculated price could not be paid as the smallest units are not payable in a cash economy.
Using the commuter bus fares and long-distance fares, on average, the study has shown that people pay Sh37.2 more on commuter buses and Sh266 for ordinary long-distance buses. And the consumers of semi-luxury buses pay less on average. The average cost that is used to clear the denominational problem has been called the “adjustment unit,” calculated by just taking the displayed price minus the calculated price.
Online marketplaces
The study compares prices cited by two online malls operating in Tanzania, Dar Shopping and Kikuu. The prices were obtained by using open open-source tool called Data Miner to scrape the respective websites. Dar Shopping uses cash, and the customer pays on delivery. Kikuu, on the other hand, uses only digital means of payment.
READ MORE: Too Expensive to Go Cashless: The Cost of Digital Payments in Tanzania
The study has shown a significant difference in the prices cited in the two online marketplaces. At Dar Shopping, for example, only 1.17 per cent of prices end in a non-zero digit, and just 2.58 per cent end in Sh50, reflecting a reliance on rounded figures like Sh100 or Sh500. In contrast, Kikuu’s prices are far more granular, with 44.02 per cent ending in non-zero digits and 5.44 per cent in Sh50.
Research shows that in cash-only markets, prices are often rounded up, costing buyers more. For instance, only 0.42 per cent of Dar Shopping’s prices end in Sh100, compared to Kikuu’s more flexible pricing, which better reflects actual value. This rigidity in cash-based systems stems from the practical need to match prices to available denominations, constraining digital payments from entirely bypassing.
Denominational inflation is not merely a pricing inconvenience; it’s a monetary policy challenge. The Bank of Tanzania (BoT) aims to maintain inflation at a five per cent target, measured by the Consumer Price Index (CPI). However, as the study notes, limited currency divisibility increases the “adjustment unit” in the money supply, effectively raising prices.
This aligns with the Quantity Theory of Money, which posits that money supply growth drives inflation. When prices are rounded upward due to unavailable denominations, consumers’ purchasing power erodes, and the general price level rises.
This ‘cash rounding’ effect worsens inflation in a way that’s different from usual causes, like supply shortages or high demand. By introducing the concept of transactional inflation, my work underscores how the mechanics of payment systems can directly contribute to economic distortions.
Key solution
The solution lies in embracing digital payment systems, which offer precise pricing and eliminate the need for rounding. Unlike cash, digital platforms like mobile money allow transactions to reflect exact values, ensuring fairness for both consumers and producers.
READ MORE: Business Leaders Pledge Innovation, Collaboration in Driving Tanzania’s Digital Future
Tanzania has made progress since mobile money’s introduction in 2008, with six providers now active, including Vodacom M-Pesa and Mixx by Yas. Yet, adoption remains limited, with FinScope Tanzania reporting slower uptake compared to Kenya. The study argues that digital payments could enhance monetary policy effectiveness by reducing currency production costs and enabling better price regulation.
Switching to digital payments isn’t just about technology; it’s about fairness, especially for the poor. As the American economist Milton Friedman argues, inflation is a monetary issue, and governments bear responsibility for facilitating equitable exchanges.
In Tanzania, the limited divisibility of currency disproportionately burdens low-income consumers, who pay more for goods and services due to rounding. However, challenges remain. Digital adoption hinges on infrastructure and affordability. The study suggests that transaction fees should not exceed the adjustment unit of cash payments to make digital systems competitive.
Francis Nyonzo is an economist interested in social justice and digital rights. He is available at francisnyonzo@gmail.com. These are the writer’s own opinions and do not necessarily reflect the viewpoints of The Chanzo. Do you want to publish in this space? Contact our editors at editor@thechanzo.com for further clarification.
