The Impact of Rising National Debt and Currency Depreciation on the Citizen's Economic Growth and Stability
Tanzania has experienced notable changes in both external and domestic debt over recent years. As of April 2021, Tanzania's external debt was TZS 75.39 billion, increasing to TZS 87.67 billion by March 2023, before slightly declining to TZS 83.80 billion by April 2024. This indicates an overall 11% increase over the year from April 2023 to April 2024. Similarly, domestic debt rose from TZS 27.94 billion in April 2021 to TZS 31.34 billion by March 2023, then decreased slightly to TZS 30.75 billion by April 2024, reflecting a 10% annual increase from April 2023 to April 2024. Consequently, Tanzania's total debt, combining both external and domestic debt, rose from TZS 103.33 billion in April 2021 to TZS 119.01 billion by March 2023 and then decreased to TZS 114.55 billion by April 2024, representing an 11% increase over the year.
The increasing national debt, both external and domestic, has a direct impact on the value of the Tanzania shilling. The consistent rise in debt levels indicates a higher demand for foreign currencies, particularly the US dollar, to service external debt obligations and finance imports. This increased demand exerts pressure on the shilling, leading to its depreciation. For instance, in April 2024, the Tanzania shilling traded at an average rate of TZS 2,584.69 per US dollar, compared to TZS 2,563.07 in March 2024, representing a slight monthly depreciation. Over the year, the shilling depreciated by 11.2%, reflecting broader economic factors and increased demand for foreign currency.
The Interbank Cash Market (IBCM) and the Interbank Foreign Exchange Market (IFEM) provide insights into the liquidity management and foreign exchange dynamics that influence the shilling's value. In April 2024, the IBCM saw increased transaction volumes, rising from TZS 1,635.2 billion in March to TZS 1,768.4 billion, indicating heightened liquidity activity. Despite declining interest rates, suggesting improved liquidity conditions, the high demand for US dollars in the IFEM persisted, driven by international trade requirements and debt servicing needs.
To stabilize the foreign exchange market, the Central Bank intervened by selling USD 69.75 million in April 2024. Such interventions are crucial in managing exchange rate volatility and ensuring an adequate supply of foreign currency. Despite these efforts, the sustained high demand for US dollars and the depreciation of the shilling indicate ongoing challenges in the foreign exchange market.
The increase in national debt and the depreciation of the shilling highlight several economic implications for Tanzania:
The depreciation of the Tanzania shilling against major foreign currencies, such as the US dollar, directly impacts the cost of imported goods and services. For the average Tanzania citizen, this translates into higher prices for everyday essentials, such as food, fuel, and medicine, which are often imported. This inflation erodes purchasing power, making it more difficult for individuals to afford basic necessities and maintain their standard of living.
While increased borrowing can stimulate economic growth through infrastructure projects and development programs, the benefits may not be evenly distributed. Large-scale projects may create jobs and spur economic activity, but the average citizen might not see immediate benefits, especially if these projects are concentrated in urban areas or specific sectors. Additionally, if the government prioritizes debt servicing over social spending, programs that directly benefit low-income citizens, such as education, healthcare, and social services, may face cuts.
The overall decline in interbank interest rates, as seen in the IBCM, suggests improved liquidity conditions. For the average citizen, lower interest rates can make borrowing cheaper, potentially increasing access to credit for small businesses and personal loans. However, if inflation rates are high due to the depreciating shilling, the real cost of borrowing may remain burdensome, limiting the positive impact on individual economic activities.
Government borrowing to finance infrastructure and development projects can lead to improved public services and infrastructure. This can have long-term benefits for the average citizen by providing better roads, schools, hospitals, and utilities. Improved infrastructure can enhance productivity and open up new economic opportunities, particularly in rural areas where access to markets and services is limited. However, the efficiency and effectiveness of these investments are crucial; mismanagement or corruption can undermine potential benefits.
Depreciation of the shilling can impact savings and investments. For those with savings in local currency, the real value of their savings may decrease, discouraging saving behavior. Conversely, those with investments in assets or foreign currencies may see their wealth grow in local currency terms. Uncertainty and inflation can also discourage long-term investments, affecting overall economic growth and individual financial security.
Economic challenges such as rising inflation and high debt levels can exacerbate social inequality. The average citizen, particularly those with lower incomes, may feel the brunt of economic pressures more acutely. As the cost-of-living increases and access to public services potentially diminishes, the gap between the wealthy and the poor can widen, leading to greater social and economic disparities.