Liquidity Trends, Government Borrowing, and Exchange Rate Movements

In December 2024, Tanzania’s financial markets showed notable shifts in liquidity, government borrowing, and currency performance. Interbank cash market rates fell to 7.41% from 8.06%, signaling improved liquidity among banks. The government securities market saw Treasury bill yields rise to 12.86%, reflecting higher borrowing costs. Meanwhile, the Tanzanian shilling appreciated by 9.3%, trading at TZS 2,420.84 per USD, supported by strong inflows from cashew nut, tobacco, and gold exports. These developments indicate a stable financial system, easing monetary conditions, and a strengthening currency, which could have mixed effects on borrowing costs, investment, and trade​

The financial market in Tanzania, as reported in the Bank of Tanzania’s Monthly Economic Review (January 2025), showed notable developments in the Government Securities Market, Interbank Cash Market, and Interbank Foreign Exchange Market during December 2024.

1. Government Securities Market

• The Bank of Tanzania conducted two Treasury bill auctions in December 2024, with a combined tender size of TZS 252.8 billion to support government budgetary needs.
• Total bids received amounted to TZS 239.5 billion, of which TZS 217.8 billion were successful.
• The weighted average yield (WAY) on Treasury bills increased to 12.86%, up from 12.68% in November 2024, indicating rising government borrowing costs.
• In the Treasury bond market:
  • The 10-year bond auction was canceled due to undersubscription.
  • The 20-year bond was in high demand, with total bids of TZS 244.9 billion, out of which TZS 211.9 billion were accepted.
  • The yield on the 20-year bond increased to 15.71% from 15.64%, reflecting higher investor expectations for returns​.

2. Interbank Cash Market (IBCM)

• The Interbank Cash Market plays a key role in distributing liquidity among banks.
• In December 2024, total transactions in the IBCM reached TZS 1,616.8 billion, slightly lower than TZS 1,650 billion in November 2024.
• The overnight segment represented 12% of total market turnover, while 7-day transactions accounted for 43.9%.
• The overall IBCM interest rate decreased to 7.41%, down from 8.06% in November 2024, reflecting improved liquidity conditions in the banking sector​.

3. Interbank Foreign Exchange Market (IFEM)

• The foreign exchange market showed a significant improvement in liquidity, driven by increased foreign exchange inflows from exports of cashew nuts, tobacco, mining, and tourism receipts.
• Total transactions in IFEM reached USD 95.7 million in December 2024, up from USD 17.1 million in December 2023, showing a more active market.
• The Bank of Tanzania intervened, purchasing USD 0.5 million and selling USD 2 million.
• The Tanzanian shilling appreciated significantly, reversing the depreciation trend observed in previous months:
  • The exchange rate strengthened to TZS 2,420.84 per USD, compared to TZS 2,659.03 per USD in November 2024, representing a monthly appreciation of 9.3%.
  • On an annual basis, the shilling appreciated by 3.8%, a notable improvement from the 6.3% depreciation recorded in the previous month​.

Key Takeaways:

• The government securities market saw increased yields, indicating rising government borrowing costs and investor demand for higher returns.
• The interbank cash market experienced lower interest rates, suggesting improved liquidity and reduced short-term borrowing costs for banks.
• The foreign exchange market saw strong inflows, leading to Tanzania Shilling appreciation by 9.3% in one month, supported by rising exports and monetary policy adjustments.

The developments in Tanzania's financial markets provide key insights into liquidity conditions, investor sentiment, and monetary policy effectiveness

1. Government Securities Market: Rising Yields & Demand Shift

• The increase in Treasury bill yields to 12.86% (from 12.68%) and 20-year bond yields to 15.71% (from 15.64%) suggests that investors demand higher returns, possibly due to:
  • Perceived risk of government debt.
  • Tighter liquidity conditions in the market.
  • Expectations of inflation or monetary tightening in the future.
• The 10-year bond cancellation due to low demand signals that investors prefer shorter or longer maturities, possibly due to uncertainties over medium-term economic policies.

Implication: The government may face higher borrowing costs, affecting fiscal planning and debt sustainability.

2. Interbank Cash Market (IBCM): Improved Liquidity, Lower Rates

• The IBCM interest rate fell to 7.41% (from 8.06%), and total transactions reached TZS 1,616.8 billion, indicating:
  • Improved liquidity in the banking system.
  • More confidence among banks to lend to each other.
• The fact that 7-day transactions accounted for 43.9% of turnover shows that banks are shifting towards slightly longer borrowing periods rather than relying solely on overnight liquidity.

Implication: The banking system has adequate liquidity, reducing pressure on short-term funding costs and supporting credit expansion to businesses and individuals.

3. Interbank Foreign Exchange Market (IFEM): Stronger Shilling & Increased Transactions

• The shilling appreciated by 9.3% in one month, trading at TZS 2,420.84 per USD (from TZS 2,659.03 in November 2024).
• Foreign exchange transactions increased significantly to USD 95.7 million, up from USD 17.1 million in December 2023, driven by:
  • Higher export earnings from cashew nuts, tobacco, and gold.
  • Tourism inflows and mining revenues.
  • Easing global interest rates, which reduced capital outflows.

Implication: A stronger shilling reduces import costs, helping to contain inflation, but could make exports less competitive if the trend continues.

Overall Takeaway:

1. Monetary policy is effectively stabilizing liquidity, as reflected in lower interbank rates and an active foreign exchange market.
2. The government is facing rising borrowing costs, which may impact fiscal planning.
3. The shilling is strengthening, showing strong foreign exchange inflows, but policymakers should balance this to avoid hurting exports.

These trends suggest that Tanzania’s financial markets are active and responsive to policy changes, investor sentiment, and external economic factors​