The Tanzania Shilling has faced a steady depreciation, recording a 10.1% decline year-on-year as of September 2024, with the average exchange rate reaching TZS 2,727 per USD. This shift reflects both local and global financial pressures, including heightened demand for foreign currency and increasing import costs. Although the Bank of Tanzania has minimized its market interventions, foreign reserves remain robust, covering 4.4 months of imports. These reserves offer a financial cushion, helping Tanzania navigate currency volatility and maintain economic stability amid external shocks and inflation risks.

1. Depreciation Rate: As of September 2024, the Tanzania Shilling depreciated by 10.1% year-on-year, with the average exchange rate reaching TZS 2,727 per USD compared to TZS 2,694 per USD in the previous month. This steady depreciation marks a continued downward trend in the currency's valuereign Exchange Market (IFEM) Transactions**:
   • In September 2024, transactions in the Interbank Foreign Exchange Market (IFEM) increased to USD 8.35 million, up from USD 4.61 million in August. The Bank of Tanzania reduced its net sales in the IFEM to USD 0.75 million, down from USD 1 million in August. This reduced intervention suggests a cautious approach to managing currency supply in the market amid ongoing depreciation.
2. Import Coverage: Despite the depreciation, Tanzania’s foreign exchange reserves remain sufficient, amounting to USD 5,413.6 million by the end of September 2024, enough to cover approximately 4.4 months of imports. This buffer provides a level of economic stability and acts as a safeguard against further currency volatility.

This depreciation external pressures on the Tanzania Shilling, likely stemming from high demand for USD, global economic conditions, and local market dynamics. Despite the decline, Tanzania’s substantial foreign reserves offer a degree of resilience to absorb future external shocks.

The depreciation of the Tanzania Shilling indicates key economic signals:

1. External Pressure on Imports and Costs:
   • The Shilling’s 10.1% depreciation year-on-year implies that imports have become more expensive in Tanzania, which could drive up costs for goods reliant on foreign inputs, such as fuel, machinery, and consumer products. This can potentially increase inflationary pressures on the domestic market, as businesses may pass on higher import costs to consumers.
2. Increased Demand for Foreign Currency:
   • The rise in foreign exchange transactions in the Interbank Foreign Exchange Market (IFEM) to USD 8.35 million from USD 4.61 million in August indicates heightened demand for foreign currency. This demand likely stems from increased imports and dollar-denominated debt payments, placing pressure on the Shilling as more businesses and government entities seek to secure USD.
3. Cautious Central Bank Intervention:
   • The Bank of Tanzania's reduced participation in the foreign exchange market—down to USD 0.75 million in net sales—suggests a careful approach to currency stabilization. By not heavily intervening, the central bank may be preserving its foreign reserves to avoid rapid depletion, especially given the uncertainty in global markets. This cautious intervention reflects a balance between managing the currency’s value and maintaining adequate reserve levels.
4. Resilience through Foreign Reserves:
   • Tanzania’s foreign reserves, covering 4.4 months of imports, offer a level of financial stability. This reserve cushion can protect the economy from sudden shocks, such as volatility in global commodity prices or external funding pressures, though sustained currency depreciation could gradually erode this buffer if not managed carefully.
5. Investment and Inflation Impact:
   • Depreciation can have a mixed effect on foreign investment. While a weaker currency may make Tanzania assets cheaper for foreign investors, it also signals currency risk, which could deter long-term investments. Additionally, if depreciation persists, inflation could rise, leading to tighter monetary policies that further impact borrowing costs.

In summary, the Tanzania Shilling’s depreciation reflects structural challenges in balancing foreign currency supply and demand, managing inflation risks, and maintaining investor confidence. The central bank’s cautious stance underscores the need for a sustainable approach to currency management, aiming to support economic stability amidst external and internal pressures.