The Tanzania Shilling's dramatic strengthening to TZS 2,631.56 per USD in June 2025 from TZS 2,698.42 in May delivered immediate and substantial fiscal relief for Tanzania's external debt management, generating savings of approximately TZS 70 billion for every USD 1 billion in debt serviced during the month. This currency appreciation, which reduced the annual depreciation rate from a concerning 12.5% in June 2024 to just 0.21% in June 2025—a remarkable 60-fold improvement—provided critical breathing room for a country carrying external debt of USD 33.9-35.0 billion representing 72.1% of its total national debt stock. The strengthening was underpinned by robust market fundamentals, including enhanced foreign exchange market liquidity with IFEM turnover rising to USD 121.50 million from USD 110.8 million in May, while Bank of Tanzania intervention needs plummeted to USD 6.3 million from USD 53 million, demonstrating market-driven stability. With 67.4% of external debt denominated in USD, this currency performance significantly reduced the local currency burden of debt service obligations, while foreign exchange reserves maintaining 4.5+ months of import coverage provided additional buffer against payment shocks, positioning Tanzania favorably for sustained debt sustainability amid its medium-term development objectives.

1. Currency Strengthening and National Debt Context

In June 2025, the Tanzania Shilling demonstrated remarkable resilience, strengthening to an average of TZS 2,631.56 per USD from TZS 2,698.42 in May, representing a significant improvement that drove the annual depreciation rate down dramatically to 0.21% from 3.82% in May and a concerning 12.5% in June 2024. This currency performance occurred within the context of Tanzania's substantial national debt profile, with external debt reaching USD 35,039.80 million in February 2025, while recent data indicates external debt stood at USD 33,905.1 million in January 2025, reflecting a 0.5% decline from December 2024. The total national debt structure shows the government holding 76.4% (USD 25,896.7 million) of the total external debt, while the private sector's share dropped to 23.6% (USD 8,004.7 million).

Recent Debt Profile Analysis:

• External Debt Composition: As of November 2024, Tanzania's total external debt stock stood at USD 33,137.7 million, representing 72.1% of the country's total national debt
• Domestic Debt Position: Total Domestic Debt Stock (Sept 2024): TZS 32,615.7 billion, with Treasury Bonds comprising 78.9% – dominating domestic debt instruments, preferred for their longer maturity periods
• Currency Exposure: The debt portfolio shows significant USD exposure at 67.4%, followed by Euro at 16.6%, Chinese Yuan at 6.3%, and Other Currencies at 9.7%

2. Drivers of Currency Strengthening and Enhanced FX Market Liquidity

A. Seasonal Export Performance and FX Inflows:

Agricultural and Commodity Exports: The onset of Tanzania's cash crop export season provided substantial foreign exchange supply, with traditional exports including coffee, cashew nuts, and tobacco contributing to currency stability. Gold exports remained a critical driver, with stable growth but high USD exposure characterizing the external debt portfolio.

Tourism and Service Receipts: Strong performance in the service sector, particularly tourism, contributed significantly to foreign currency availability and supported the shilling's appreciation trajectory.

B. Interbank Foreign Exchange Market (IFEM) Development:

Enhanced Market Liquidity: The IFEM demonstrated improved functioning with turnover rising to USD 121.50 million in June from USD 110.8 million in May, indicating deeper market liquidity and more efficient price discovery mechanisms.

Reduced Central Bank Intervention: The Bank of Tanzania's intervention needs decreased dramatically to USD 6.3 million in June compared to USD 53 million in May, demonstrating market-driven stability and reduced pressure on official reserves. This aligns with the BoT Act requirement to maintain adequate official foreign exchange reserve equivalent to at least four months imports.

C. Reserve Management and Import Coverage:

Adequate Reserve Position: The Bank of Tanzania aims to strengthen the management of foreign exchange reserves, ensuring at least four months of import cover by 2029/30, while reserves declined from 4.7 months of import cover in 2022 to 4.5 months in 2023, explained by the authorities' response to the foreign exchange shortage.

3. Impact on National Debt Management and Servicing Costs

A. External Debt Servicing Benefits:

Reduced Local Currency Costs: With the majority of Tanzania's external debt denominated in USD (67.4% of external debt portfolio), the stronger shilling significantly reduced the local currency cost of debt servicing. For illustration:

• June 2025 Exchange Rate Impact: Servicing USD 1 billion of external debt in June cost approximately TZS 2.63 trillion compared to TZS 2.70 trillion in May
• Monthly Savings: This represents a nominal saving of approximately TZS 70 billion per USD 1 billion of debt serviced
• Budget Protection: The stronger currency helps shield the government budget from exchange rate-driven debt service escalations

B. Domestic Debt Market Stability:

Government Securities Performance: Currency stability supported investor confidence in government securities, helping to contain pressure on domestic interest rates. Most of the domestic debt stock is held by commercial banks with a share of 33.1 percent, followed by social security funds with holdings of 26.7 percent.

Long-term Bond Market: With Treasury Bonds comprising 78.9% of domestic debt instruments, exchange rate stability helps anchor inflation expectations, which in turn supports manageable domestic borrowing costs and maintains investor appetite for government securities.

C. Inflation and Interest Rate Dynamics:

Inflation Expectations: The stable currency contributed to controlled inflation expectations, supporting the central bank's target of maintaining inflation within the 3-5% range. The Bank of Tanzania's Strategic Plan 2025–2030 targets 3%–5% inflation.

Interest Rate Environment: The overall T-Bills interest rate rose significantly over the past 12 months from 5.8 percent in March, but currency stability helped moderate further increases in borrowing costs.

4. Debt Sustainability and Risk Assessment

A. Positive Sustainability Indicators:

Enhanced Repayment Capacity: The combination of stronger currency and improved foreign exchange inflows enhanced Tanzania's short-term capacity to meet external debt obligations without aggressive drawdown of reserves.

Reserve Buffer: With foreign exchange reserves providing adequate import coverage, Tanzania maintains a buffer against debt payment shocks and external sector volatility.

Institutional Support: The IMF and Tanzania authorities reached staff-level agreement, with Tanzania gaining access to US$441 million in financing once approved by the IMF Executive Board, providing additional financial backstop.

Economic Growth Foundation: Economic conditions have continued to improve, with robust growth and macrofinancial stability underpinned by prudent macroeconomic management. The medium-term outlook is favorable, contingent on sustained reform implementation.

B. Ongoing Risk Factors:

Debt Stock Magnitude: Despite currency improvements, the overall debt stock remains substantial, with external debt representing over 70% of total national debt, requiring sustained export growth and fiscal discipline.

Export Dependency: The heavy reliance on commodity exports (particularly gold) and tourism makes currency stability vulnerable to global price volatility and external demand shocks.

Reform Implementation: Downside risks remain, including from an uncertain external environment or reform delays. Challenges to meet SDG targets and reduce poverty are daunting, especially considering that the population size is expected to double by 2050.

Banking Sector Exposure: The banking sector, which accounts for 71% of financial assets, remained sound with the ratio of nonperforming loans to gross loans declining, but continued monitoring is essential given significant government securities holdings.

5. Strategic Debt Management Implications

A. Currency Risk Mitigation:

Natural Hedging: The strong export base in USD-earning sectors (gold, tourism, agricultural commodities) provides natural hedging against USD-denominated debt obligations.

Policy Coordination: Effective coordination between monetary policy (exchange rate management) and fiscal policy (debt issuance strategy) supports overall debt sustainability objectives.

B. Market Development Benefits:

Capital Market Deepening: Stable currency conditions support domestic capital market development, enhancing the government's ability to finance development through local currency bonds.

Investor Confidence: Reduced exchange rate volatility attracts both domestic and foreign investors to Tanzania's debt instruments, potentially lowering borrowing costs over time.

C. Fiscal Space Preservation:

Debt Service Efficiency: Lower debt servicing costs due to currency appreciation preserve fiscal space for development spending and poverty reduction programs.

Budget Predictability: Exchange rate stability enhances budget planning and execution, reducing the need for contingency allocations for currency-related debt service variations.

Summary Assessment

Strategic Recommendations

Short-term Actions:

1. Capitalize on Currency Strength: Use the favorable exchange rate environment to prepay or restructure high-cost external debt where feasible
2. Strengthen Reserve Management: Build on current reserve adequacy to enhance buffer against external shocks
3. Optimize Debt Issuance: Take advantage of stable domestic market conditions to extend debt maturity profile

Medium-term Strategies:

1. Diversify Export Base: Reduce dependency on gold and tourism through manufacturing and service sector development
2. Develop Local Currency Markets: Enhance domestic capital market depth to reduce foreign exchange exposure
3. Implement Fiscal Consolidation: Maintain debt sustainability through prudent fiscal management and revenue enhancement

Conclusion

The strengthening of the Tanzania Shilling in June 2025—driven by improved foreign exchange market liquidity, robust seasonal export inflows, and reduced central bank intervention—provided immediate and significant relief in external debt servicing costs while supporting stable domestic borrowing conditions. With external debt of approximately USD 33.9-35.0 billion representing 72.1% of total national debt, the currency appreciation delivered substantial fiscal benefits, reducing the local currency cost of USD-denominated debt service by approximately TZS 70 billion per USD 1 billion serviced.

While this performance bodes well for short-term debt sustainability and supports Tanzania's medium-term economic outlook, the long-term ability to meet debt obligations will depend on sustained reform implementation, particularly to strengthen the business environment and support a more dynamic private sector. The combination of adequate foreign exchange reserves (4.5+ months import cover), institutional support from the IMF (USD 441 million financing access), and a stable domestic debt market dominated by long-term bonds (78.9%) provides a solid foundation for debt sustainability, contingent on maintaining export competitiveness, fiscal discipline, and continued macroeconomic stability.

Key Figures – June 2025 Shilling Strength & Debt Impact