The increase in Tanzania's national debt, particularly external debt, has a significant relationship with the depreciation of the Tanzania shilling. This relationship has various economic implications, including higher debt servicing costs, potential inflationary pressures, and impacts on economic growth and investment. Managing these factors is crucial for maintaining economic stability and fostering sustainable development.

National Debt Increase

• Current Debt Level: The national debt of Tanzania was USD 43,119.8 million at the end of May 2024, with an increase driven mainly by a rise in external debt, which accounts for 72.4 percent of the total debt.
• External Debt: External debt stock increased by 1 percent month-on-month to USD 31,212.4 million at the end of May 2024.

Depreciation of the Tanzania Shilling

• Shilling Depreciation: The Tanzania shilling depreciated by 11.6 percent against the US dollar over the year, with an average exchange rate of TZS 2,599.05 per US dollar in May 2024 compared to TZS 2,584.69 per US dollar in the preceding month.

Economic Relationship

1. Debt and Currency Value:
   • Increased Debt: Higher national debt, especially external debt, increases the demand for foreign currency as the country needs to service its debt in foreign currencies. This can lead to depreciation of the local currency if the demand for foreign currency exceeds supply.
   • Investor Confidence: Rising debt levels can negatively affect investor confidence, leading to reduced foreign investment and capital outflows, which can further weaken the local currency.
2. Debt Servicing Costs:
   • Higher Costs: As the shilling depreciates, the cost of servicing external debt in foreign currency terms increases. This can lead to higher fiscal deficits as more local currency is needed to meet debt obligations, potentially leading to more borrowing and a vicious cycle of debt and depreciation.
   • Fiscal Pressure: Increased debt servicing costs can strain the government’s budget, diverting funds from essential development projects and social services.

Economic Implications

1. Inflation:
   • Imported Inflation: Depreciation of the shilling makes imports more expensive, leading to higher prices for imported goods and services. This can contribute to overall inflation in the economy, eroding purchasing power and increasing the cost of living for Tanzanian.
   • Cost-Push Inflation: Higher import costs can lead to cost-push inflation, where businesses pass on the higher costs of imported inputs to consumers.
2. Economic Growth:
   • Investment Impact: A weaker currency and higher debt levels can discourage foreign and domestic investment due to increased uncertainty and higher costs of doing business.
   • Export Competitiveness: On the positive side, a weaker shilling can make Tanzania exports cheaper and more competitive internationally, potentially boosting export revenues and helping to offset some of the negative impacts.
3. Balance of Payments:
   • Widening Deficit: Depreciation can exacerbate the current account deficit if the increase in the cost of imports outweighs the gains from increased export competitiveness.
   • Reserves Depletion: To stabilize the currency, the central bank may use foreign exchange reserves, which can deplete the reserves and further undermine economic stability.

Figures 

• Debt Stock: USD 43,119.8 million (May 2024)
• External Debt: USD 31,212.4 million (May 2024)
• Shilling Exchange Rate: TZS 2,599.05 per USD (May 2024)
• Depreciation: 11.6 percent annually