The 8% depreciation of the Tanzanian shilling (TZS) in 2023 significantly impacts Tanzania’s external debt servicing, particularly since 68.9% of its external debt is denominated in USD. With Tanzania’s external debt reaching 34,056 USD Million (approximately TZS 91.29 trillion at an exchange rate of TZS 2,677/USD in March 2025), the depreciation increases the local currency cost of servicing USD-denominated debt, straining fiscal resources and limiting budgetary space for development priorities. Below, I explore the potential risks of this depreciation, supported by figures and calculations, focusing on debt servicing costs, fiscal space, and broader economic implications.

1. Increased Debt Servicing Costs in Local Currency

The 8% shilling depreciation in 2023 (from approximately TZS 2,315/USD at the end of 2022 to TZS 2,500/USD by the end of 2023) directly raises the cost of servicing USD-denominated debt in local currency terms. Since 68.9% of Tanzania’s external debt is USD-denominated, this affects a significant portion of the debt stock.

• USD-Denominated Debt:
  • Total external debt (Mar 2025): 34,056 USD Million.
  • USD-denominated portion: 68.9% = 34,056 × 0.689 = 23,465 USD Million (approximately TZS 62.83 trillion at TZS 2,677/USD in Mar 2025).
  • In 2022 (pre-depreciation, TZS 2,315/USD): 23,465 USD Million = TZS 54.32 trillion.
  • Post-8% depreciation (TZS 2,500/USD in 2023): 23,465 USD Million = TZS 58.66 trillion.
  • Increase in servicing cost: TZS 58.66 trillion - TZS 54.32 trillion = TZS 4.34 trillion (approximately USD 1,736 Million at TZS 2,500/USD) due to depreciation alone for 2023.
• Annual Debt Servicing:
  • External debt service is estimated at USD 1–2 billion annually (based on 2024/25 projections), with USD-denominated debt servicing at USD 689–1,378 Million (68.9% of USD 1–2 billion).
  • Pre-depreciation (2022): USD 1 billion = TZS 2.315 trillion; USD 1.378 billion = TZS 3.19 trillion.
  • Post-depreciation (2023): USD 1 billion = TZS 2.5 trillion; USD 1.378 billion = TZS 3.45 trillion.
  • Additional cost: TZS 185–260 billion (USD 74–104 Million) annually for USD-denominated debt servicing due to the 8% depreciation.

This increased cost directly reduces fiscal space, as debt servicing already absorbs ~40% of government expenditures (approximately TZS 19.74 trillion of the TZS 49.35 trillion FY 2024/25 budget).

2. Strain on Fiscal Space

The higher local currency cost of debt servicing due to depreciation limits Tanzania’s ability to fund critical sectors like health, education, and infrastructure, exacerbating fiscal pressures.

• Budget Context:
  • FY 2024/25 budget: TZS 49.35 trillion (USD 18.4 billion at TZS 2,677/USD).
  • Tax revenue: TZS 29.41 trillion (59.6%), with the deficit (TZS 19.94 trillion) financed by borrowing, including external loans.
  • Debt servicing (external + domestic): TZS 5.31 trillion for domestic debt and USD 1–2 billion (TZS 2.68–5.35 trillion) for external debt in 2024/25.
  • The additional TZS 185–260 billion from depreciation increases the external debt service burden by 3.5–4.9%, further crowding out development spending.
• Impact on Social Spending:
  • Health and education budgets in 2024/25 were TZS 1.4 trillion (health) and TZS 4.2 trillion (education), or 2.8% and 8.5% of the budget, respectively.
  • The additional TZS 185–260 billion in debt servicing costs is equivalent to 13–19% of the health budget or 4–6% of the education budget, potentially forcing cuts or reallocations.
• Fiscal Deficit: The fiscal deficit is projected to rise to 4% of GDP in FY 2025/26 (from 3.8% in 2022/23), partly due to increased servicing costs. This may necessitate further borrowing, creating a potential debt spiral.

3. Pressure on Foreign Exchange Reserves

The shilling’s depreciation exacerbates Tanzania’s foreign exchange constraints, as servicing USD-denominated debt requires more USD, straining reserves.

• Foreign Exchange Reserves:
  • Reserves in 2025: USD 5.7 billion, covering 3.8 months of imports (below the recommended 4 months for low-income countries).
  • Annual external debt service (USD 1–2 billion) consumes 17.5–35% of reserves, and the 8% depreciation increases USD demand by USD 74–104 Million annually.
  • Declining export revenues (e.g., -2% for coffee, -1.5% for sugar in 2023) and tourism receipts (USD 2.6 billion in 2023, down from pre-COVID peaks) limit reserve replenishment.
• Exchange Rate Risk:
  • With 67.7% of external debt in USD (slightly adjusted from 68.9% for 2025 data), a further 2.6% depreciation in 2024/25 adds TZS 1.62 trillion (USD 605 Million) to the USD-denominated debt’s local currency value.
  • If depreciation persists (e.g., another 5% in 2025 to TZS 2,813/USD), the USD-denominated debt (23,465 USD Million) would cost TZS 66.02 trillion, a further increase of TZS 3.19 trillion from 2023 levels.

4. Broader Economic Risks

The shilling’s depreciation amplifies economic vulnerabilities, particularly in the context of global and domestic pressures.

• Inflationary Pressure:
  • Depreciation fuels import-driven inflation, with Tanzania’s inflation rate rising to 4.1% in 2023 from 3.8% in 2022. This increases the cost of imported goods (e.g., fuel, machinery), indirectly raising project costs for debt-financed infrastructure like the SGR (USD 7.6 billion).
  • Higher inflation erodes purchasing power, potentially increasing domestic borrowing to fund social programs, further straining the budget.
• Global Economic Slowdown:
  • The IMF’s 2025 global growth forecast of 2.8% and rising global interest rates increase borrowing costs for non-concessional loans (36.3% of debt, USD 12.4 billion). This compounds the impact of depreciation on debt servicing.
• Election-Related Spending:
  • The 2025 general elections may drive populist spending, increasing the fiscal deficit and reliance on external borrowing. The FY 2025/26 budget projects a 13.4% spending increase to TZS 57.04 trillion, potentially exacerbating debt servicing pressures.

5. Mitigating Factors

Despite these risks, Tanzania’s debt profile remains sustainable, mitigating some impacts of depreciation:

• Concessional Loans: 53.9% of external debt (USD 18.3 billion) is from multilateral institutions with low interest rates (e.g., 0.75–2% for World Bank loans), reducing servicing costs compared to commercial loans (5–7% interest).
• Low Debt Distress Risk: The IMF’s 2024 Debt Sustainability Analysis classifies Tanzania’s external debt distress risk as low, with a debt-to-GDP ratio of ~32–35% (2025), below the 55% threshold for low-income countries.
• Economic Growth: Projected GDP growth of 6% in 2025 (vs. 5.6% in 2024) and a GDP of ~USD 100 billion help absorb debt servicing costs, maintaining sustainability.

Quantitative Summary

• USD-Denominated Debt (2025): 23,465 USD Million (68.9% of 34,056 USD Million).
• Servicing Cost Increase (2023): TZS 4.34 trillion (USD 1,736 Million) due to 8% depreciation (TZS 2,315 to TZS 2,500/USD).
• Annual Servicing Impact: Additional TZS 185–260 billion (USD 74–104 Million) for USD-denominated debt.
• Fiscal Space Impact: Equivalent to 13–19% of health budget or 4–6% of education budget in FY 2024/25.
• Reserve Pressure: Debt service consumes 17.5–35% of USD 5.7 billion reserves, worsened by depreciation-driven USD demand.

Conclusion

The 8% shilling depreciation in 2023 increases Tanzania’s USD-denominated debt servicing costs by TZS 4.34 trillion for the 23,465 USD Million debt stock, adding TZS 185–260 billion annually to servicing costs. This strains fiscal space, consuming ~40% of government expenditures and limiting social and development spending. Foreign exchange reserve pressures and inflationary risks further complicate the economic outlook, though concessional loans and strong GDP growth (6% in 2025) mitigate distress risks. Continued depreciation or global economic challenges could exacerbate these risks, necessitating prudent fiscal and monetary policies.

This table quantifies the impact of the 8% shilling depreciation in 2023 on Tanzania’s external debt servicing, highlighting increased costs (TZS 4.34 trillion for USD-denominated debt), fiscal strain (crowding out 13–19% of health spending), and reserve pressures (17.5–35% of reserves).

Notes:

• Depreciation Impact: The 8% shilling depreciation (TZS 2,315 to TZS 2,500/USD in 2023) increases the local currency value of 23,465 USD Million USD-denominated debt by TZS 4.34 trillion (USD 1,736 Million), raising annual servicing costs by TZS 185–260 billion (USD 74–104 Million).
• Fiscal Space: Additional servicing costs represent 13–19% of the TZS 1.4 trillion health budget and 4–6% of the TZS 4.2 trillion education budget, limiting social spending.
• Reserves Pressure: Debt service (USD 1–2 billion) consumes 17.5–35% of USD 5.7 billion reserves, with depreciation adding USD 74–104 Million in USD demand.
• Exchange Rates: 2022: TZS 2,315/USD; 2023: TZS 2,500/USD (post-8% depreciation); Mar 2025: TZS 2,677/USD (includes 2.6% depreciation in 2024/25).
• Mitigating Factors: Concessional loans (53.9%, USD 18.3 billion) and a low debt distress risk (per IMF 2024 DSA) offset some risks, with a ~32–35% debt-to-GDP ratio.