In October 2024, the Tanzania Shilling showed signs of stabilization, appreciating slightly against the US Dollar after months of depreciation. This shift can be attributed to improved foreign exchange liquidity from key export sectors such as cashew nuts, gold, and tourism, alongside strategic interventions by the Bank of Tanzania. Despite a gradual depreciation trend over the years, recent developments suggest a positive turn in external sector performance and effective exchange rate management.

1. Exchange Rate Movements:

• October 2024:
  • Average exchange rate: TZS 2,719.91 per USD
• September 2024:
  • Average exchange rate: TZS 2,727.41 per USD
• Annual depreciation rate: 8.98% (improved from 10.11% in September 2024)

The Tanzania Shilling showed a slight improvement in October 2024, appreciating by 0.28% compared to September 2024. This indicates a stabilization trend after several months of depreciation. The depreciation rate over the past year has decreased, suggesting that external pressures on the currency may be easing.

2. Key Factors Affecting the Exchange Rate:

A. Improved Foreign Exchange Liquidity:

Several key export sectors have contributed to increased foreign exchange inflows, which helped stabilize the Shilling:

1. Cashew Nut Exports: This is a significant foreign exchange earner for Tanzania. The increased demand for cashew nuts on the global market likely contributed to stronger inflows of foreign currency.
2. Gold Exports: Tanzania is one of the top gold producers in Africa, and higher gold prices globally have boosted foreign currency inflows.
3. Tourism Earnings: As the tourism sector continues to recover post-pandemic, the influx of foreign currency from tourism has provided additional support to the Shilling.

B. Bank of Tanzania Intervention:

1. Limited Market Participation: The central bank has limited its participation in the foreign exchange market in October, intervening less than in previous months.
2. Net Purchase of USD 4.5 Million: The Bank of Tanzania made a modest net purchase of USD 4.5 million in October, which indicates a targeted, cautious approach to stabilizing the currency without overextending reserves.
3. Purpose: The Bank’s primary objective was to mitigate excessive exchange rate volatility. Their strategy seems to have been effective, contributing to the Shilling’s stabilization in October.

3. Historical Exchange Rate Data (2017-2023):

A look at historical data reveals a gradual depreciation trend of the Tanzania Shilling over the years, but with some periods of relative stability:

• 2017: TZS 2,228.9 per USD
• 2018: TZS 2,263.8 per USD
• 2019: TZS 2,288.2 per USD
• 2020: TZS 2,294.1 per USD
• 2021: TZS 2,297.8 per USD
• 2022: TZS 2,303.1 per USD
• 2023: TZS 2,382.1 per USD

From 2017 to 2023, the Shilling depreciated steadily, with the rate increasing by about TZS 150 per USD over the period. This is consistent with inflationary pressures and a growing trade deficit.

4. Interbank Foreign Exchange Market (IFEM) Activity:

The Interbank Foreign Exchange Market (IFEM) activity shows significant changes in the volume of transactions:

• October 2024: USD 50.7 million in transactions
• September 2024: USD 8.35 million in transactions

The sharp increase in market activity reflects growing demand and supply for foreign exchange in the market, indicating heightened foreign exchange transactions. This could be tied to the improved liquidity from exports and the increasing demand for USD in the economy.

5. Summary and Key Insights:

1. Gradual Depreciation Trend: Over the past few years, the Tanzania Shilling has faced a consistent depreciation trend against the US Dollar. However, the pace of depreciation has slowed in recent months, particularly in October 2024.
2. Recent Improvement in Exchange Rate Stability: The exchange rate improved in October 2024, with the Shilling appreciating slightly from September, signaling a positive shift in external sector performance.
3. Reduced Depreciation Pressure: The improved foreign exchange liquidity from key exports like cashew nuts, gold, and tourism earnings helped ease pressure on the Shilling. This has reduced the depreciation pressure that has been prevalent over the past several years.
4. Effective Market Management: The Bank of Tanzania’s careful intervention in the market (with a net purchase of USD 4.5 million) and its efforts to reduce volatility appear to have been effective in stabilizing the Shilling.
5. Growing Market Activity in IFEM: The notable increase in IFEM transactions, from USD 8.35 million in September to USD 50.7 million in October, indicates a more active foreign exchange market. This may suggest more participation by businesses and financial institutions in currency transactions, potentially contributing to exchange rate stabilization.

6. Conclusion:

The recent appreciation of the Tanzania Shilling and the improved annual depreciation rate suggest that external sector performance is improving. Factors such as strong export performance, particularly in cashew nuts, gold, and tourism, have bolstered foreign exchange liquidity. Additionally, the Bank of Tanzania's careful market interventions have contributed to the exchange rate’s stability, easing pressure on the Shilling.