Tanzania Investment and Consultant Group Ltd

| Economic Research Centre

Understanding the Factors Behind Tanzania's Shilling Depreciation
May 11, 2024  
Understanding the Factors Behind Tanzania's Shilling Depreciation The continued depreciation of the Tanzania shilling against the US dollar can be attributed to several factors, reflecting both domestic and global dynamics. Firstly, the high demand for foreign exchange, particularly the US dollar, in the Interbank Foreign Exchange Market (IFEM) indicates significant pressure on the shilling. In […]

Understanding the Factors Behind Tanzania's Shilling Depreciation

The continued depreciation of the Tanzania shilling against the US dollar can be attributed to several factors, reflecting both domestic and global dynamics.

Firstly, the high demand for foreign exchange, particularly the US dollar, in the Interbank Foreign Exchange Market (IFEM) indicates significant pressure on the shilling. In March 2024, the Central Bank sold USD 76.75 million in the IFEM, while commercial banks sold USD 8.8 million. This high demand suggests that Tanzania businesses and individuals are seeking foreign currency for various purposes, such as imports, debt servicing, and capital flight.

Secondly, reduced inflows from key sectors like tourism and crop exports exacerbate the depreciation. Tourism is a vital source of foreign exchange earnings for Tanzania. However, seasonal fluctuations and external factors, such as global travel restrictions, can lead to decreased tourist arrivals and revenue. In March 2024, low seasonal inflows from tourism and crop exports contributed to the challenging foreign exchange dynamics.

Global dynamics affecting the US dollar also play a role. The US dollar's strength on international markets can put pressure on emerging market currencies like the Tanzania shilling. In March 2024, the shilling traded at an average rate of TZS 2,563.07 per US dollar, compared to TZS 2,547.74 per US dollar in the previous month and TZS 2,322.16 per US dollar in the corresponding month in 2023. This represents an annual depreciation of 9.4 percent, indicating the impact of global currency dynamics on the shilling's value.

Reasons for the continued depreciation of the Tanzania shilling:

  1. High Demand for US Dollar: Significant demand for foreign exchange, particularly the US dollar, driven by imports, debt servicing, and capital flight.
  2. Reduced Inflows from Key Sectors: Declining revenue from key sectors like tourism and crop exports due to seasonal fluctuations and external factors such as global travel restrictions.
  3. Global Dynamics: Strengthening of the US dollar on international markets, impacting emerging market currencies like the Tanzania shilling.

These challenges may require a combination of monetary and fiscal policies to stabilize the currency and promote sustainable economic growth.

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