Tanzania at risk of facing some economic hardship

• Tanzanian shilling hits an all-time low against the dollar, potentially leading to increased costs of imported goods and subsequent inflation.
• Additionally, Sub-Saharan African countries experience currency depreciation against the dollar, causing inflationary pressures due to higher import costs.
• Tanzanian lecturer proposes government subsidies on imports and intervention policies to stabilize currency rates.

The Tanzanian currency’s poor performance is likely to ripple across the country’s entire economy, as its all-time low fall is projected to increase the price of imported goods into the East African nation.

Following the Bank of Tanzania (BOT) report revealing exchange rates as of August 16, 2023, which discloses that the Tanzanian shilling reached a new record low of an average of 2428.7 versus the dollar, economists predict that Tanzanians would have to spend more money importing goods into the country.

“The results of what is going on will begin to show up through the rise in the cost of inputs for firms, which in turn will pass on the additional expenses to consumers,” said Dr. Jane Buberwa, an economist based in Dar es Salaam.

Read also: East Africa experiences some trade tensions as trade between Tanzania and Kenya dip

However, it is important to note that currency depreciation is a concern across practically all of Sub-Saharan Africa. According to Dr. Buberwa, countries in this region's currencies continue to fall against the US dollar, cycling inflationary pressures across the continent as import costs continue to rise.

“With the weakening of our shilling against the dollar, local prices will soon surge including essential items like food which mostly are imported,” she noted.

An assistant lecturer on Banking and International currency at Ardhi University, Mr. Aziz Rashid, noted that this sort of currency issue is bound to be detrimental to an economy that imports more than it produces.

“If this situation continues at this pace, it will lead to imported inflation, which is a large increase in the price of goods due to external factors depending on the strength of the dollar reserve,” the lecturer noted.

His solution to this problem is the addition of subsidies on imported goods by the government to help cushion the economic shockwave the currency devaluation is bound to prompt. He also suggested the revision of some of the country’s current monetary policies, although, this he notes, would be dependent on the amount the government has in its reserves.

“In order to reduce the pressure of the increase of the dollar against the shilling, the government can reduce the pressure on the forex market by using ‘Direct Intervention Policies’,” he added.

This is the stage at which the BoT goes to the forex market and dumps large amounts of dollars against shillings in order to stabilize currency rates, citing Turkey as an example of a country that employed the strategy successfully, depending on the amount of money it had on hand.

“We have to reduce this pressure also by looking at our major trading partners so that we can agree to make transactions in our local currencies, as was the case with India (Tanzania and India transacted using Shillings and Rupees),” the lecturer advised.

According to the International Monetary Fund (IMF), foreign forces were mostly to blame for the region's currency decline. Lower risk appetite in global markets, along with interest rate rises in the US, has moved investors away from the area and into safer and higher-paying US Treasury bonds, according to the report.

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