Why the Tanzanian Shilling is Gaining Strength Against the Foreign Currency
There has been a lot of talk recently about the Tanzanian Shilling (TZS) gaining strength against the US Dollar, and many people are asking why this is happening. Some are even wondering if the US Dollar is falling, while others want to know what’s behind this shift. To clear things up, it’s important to understand that the US Dollar isn’t actually weakening overall. In fact, the US dollar is still stronger than many major currencies, including the Euro, British pound, and Indian rupee. In the case of Tanzania, however, a few specific things have helped the Tanzanian Shilling gain some strength in recent months.
USD VS EURO AS of 13.12.2024
USD VS POUND
USD VS TZS
Why the Tanzanian Shilling is Gaining Strength:
Factual facts
One of the main reasons for the Shilling’s improvement is an increase in the amount of foreign money flowing into Tanzania. This has happened because of several important factors:
Tourism on its peak season: Since December is a peak season, tourism in Tanzania has been thriving. More people are coming to visit, bringing money with them, which increases the supply of US dollars in the country.
More Exports from Tanzania: Tanzania has also been exporting more goods, such as tobacco, coffee, cotton, and food to neighboring countries. The country’s exports of gold have also remained strong, and these exports bring in a lot of foreign currency.
Loans from the IMF: Countries sometimes borrow money from international institutions like the International Monetary Fund (IMF) to support their economy, which results in foreign currency inflows. These loans typically help stabilize the economy or support specific projects.
Intervention by the Bank of Tanzania: The central bank has implemented measures to stabilize the shilling, including increased foreign exchange interventions. These measures aim to ensure market stability and support the shilling against excessive volatility.
Foreign companies: When international companies or subsidiaries in Tanzania, receive large inflows of foreign currency (such as US Dollars), they often need to exchange these dollars for the local currency
According to the Bank of Tanzania’s report from September 2024, the country’s foreign exchange situation improved during this period. This was mainly due to more money coming from tourism and exports like crops and gold. The report also highlighted that the exports of traditional goods like tobacco, coffee, and cashew nuts had grown significantly.
For example, from October 2023 to October 2024, the export of traditional goods increased to over 1.1 billion US Dollars, compared to about 910 million US Dollars the year before. Exports of non-traditional goods, such as minerals and agricultural products, also went up, reaching nearly 7 billion US Dollars in total. The export of horticultural products like vegetables also increased.
In Arusha, Tanzania, the President of Kenya, William Ruto, highlighted that Tanzania has increased its trade volume with other countries. This has contributed to an increase in foreign currency inflows and helped stabilize the shilling.
Gold Reserves
On October 8th, 2024, the Bank of Tanzania announced that is purchasing gold at a rate of TZS 233,372.14 per gram. Domestic Gold Purchase Program. This program offers gold sellers the opportunity to sell their gold directly to BOT at competitive World Market Prices. The program offers reduced fees and faster payment processing as part of the 20% gold purchase commitment outlined in Section 59 of the Mining Act (Cap 123)
Bank of Tanzania (BOT) has started accumulating, they have likely contributed to the stabilization of the Tanzanian shilling, as I recall, the late President John Pombe Magufuli suggested that the Bank of Tanzania begin reserving gold, and this initiative started in the last quarter of the year.
Imagine you’re holding a precious item, like a family heirloom, that has been passed down through generations. It holds value, not just for its rarity, but because it's something people trust. Now, picture a country like Tanzania using something similar—gold—as a "trustworthy asset" to back up its currency, the Tanzanian Shilling.
For many years, the Bank of Tanzania (BOT) has been setting aside gold as a kind of safety net. Gold is valuable worldwide, and because it holds its value, it helps show that the country has something reliable to support its money. This makes the Tanzanian Shilling feel more secure to investors and traders, because they know the country has something stable to back it up.
So, when the Bank of Tanzania accumulates more gold, it’s like adding more trust and strength to the Shilling. Just like how your family’s heirloom might make you feel more confident in tough times, having more gold reserves can help the country’s currency stay strong, even when there are challenges in the economy. It's a way of ensuring that there’s real value behind the money people are using, which can help keep the Tanzanian Shilling more stable in the global market.
Bank of Tanzania Intervention in the Interbank Foreign Exchange Market
Here’s the report based on the information from the Bank of Tanzania's public notice on November 20th: The Bank of Tanzania intervened in the Interbank Foreign Exchange Market (IFEM) in accordance with its Foreign Exchange Intervention Policy, 2023. During this intervention, the Bank purchased USD 23.00 million through an auction at a weighted average exchange rate of TZS 2,655.13 per USD. The objective of the auction was to accumulate foreign exchange reserves in response to a recent increase in liquidity in the foreign exchange market.
Loans
Now, let’s say the country needs more foreign currency to support its economy. This is where loans from organizations like the International Monetary Fund (IMF) come in. When the IMF lends money to Tanzania, it doesn’t give them the loan in Tanzanian Shillings. Instead, the loan is usually given in a foreign currency like US Dollars or Special Drawing Rights (SDRs).
Once Tanzania receives the loan, the money is added to the country's foreign reserves, increasing the total amount of foreign currency available to the government and the central bank. This helps Tanzania pay for things like imports, pay off debts, and stabilize its currency if needed.
not a relatable imagine but you can see
The best thing in such scenarios is that if Tanzania experiences a strong Shilling due to increased foreign currency inflows, it could potentially pay off its national debts more cheaply. If the Shilling is stronger, the country could use fewer Shillings to buy the same amount of foreign currency needed to service its debt. This could be an ideal opportunity to reduce debt obligations if the Shilling remains strong.
Related influences
When international companies or subsidiaries in Tanzania, receive large inflows of foreign currency (such as US Dollars), they often need to exchange these dollars for the local currency (in this case, Tanzanian Shillings) to pay for local operations, employees, or other expenses. This process increases the supply of US Dollars in the local market, and as the demand for US Dollars decreases (since more are available for exchange), the value of the Tanzanian Shilling can rise in comparison to the Dollar.
Credits: East Africa Radio, Google, Bank Of Tanzania Monetary report, public notes, Quarterly reports.
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Lukelo Ngajilo