Decline of the Tanzanian Shilling Against Regional Currencies Amid Rising Trade

The Tanzanian shilling has declined against the Ugandan and Kenyan currencies despite increased exports due to a reliance on U.S. dollars for transactions. This trend has occurred even as the shilling strengthened against the Rwandan and Burundian francs. Notably, Tanzania has become Uganda’s largest supplier of imports, reflecting significant changes in regional trade dynamics.

The Tanzanian shilling has recently depreciated against both the Ugandan and Kenyan currencies, despite an increase in exports to these neighboring nations. This trend stems from the fact that transactions predominantly occur in U.S. dollars rather than in the local currency. Financial analysts, including Bernard Mumwi, indicate that this reliance on the dollar generates significant demand for it, which ultimately undermines the value of the Tanzanian shilling. Meanwhile, the shilling has performed better against the Rwandan and Burundian francs, appreciating by 58% and 13.3% respectively over the same period.

In January 2021, the exchange rate was Tsh20.906 for Ksh1; by October 2024, it had risen to Tsh21.046, marking a decline of approximately 0.7%. In contrast, the Tanzanian shilling depreciated by 18% against the Ugandan shilling during this timeframe, with the average rate shifting from Tsh0.612 to Tsh0.725 per Ugandan shilling. A notable factor is the increased export of various goods, particularly gold, from Tanzania to Uganda, leading to a record $1.77 billion in imports during the year ending June 2024. Consequently, this has made Tanzania Uganda’s largest supplier of imports, outpacing Kenya, which has historically held this position.

The economic implications of these exchange rate trends are significant. Governor Emmanuel Tutuba of the Bank of Tanzania articulated that local currency use tends to strengthen the Tanzanian shilling. However, the prevalence of dollar transactions by traders from Uganda and Kenya has led to the currency’s weakening. Analysts suggest that the overall economic landscape is shifting in favor of regional trade, with Tanzania consolidating its role as a major trade partner for Uganda.

The issue of currency depreciation in Tanzania, particularly in relation to its regional counterparts, has become increasingly pertinent given the rise in trade activities. The reliance on the U.S. dollar in transactions creates a complex dynamic whereby local currencies like the Tanzanian shilling can lose value even when exports are robust. This situation is further compounded by the evolving trade relationships within the EAC, with Tanzania emerging as a prominent supplier to Uganda, previously dominated by Kenya. Understanding this economic landscape is essential for analyzing the currency fluctuations and trade patterns observed in recent reports.

In summary, the Tanzanian shilling’s depreciation against the Ugandan and Kenyan currencies highlights the impact of dollar-based transactions on local currencies within the EAC region. The strengthening of trade relations between Tanzania and Uganda signifies a shift, positioning Tanzania as the primary source of imports for Uganda. The ongoing economic interplay among these nations necessitates careful monitoring of currency performance and trade balance to facilitate financial stability and growth in the region.

Original Source: www.thecitizen.co.tz