Tanzanian Shilling Depreciation: Causes and Economic Impact After Brief Rally

The Tanzanian shilling, after posting gains against the US dollar in December 2024, is now depreciating due to increased demand for dollars driven by rising imports and reduced exports. Recent declines in tourism and agricultural sales have tightened foreign currency availability, raising costs across sectors. Analysts suggest the fluctuations are temporary but could pose longer-term economic risks if the trend continues.

The Tanzanian shilling, which experienced a rising trend against the US dollar throughout December 2024, is now facing depreciation once again. The Bank of Tanzania reported that the shilling exchanged at Sh2,721.68 on October 4, 2024, improved to Sh2,513.1169 by December 10, 2024, before ending the year at Sh2,394.7558. However, this positive trend has reversed, with the shilling closing January 2025 at Sh2,486.6387, further dropping to Sh2,611.786 by mid-February 2025.

Multiple factors have influenced this depreciation, according to the Bank of Tanzania. There is an increasing demand for US dollars driven by heightened imports, particularly in anticipation of the holy month of Ramadhan and the Chinese New Year. BoT governor Emmanuel Tutuba also highlighted rising fuel imports and economic pressures resulting from recent landslides disrupting small-scale mining operations.

The agricultural sector has suffered a decline in sales, which typically enhance foreign currency inflow, while tourism is currently in its low season. Collectively, these factors are tightening the availability of foreign currency in the market. Financial analyst Oscar Mkude stated that while the current dip in the shilling’s value is expected to be temporary, a prolonged downtrend would be concerning.

Professor Dickson Pastory from the College of Business Education pointed out that a notable reduction in exports, especially in minerals and agricultural goods, has negatively impacted foreign exchange availability. Coupled with increasing demand for US dollars due to imports, this situation creates an imbalance. He confirmed that fewer exports and limited foreign investments constrain foreign currency supply, worsened by the global strengthening of the US dollar.

Analyst Christopher Makombe noted the shilling’s depreciation aligns with historical patterns, influenced by businesses’ foreign currency needs as they restock post-holiday. Additionally, the tourism sector typically sees lower inflows after the holiday peak, while agricultural exports have decreased, exacerbating the dollar shortage. This depreciation will likely escalate costs, impacting fuel prices, transportation, and consumer goods, thereby affecting overall inflation.

Overall, the Tanzanian shilling’s recent depreciation against the US dollar highlights underlying economic challenges, including reduced exports and increased import demand. While analysts suggest that short-term fluctuations may stabilize, the convergence of these pressure points threatens broader economic stability.

In summary, the Tanzanian shilling’s depreciation against the US dollar is influenced by heightened import demand, agricultural export declines, and reduced foreign currency inflows. Although analysts anticipate short-term fluctuations, sustained depreciation could lead to significant economic repercussions, including rising costs for fuel and consumer goods. Addressing these issues promptly is crucial for stabilizing the shilling and supporting the economy.

Original Source: www.thecitizen.co.tz