Kitaifa
IMF proposes 3 steps to address Tanzania’s forex woes
Dar es Salaam. The International Monetary Fund (IMF) has proposed three measures to help address pressures in Tanzania’s foreign exchange market.
The IMF executive board suggested exchange rate flexibility, fiscal consolidation and continued tightening of local currency liquidity after completing its second review of the Extended Credit Facility (ECF) arrangement for the country on Wednesday.
Tanzania’s foreign exchange market was hit by shortages of the US dollar this year, sending prices of some imports up and prompting remedial measures by the central bank.
The IMF said a coordinated macroeconomic policy response is necessary to address pressures in the foreign exchange market.
“The authorities’ response to the emerging foreign exchange market pressures has focused on interventions and regulatory measures. Addressing the root causes of imbalances calls for a more comprehensive policy response that includes exchange rate flexibility, fiscal consolidation and continued tightening of local currency liquidity,” the IMF said in a statement signed by deputy managing director and acting chair Bo Li.
The Bank of Tanzania (BoT) said earlier in the year that external shocks such as the Russia-Ukraine war, residual impact of the Covid-19 pandemic and effects of climate change continued to exert pressure on the current account position, foreign reserves and exchange rate.
The stock of foreign exchange reserves was $4.6 billion in October 2023, enough to cover about 4.0 months of projected imports of goods and services.
The reserves were in line with Tanzania’s target of four months, but below the East African Community (EAC) and Southern African Development Community (SADC) benchmarks of 4.5 and six months, respectively.
The IMF also expressed optimism at Tanzania’s economic growth this year after last year’s slowdown.
Growth is expected to rebound in 2023, but an unfavourable global economic environment and domestic factors continue to weigh on Tanzania’s economic recovery, it said.
Inflation has moderated and is within the BoT’s target, but the fiscal deficit was wider than expected in 2022/23, largely reflecting shortfalls in revenue collections.
However, “the authorities are committed to implementing the fiscal consolidation envisaged in the FY2023/24 budget”.
The IMF said a wider current account deficit for 2022/23 and tighter external financial conditions resulted in pressures in the foreign exchange market.
“The economic recovery is expected to regain momentum going forward but faces headwinds from the unfavourable global economic environment. Near-term policy priorities include exchange rate flexibility combined with tightening of local currency liquidity and fiscal consolidation, while preserving priority social spending. The medium-term outlook is positive subject to steadfast implementation of the authorities’ reform agenda, anchored by the ECF arrangement.”
The IMF said continuing efforts to modernise the monetary policy framework and complete the ongoing transition to an interest rate-based monetary policy are key to enhancing the effectiveness of monetary policy.
Upgrading the financial supervision framework will help to buttress financial sector stability and promote financial deepening, it added.
“Structural reforms are essential to promote inclusive, resilient, and sustainable growth. Business reforms should focus on streamlining bureaucratic procedures, simplifying the regulatory regime, and enhancing regulatory transparency. Implementation and enforcement of the authorities’ anti-corruption legislation and strategies is central to enhancing governance. Tanzania’s high vulnerability to climate change calls for continued efforts to increase resilience through mitigation and adaptation policies.”
In May this year, the BoT reported a reduction of the foreign currency reserves to $4.9 billion at the end of April, from $5.5 billion a year earlier.
In order to stabilise the financial situation, the government adopted multiple multifaceted approaches.
In August, the government intensified measures to alleviate the US dollar shortage in the country, which included providing export credit guarantee schemes and increasing export by supporting local businesses.
The then chief government spokesperson, Mr Gerson Msigwa, said the government was developing schemes to guarantee export credits for goods sold outside the country, which means that banks provide loans to traders by making a 50 percent contribution.