Debt servicing eats up forex reserves by $439m

Dar es Salaam. Tanzania’s foreign exchange reserves shrunk by $439.3 million during the first half of the 2018/19 financial year as the country serviced its debt and implemented several big infrastructure projects.

This implies that the there was a renewed demand for foreign currency (forex) by the country’s corporate bodies, the government and importers, which outweighed forex inflows.

A new report by the Bank of Tanzania (BoT) puts the country’s gross official reserves at $5.044 billion at the end of December 2018, down from $5.484 billion at the end of June 2018.

“The slight fall was primarily the result of foreign debt servicing,” an official at the central bank told The Citizen.

Apart from imports, central banks across the world also use foreign reserves to iron out adverse volatility of their local currencies – in this case the Tanzania Shilling – against the vehicle currency, usually the US dollar. The reserves, recorded in June 2018, were enough to cater for Tanzania’s imports cover for a period of 5.6 months while the new figure means that the country has reserves that can cover its import requirements for only a period of 4.9 months.

Despite the drop, BoT says the amount is still above the benchmark that’s recommended by member states of the East African Community of at least 4 months.

Meanwhile, the current account deficit widened last year, largely due to a drop in exports of traditional crops and a steep rise in imports, mostly capital goods. Analysts are, however, of the view that the widening of the current account deficit is in no way a bad thing for the economy.

“Widening of the current account deficit has been fueled by President (John Magufuli)’s investment in infrastructure which requires more importation of capital goods. This, in the long run, would be an asset to the country,” said Prof Semboja Haji, of the State University of Zanzibar.

The BoT’s monthly economic review for January 2019 shows that the current account deficit rose to $2.7 billion (Sh6.1 trillion at the prevailing exchange rate) during the year that ended on December 31, 2018, up from $1.6 billion (Sh3.6 trillion) on December 31, 2017.

This, according to BoT, was attributed to the fall of the value of traditional exports to $0.7 billion (Sh1.6 trillion) from $1 billion (Sh2.3 trillion). The decline was significantly linked to the fall in export values of tea, cashew nuts and cloves.

BoT adds that cashew nut export earnings fell due to delays in commencement of exports, while the fall in the value of tea exports was due to low prices.

“Lower prices of tea (Mombasa auction) was largely due to oversupply and reduction of demand from Pakistan, one of the largest export destinations,” BoT says in its statement.

In another development, the goods-and-services imports bill increased by 7.8 per cent, reaching $10.3 billion (Sh23.2 trillion) in the year to December 31, 2018, compared with the same period in the previous year. During the period under reference, goods imports increased by 8.2 per cent, to $8.2 billion (Sh18.5 trillion).

The increase in import bill for capital goods was associated with the ongoing infrastructural development in the country, including the construction of a standard gauge railway, airports, ports, roads and bridges. Oil imports which account for the lion’s share of goods import, increased by 1.1 per cent.

However, the value of imports of food and foodstuffs declined substantially on account of adequate food production across the country, following good harvests during 2017/18 farming season.

debt servicing,” an official at the Bank of Tanzania (BoT) told The Citizen.

Apart from imports, central banks across the world also use foreign reserves to iron out adverse volatility of their local currencies – in this case the Tanzanian Shilling – against the vehicle currency (the US dollar).

The reserves, recorded in June 2018, were enough to cater for Tanzania’s import cover for a period of 5.6 months while the new figure means that the country has reserves that can cover its import requirements for a period of 4.9 months.

Despite the drop, BoT says the money is still above the benchmark that’s recommended by member states of the East African Community of at least 4 months.

Meanwhile, the current account deficit widened last year, largely due to a drop in exports of traditional crops and a steep rise in imports, largely of capital goods.

Analysts are however of the view that the widening of the current account deficit was, in no way, a bad thing for the economy.

“The widening of the current account deficit has been fueled by President (John Magufuli)’s investment in infrastructure which requires more importation of capital goods. This in the long run, would be an asset to the country,” said Prof Semboja Haji, of the State University of Zanzibar.

The BoT’s monthly economic review for January 2019 shows that current account deficit rose to $2.7 billion (Sh6.1 trillion at the prevailing exchange rate) during the year ending December 2018, from $1.6 billion (Sh3.6 trillion) in 2017.

This, according to BoT, was attributed to the fall of the value of traditional exports to $0.7 billion (Sh1.6 trillion) from $1 billion (Sh2.3 trillion).

The decline was significantly linked to the fall in export values of tea, cashew nuts and cloves.

BoT adds that cashew nuts exports earnings fell due to delays in commencement of exports whereas the value of tea exports was due to low prices.

“Lower prices of tea (Mombasa) was largely due to oversupply and reduction of demand from Pakistan, one of the largest export destinations,” BoT says in a statement.

In another development, goods and services import bill increased by 7.8 percent to $10.3 billion (Sh23.2 trillion) in the year ending December 2018 compared with the same period in the previous year.

Under the period of reference, goods import increased by 8.2 percent to $ 8.2 billion (Sh18.5 trillion).

The increase in import bill for capital goods was associated with the ongoing infrastructural development in the country, including construction of standard gauge railway, roads and bridges, airports and ports.

Oil imports which account for the lion’s share of goods import, increased by 1.1 percent.

However, the value of imports from food and foodstuffs declined substantially on account of adequate food supply across the country following good harvests during 2017/18 crop-season.