What lies ahead as shilling continues to slip against the dollar

The decision significantly reduced liquidity in global financial markets, strengthening the dollar and exerting downward pressure on currencies like the shilling.

The shilling traded at an average of Sh2,365.38 per dollar, according to the Bank of Tanzania, but the rate had increased to Sh2, 635.92 by yesterday.

Some commercial banks are offering rates as high as Sh2,738 per dollar, while in the black market, the exchange rate has soared to Sh3,000 and beyond.

Financial markets analyst Bernard Mumwi told The Citizen that the trend shows that dollar prices may continue to go up at least until the end of the year.

"The high cost of the dollar in Tanzania is due to the underperformance of the local currency, which is why we have seen institutions as the BoT adopt policies to prop up the economy and stabilise prices. Another initiative includes the reopening treasury bonds with higher interest rates to encourage saving and absorb money from the economy," he said.

Mr Mumwi emphasised the importance of monitoring US economic indicators, which may lead to further tightening of the economy.

“As the US tightens its economy, we must continue with our efforts to boost the value of our shilling,”

There is speculation in US markets that the Federal Open Market Committee (FOMC) may cut interest rates at its next meeting on September 18.

Reports by US media outlets, including Forbes magazine, support this view based on FOMC minutes and public statements.

According to the Forbes website, Federal Reserve chair Jerome Powell hinted in his Jackson Hole Economic Symposium speech that a cut is on the way.

“The time has come for policy to adjust. The direction of travel is clear and the timing and pace of rate cuts will depend on incoming data, the evolving outlook and the balance of risks,” Mr Powell was quoted saying.

Should the Fed go ahead and reduce rates, it could improve the global supply of dollars, potentially lowering prices and benefiting developing economies like Tanzania.

However, the extent of this impact remains to be seen and the Tanzanian government is likely to continue with its efforts to stabilise the shilling and address the underlying factors contributing to its depreciation.

Financial analyst Christopher Makombe attributed the dollar rally in Tanzania to demand-driven factors.

“There has been a sharp increase in demand for dollars in Tanzania, especially with many projects being paid for in dollars. The growth of business and the economy also contributes to this demand, causing it to outstrip supply.”

Mr Makombe suggested that increasing dollar liquidity, particularly through boosting exports, is crucial in addressing the shortage.

"To curb this shortage, we need to find ways to increase dollar liquidity, including enhancing our exports so that the supply of dollars in the country meets our needs," he said.

Tanzania's monetary policy stance

On the domestic front, the Bank of Tanzania revised its Central Bank Rate (CBR) to 6 percent from the previous 5.5 percent in April 2024 to curb inflationary pressures arising from global economic developments.

This decision was maintained for the quarter ending September 2024 following the successful management of economic expectations in the previous quarter.

Analysts who spoke with The Citizen view this as a prudent move and advise further tightening of economic policies to stabilise the shilling and control inflation.

Additionally, delivering the Budget Speech on June 13, Finance minister Mwigulu Nchemba issued meant to curb the widespread use of the US dollar in the country.

He directed that all transactions be conducted and advertised in Tanzanian shillings, aligning with the legal framework of the country and promoting financial stability.

The directive aims to bolster the demand for the shilling and reduce dependency on foreign currency.

In October 2023 the BoT also introduced issued new Foreign Exchange (Bureau de Change) Regulations, which revoke the Foreign Exchange (Bureau de Change) Regulations, 2019 to streamline and tighten currency exchange operations.

These regulations included the introduction of three classes of Bureau de Change licences: A, B, and C.

A significant part of these new rules allowed hotels with three stars and above to establish money exchange shops without a minimum capital requirement.

So far, about 30 hotels across the country have been licensed to operate bureau de change services within their premises.

BoT senior inspector for financial sector supervision Gwamaka Charles said the move will ease the currency exchange process for both international and local visitors who have had to seek such services outside their hotels.

“We have granted licences to over 30 hotels across the country, enabling them to offer bureau de change services within their premises," he said during the official launch of a new bureau de change at the Hyatt Regency Hotel in Dar es Salaam last weekend.