Budgeting for a strong and resilient shilling
What you need to know:
- The currency’s stability, in the long term, is a factor of how much foreign currency it needs to pay for imports versus how much of its currency is needed by other countries. Consequently, and since the African region has had significant currency pressures, one has to look at the country’s main imports and exports for the solution to its currency challenges.
Economists have many blind spots, one of which is when they talk of currency stability; they often apportion blame or praise on Central Banks, not Treasury Departments. They constrain currency stability to monetary policy. But while budgets are about fiscal policy, their reach goes far beyond the fiscal, and often impacts the monetary. When it comes to the Tanzanian Shilling, there are two clear pillars that hold it together, the performance of the mining and tourism sectors. To protect the shilling, the Minister of Finance must therefore protect these two sectors.
Whilst governments are powerful Leviathans, they are not omnipotent. They cannot wish or will a stable currency into existence. Monetary policy is useful, but it has its limits. And within this context, it is important to appreciate that the fate of the Tanzanian shilling is intertwined with the country’s balance of payments. The currency’s stability, in the long term, is a factor of how much foreign currency it needs to pay for imports versus how much of its currency is needed by other countries. Consequently, and since the African region has had significant currency pressures, one has to look at the country’s main imports and exports for the solution to its currency challenges.
Tanzania’s biggest import bill is its fuel bill. In 2023, our imports of refined oil amounted to $2.97 billion (out of the total import value of $13.7 billion) according to the Bank of Tanzania. Other major imports are fertilisers and edible oils. While there is not much the country can do to lower global oil prices, the other big-ticket items can be addressed in the long term. A boost to the edible oil and fertilisers manufacturing is therefore good for the shilling as this would mean less dollars needed to import the products. Fiscal measures such as a reduction of indirect taxes on locally manufactured edible oils will therefore be welcomed. Fix this part of the equation and you have reduced the number of dollars leaving the country.
On the export side, the two biggest earners of dollars for the economy are mining (particularly gold at the moment) and tourism. Mining is especially beneficial because it attracts not only foreign exchange by way of sales of processed minerals, but it also attracts foreign indirect investment (FDI). Whilst most of it (FDI), especially in the initial stages, is predictably spent on equipment that reduces that retained FDI, it is no doubt a shilling booster to have dollars come in by way of FDI. The opposite is of course FDI coming by way of debt, which puts future pressures on the shilling when such loans have to be paid, with interest. This is especially critical given the fact that in this year’s Ministry of Finance’s budget of Sh18.3 trillion, a total of Sh13.131 trillion is expected to service the government debt. For every Sh100 spent by the ministry of finance in the coming budget, Sh72 will be spent in paying debt.
Mining is particularly attractive because of it being labour-intensive. Large mines can employ thousands of people directly, and multiples of that number indirectly. The contribution of mining to the economy has steadily increased from 5.1% six years ago to 9.1% in 2022. In the financial year 2022/23 mining contributed 56% of Tanzania’s total exports. What is promising is the fact that we are starting to see major banking players locally getting involved in mining projects. In terms of local content, this is very impressive. To support the shilling, deliberate measures therefore need to be taken to boost the number of active and future mining projects.
Just like mining, tourism is labour-intensive, given its experiential nature, which present opportunities for employment for many Tanzanians, particularly unskilled and semi-skilled ones.
In 2023, where for the first time, tourist visits exceeding pre-pandemic levels, Tanzania generated $3.4 billion in tourist receipts. But to achieve an even greater growth, two things need to be done. The northern circuit and Zanzibar have carried the lion’s share of the tourism burden and it is time to diversify into the southern circuit. In fact, according to the recent World Bank Country Economic Memorandum, there is a risk of overcrowding which may strain infrastructure and lessen the experience of tourists.
The World Bank actually recommends that the country elevates to an international airport status the Iringa Airport, and building infrastructure to improve access to Ruaha, Selous (Nyerere), Mikumi, Udzungwa and lake Nyasa. This will transform and expand the tourism potential of the country.
The stability of the shilling is as important as the growth of the economy. If I were to sum it up, if Tanzania wants a stable and well performing shilling, it must do two things: produce more edible oil so that it imports less of it and continue to expand the mining and tourism sectors.
Samwel Ndandala is a Tax Partner with Deloitte Consulting Limited. The views presented are his own and not necessarily those of Deloitte. He can be reached at [email protected]
