The International Monetary Fund (IMF) has highlighted three critical strategies to alleviate foreign exchange pressures in Tanzania. Following a series of meetings held in Dodoma and Dar es Salaam, the IMF emphasized the importance of a flexible, market-clearing exchange rate system and a transparent forex intervention policy.
Mr. Bo Li, IMF’s Deputy Managing Director and Acting Chair, praised the Bank of Tanzania’s plan to publish the results of its forex auctions, enhancing transparency in the market. “A flexible and market-clearing exchange rate system, along with a transparent forex intervention policy, are essential to address the ongoing pressures in the forex market,” Mr. Bo stated in a report released on Tuesday.
The IMF commended the recent implementation of the forex intervention policy and the revised Interbank Foreign Exchange Market (IFEM) code of conduct, viewing them as significant steps toward achieving these goals. “In accordance with the policy,” Mr. Bo added, “forex interventions should be limited to addressing disorderly market conditions while maintaining adequate foreign exchange reserves.”
Despite these positive steps, the IMF warned that the economic outlook remains uncertain. Risks include the intensification of regional conflicts, increased commodity price volatility, and the potential for a sudden global economic slowdown or recession. Other concerns include natural disasters linked to climate change, failure to manage forex market pressures, and poorly executed public investment projects, which could negatively impact the near-term economic outlook.
“Medium-term risks involve complacency in reform implementation and the consequences of deepening geoeconomic fragmentation,” the IMF report stated.
Forex market pressures have reemerged after subsiding in the fourth quarter of last year. A widening current account deficit in 2022 and the first half of the previous year led to increased forex market pressures mid-last year. The Bank of Tanzania (BoT) initially responded with significant interventions in the IFEM and administrative measures to stabilize the exchange rate.
By the end of last year, increased exchange rate flexibility and limited interventions by the BoT, combined with improvements in the current account deficit, led to a modest recovery in the IFEM. However, forex market pressures have resurfaced this year, with reports of persistent forex shortages and parallel market transactions.
“The IFEM has been largely inactive, while the BoT has recently implemented sizable forex interventions primarily through auctions,” the report noted.
To address these renewed forex pressures, the IMF recommended that the BoT allow for greater exchange rate flexibility and take additional measures to revive the IFEM. “If left unaddressed, these pressures could undermine Tanzania’s hard-earned macro-financial stability,” the IMF cautioned.
In his presentation of the 2024/25 budget, Finance Minister Dr. Mwigulu Nchemba outlined solutions to strengthen the Tanzanian shilling. These include increasing production and the quality of exports, as well as promoting the use of domestically produced goods and services. “The value of our currency reflects the economy’s ability to meet its fundamental needs,” Dr. Nchemba told the House.
The country’s economic fundamentals include the importation of essential goods and services, which, according to Dr. Nchemba, will help stabilize the shilling.
4o