In a bid to ease the strain on Tanzania’s foreign exchange market, the International Monetary Fund (IMF) has recommended a trifecta of measures following its second review of the Extended Credit Facility (ECF) arrangement for the country.
The IMF executive board outlined three key suggestions: advocating for exchange rate flexibility, urging fiscal consolidation, and emphasizing continued tightening of local currency liquidity. These proposals come in the wake of Tanzania grappling with US dollar shortages throughout the year, causing price hikes in certain imports and prompting interventions from the central bank.
Highlighting the necessity for a coordinated macroeconomic strategy to counter the foreign exchange market pressures, the IMF stressed the need to address the root causes of these imbalances. Deputy Managing Director and Acting Chair Bo Li emphasized the imperative for comprehensive responses encompassing exchange rate flexibility, fiscal consolidation, and sustained tightening of local currency liquidity.
The Bank of Tanzania (BoT) previously attributed external shocks, such as the Russia-Ukraine conflict, residual impacts from the Covid-19 pandemic, and the repercussions of climate change, to mounting pressures on the current account position, foreign reserves, and exchange rates. As of October 2023, the foreign exchange reserves stood at $4.6 billion, equivalent to around 4.0 months of anticipated goods and services imports. While meeting Tanzania's four-month target, these reserves fell short of the benchmarks set by the East African Community (EAC) and the Southern African Development Community (SADC) at 4.5 and six months, respectively.
The IMF also expressed optimism regarding Tanzania's economic growth in the current year following a slowdown in the previous year. However, it cautioned that an unfavorable global economic climate alongside domestic factors continued to impede the country's economic recovery.Although inflation rates remained within the BoT's target range, the fiscal deficit for 2022/23 exceeded projections due to revenue collection shortfalls. Nonetheless, the authorities affirmed their commitment to implementing fiscal consolidation as outlined in the FY2023/24 budget.
The IMF attributed a wider current account deficit for 2022/23 and tighter external financial conditions to the strains observed in the foreign exchange market. While forecasting a potential resurgence in economic momentum, it emphasized near-term priorities such as exchange rate flexibility, tightening local currency liquidity, and fiscal consolidation while safeguarding critical social spending.
The IMF underlined the importance of ongoing efforts to modernize the monetary policy framework and complete the transition to an interest rate-based monetary policy for enhanced effectiveness. Additionally, it advocated for strengthening the financial supervision framework to bolster financial sector stability and foster deeper financial markets.
The IMF stressed the necessity for structural reforms aimed at promoting inclusive, resilient, and sustainable growth. These reforms should concentrate on simplifying regulatory processes, enhancing transparency, and enforcing anti-corruption measures. Furthermore, it highlighted the imperative need for climate change mitigation and adaptation policies to bolster Tanzania's resilience. In response to the dwindling foreign currency reserves earlier in the year, Tanzania's government adopted multifaceted strategies to stabilize the financial situation. These measures included export credit guarantee schemes and support for local businesses to bolster exports, as stated by former Chief Government Spokesperson Mr. Gerson Msigwa.
The initiatives aimed at guaranteeing export credits for goods sold abroad, with banks extending loans to traders by contributing 50 percent, were part of the concerted efforts to alleviate the US dollar shortage in the country. The proposals set forth by the IMF and the government's multifaceted approach indicate a concerted effort to address the foreign exchange challenges, laying the groundwork for a more resilient and stable economic landscape in Tanzania.