The Shilling will stabilise in 2016: BoT

Dar es Salaam. The Bank of Tanzania (BoT) and economists are optimistic about the performance of the shilling in 2016 following signals of little pressure domestically and from outside.

While the central bank expects a continued stability, other economists say the local currency will continue depreciating but this time at a slower pace compared to the belittling experienced in 2015.

On January 2, 2015 a spot selling of $1 was Sh1,731 but it reached a historic Sh2,400 mark in June 2015 before the BoT intervened to bring it back to Sh1,900 level during the first week of July. 

It exchanged for Sh2,159 on December 31 the same year, according to indicative foreign exchange market rates by the Bank of Tanzania.

That represents almost 25 per cent depreciation for the local currency in one year as mainly influenced by strengthening of the greenback.

The local currency which was one of the worst-performing moneys -- including Nigeria’s naira -- has remained stable at between 2,100 and 2,200 per dollar in the last five months.

However, the general feeling for this year is that the shilling may depreciate but not at the same rate as last year.

Analysts at the KCB Bank Tanzania say in their report on the 2016 financial trends expected that they predict 12 per cent depreciation of the shilling this year.

“The Tanzanian shilling has stabilised against the dollar over the past 5-6 months and even firming of late. External dynamics, notably a strong US Dollar and related shifts in investor perceptions towards emerging markets, currencies have been the dictating factor in the shilling’s performance over recent quarters and this trend will remain in place over the coming three-to-six months,” reads part of the report co-authored by KCB head of finance, Mr Godfrey Ndalahwa, and head of treasury, Mr Pascal Machango.

“Fellow East African currencies such as Kenya and Uganda, for instance, have exhibited similar stability over this period. With the US Dollar rally now mostly spent, pressures on the shilling will lighten and augur a far more modest pace of the Tanzanian shilling depreciation over the coming 12 months or so. We forecast an average deprecation of around 12 per cent in 2016,” said the statement.

On the long-term outlook, the report stated that weak balance of payments dynamics and uncertainty in the energy sector will drive further the shilling depreciation over the next couple of years.

“External imbalances arising from a shortage of domestic productive capacity are reflected in Tanzania’s gaping trade in goods deficit and this will ensure that the country’s current account balance remains deep in the red - at the equivalent of between 9  per cent and 11 per cent of GDP - over the next two years and these imbalances will remain the key pressure point for the shilling over the medium-term,” said the report.

The strengthening of the US dollar which is the most widely traded currency has not only impacted on to shilling but also affected prices considering that Tanzania is still a net importer of oil and many other commodities.

The import bill for both goods and services was $12.90 billion in the year ending November 2015 compared with $13.29 billion recorded in the year ending November 2014, according to Bank of Tanzania.

“The Tanzanian shilling has stabilised against the dollar over the past 5-6 months and even firming of late”report

On the other hand, the value of exports increased from $8.57 billion to $9.56 billion during the same period. Prof Delphin Rwegasira of the University of Dar es Salaam Economics Department said being an import dependent country with unstable exports is a major pressure for the currency to weaken.

“With the fall of oil prices in the world market, import bills may reduce but mind you that the oil market is very unpredictable,” he said by phone.

Prof Rwegasira had similar views that the shilling will continue weakening but at a slower pace than last year. He said last year’s depreciation was accelerated by fears of the General Election.

Another factor which may influence the continued shilling depreciation this year, according to him, include government expenditure in the repayment of arrears; and the US Federal Reserve decision to increase interest rates from record lows.

He said the movement will attract more investors to put their assets in dollars for the gain.

In December the US central bank made the decision to raise benchmark rates to between 0.25 per cent and 0.5 per cent from their record lows for the first time since the recession. Stock markets have been turbulent across the world since the move, and all the US markets entered negative territory again after the announcement.

On the other hand, the Bank of Tanzania which regulates financial markets and ensures price stability, is optimistic about the current performance of the shilling and hopes the trend will continue through 2016.

“The currency trading is driven by the market demand and supply and therefore it’s difficult to tell how exactly how the shilling will trend. However, we see a continued stability considering that last year’s depreciation was mainly on the pressure to strengthen the US dollar,” said Johnson Nyella, BoT’s director of economic research and policy.

The International Monetary Fund said last September that the shilling was assessed to be somewhat overvalued in 2014 and was “now closer to equilibrium.”

It said the shilling depreciated rapidly against the US dollar particularly in April–June 2015, as the global strength of the dollar overlapped with high liquidity in the banking system, seasonally low export earnings, and high repatriation of corporate dividends.

The BoT said in September also that Tanzania gained export competitiveness as the shilling depreciated against currencies of major trading partners. The movement was confirmed by the current account which improved by 14.7 per cent in the year to September 2015.