Why Tanzania's forex import capacity is at 17-year high

Dar es Salaam. Tanzania’s foreign exchange reserves were enough to cover the country’s imports requirements for a period of seven months at the end of last October: the highest to have been registered after a period of almost 17 years, official figures show.

Gross foreign reserves have risen by a staggering $1.2 billion in three months, propelled by funds from development partners - specifically a Special Drawing Rights (SDR) and interest-free loan from the International Monetary Fund (IMF) - improved export earnings and a modest rise in tourism earnings as the global economy recovers from Covid-19-induced travel restrictions.

The Monetary Policy Committee (MPC) said in a statement on Monday that the country’s foreign exchange reserves reached $6.7 billion at the end of October 2021, a massive rise from $5.502 billion at the end of July 2021.

The last time that the country’s foreign exchange reserves were quoted at more than seven months of import requirements was in 2004 when they were enough for 8.4 months of the imports cover.

Since then, they have been hovering from four to 5.7 percent of the imports cover.

The BoT director of economic research and policy, Dr Suleiman Misango, said the rise was on account of rising exports of minerals, manufactured goods, cereals and horticultural products - among others - as well as funds from development partners, including the interest-free IMF loan and service receipts from tourism.

“In recent months, we have seen some improvements in tourism earnings as the global economy improves and the number tourists coming into the country increases,” he said.

The BoT says in its Monthly Economic Review (MER) for October that Tanzania earned $9.441 billion through exports of goods and services during the year to September 30, 2021. This was higher than the $8.9 billion that Tanzania earned during a similar period in 2020.

Gold exports earned the country $2.886 billion during the year to September 2021. Manufactured exports also rose to $1.128 billion during the same period, compared to the $868.1 million earned in a similar period the preceding year.

The BoT reports a considerable increase in exports of ceramic products, cosmetics, plastic products, iron and steel to neighbouring countries.

The country also exports rice, maize and beans to neighbouring countries, with official data putting export earnings from rice at $303.4 million during the year to September 30, 2021, up from only $97.4 million during a similar period the preceding year.

The BoT also reports that export of horticultural products more than doubled during the period, driven by edible vegetables.

“The country has also received some loans and grants - including the IMF facility - that have all injected some funds into the country’s foreign exchange reserves,” Dr Misango said.

According to Prof Delphin Rwegsira of the University of Dar es Salaam, it was an open secret that the rise was partly contributed to by the IMF facility which has beefed up the coffers - especially as the money was sent directly to BoT accounts.

Another economist, Prof Samuel Wangwe, said it was good news that, after a very long time, the country had reserves to last up to seven months of its imports needs.

“The money is an emergency buffer for unforeseen eventualities, and will also be used to stabilise the economy at any time when forex is needed to make payments,” he said.

Economist-cum-politician Zitto Kabwe said he concurrs with the other analysts, saying the improvement in financial inflows as reported by the BoT was partly contributed by the SDR allocation which the IMF approved last August.

“Part of the inflows is from the new SDR allocation from the IMF… In August, the IMF made the largest SDR allocation in its history, which included about $23 billion for sub-Saharan Africa… This allocation supplements countries’ foreign reserves,” he said.

High foreign exchange reserves give the central bank – in this case the BoT - enough power to fight against future currency (in this case the Tanzania Shilling) depreciation.

It so happens that, when the local currency starts depreciating, the central bank sells its dollar reserves and buys the local current to stop the depreciation.

This is usually a good move in countries where imports do exceed exports by far - as it means that local prices of imported products will not be adversely affected by a weaker domestic currency.

However, in export-oriented economies, a weaker local currency is good because it makes the country’s exports more competitive in foreign markets.