No man is an island
"No man is an island” is an idiom taken from a 17th century sermon by John Donne, a clergyman who was then the Dean of St Paul’s Cathedral, and who is regarded as one of the greatest English poets. The words “No man is an island” were embedded in a deeply Christian sermon about how human beings are connected to each other, and how important that connection is for the wellbeing and survival of any individual.
These same words (“no man is an island”) came to my mind following a response to a question I had posed a year ago (on 3 March 2023) at the eighth Gilman Rutihinda memorial lecture held at the Bank of Tanzania (“BoT”) conference centre (where the theme was “Strengthening Monetary and Fiscal Policy Coordination in Challenging Global Economic Conditions”). I asked the panel for a view on the extent to which the exchange rate should be determined by market forces. The response from Dr Louis Kasekende, former Deputy Governor of the Bank of Uganda, was in essence that in smaller economies care does need to be taken to ensure that temporary factors (such as seasonal or one off FX flows) do not artificially distort the rate, but that otherwise ideally the rate should reflect underlying fundamentals and trends.
In my comments to the panel preceding my question, I noted that the day before (2 March 2023) a Daily News headline stated that “Shilling depreciates by [an annual average of] 0.3 per cent in [the last] four years” but that a few days earlier the IMF (in a press release of 23 February 2023) commented that “monetary policy will continue to be tuned to developments in actual and expected inflation, while allowing exchange rate flexibility to cushion the economy against external shocks”.
Exchange rate flexibility has continued to be a theme of subsequent IMF country reports. Most recently its December 2023 country report noted that in the year to June 2023 the TZS had depreciated only 1 percent against the USD despite the current account deficit widening to 6.3 percent of GDP (from 4.6 percent a year earlier), as goods imports grew more rapidly than exports, and that from the end of June to end of October 2023 there was a 7.2 percent depreciation and this despite the BoT increasing its forex sales in the market. The report highlighted that “the interbank forex market has become inactive with the BoT being the only seller, and anecdotal evidence suggests unmet forex demand at the official exchange rate” and that “unmet forex needs have reportedly led to the emergence of parallel forex markets”.
More recently, the BoT monetary policy statement (“MPS”) (issued on 12 February 2024) noted that the six month period July to December 2023 saw the TZS depreciate by 6.4 percent resulting in an overall depreciation in 2023 of 8.2 percent against the USD (as compared to 1 percent depreciation in 2022). To put this depreciation in context, it came after a long period of minimal adjustment; for example, the seven years to 31 March 2023 saw a total depreciation of the TZS against the USD of only 5.7 percent (a stronger performance against the USD than many currencies (including CNY, INR, JPY, GBP, ZAR, UGS, KES)).
For the 12 months to June 2023 the December report had highlighted the impact of the war in Ukraine (fuel and fertiliser) and stepped-up construction of key public infrastructure projects (capital goods) as drivers for the rapid growth of imports, which outpaced the growth of exports (despite the tourism rebound). More recently the BoT MPS notes improvement in the six months to December 2023 with a current account deficit of USD1.1bn (as compared to USD3.1bn in the corresponding period a year ago) reflecting a significant decline in imports and an increase in foreign inflows from tourism, traditional exports, and grants.
Looking forward, the IMF’s December report emphasised that “a coordinated macroeconomic policy response is needed to address emerging forex imbalances”. Further it counselled that the BoT should (i) “allow more exchange rate flexibility and ensure that the exchange rate responds to market conditions and cushions the economy against external shocks” and (ii) “continue its efforts to revive the forex markets, return to a market-clearing exchange rate system, and continue to maintain an adequate level of reserves while limiting forex interventions only to avoiding disorderly market conditions”. It also advised that “these measures should be accompanied by fiscal consolidation and tightening of local currency liquidity”.
Overall the December report is positive about the future outlook, projecting a rebound of real GDP growth to about 6½ percent over the medium-term assuming successful implementation of the authorities’ reform agenda, with inflation expected to remain within the BoT’s target and the current account deficit projected to moderate over the medium term as the global shocks subside and the authorities’ reforms start to pay off.
The December report does state the medium-term outlook assumes steadfast implementation of the authorities’ reform agenda, and in terms of medium to long-term upside potential for the Tanzanian economy highlights the LNG project, if executed as planned. In the near term, downside risks and uncertainties highlighted by the report include: intensification of regional conflicts; increased commodity price volatility; an abrupt global slowdown or recession; failure to arrest emerging forex market imbalances: natural disasters related to climate change; and poorly executed scale up of public investment projects.
If presented with such a list of risks and uncertainties affecting the economy, many of which are regional or global, perhaps John Donne would rephrase his idiom and state that “no economy is an island”!
David Tarimo is a Country Senior Partner with PwC Tanzania.
