TANZANIA: THE International Monetary Fund (IMF) has pinpointed three key areas of easing foreign exchange pressure in the country.
The Bretton Wood institution named the areas after a meeting in Dodoma and Dar es Salaam, as a flexible and market clearing exchange rate system and a transparent forex intervention policy.
IMF’s Deputy Managing Director and Acting Chair Mr Bo Li welcomed the Bank of Tanzania’s plan to publish the results of its forex auctions which will enhance transparency.
“A flexible and market clearing exchange rate system and a transparent forex intervention policy are key to addressing ongoing pressures in the forex market,” Mr Bo said in a report issued on Tuesday.
The recent issuance of the forex intervention policy and the revised Interbank Foreign Exchange Market code of conduct are important steps in this regard.
“In line with the policy,” Mr Bo said, “forex interventions should be limited to addressing disorderly market conditions while maintaining adequate foreign exchange reserves”.
However, IMF said the outlook is tilted to the downside: Intensification of regional conflicts, increased commodity price volatility and an abrupt global slowdown or recession.
Other risks are natural disasters related to climate change, failure to address pressures in the forex market and a poorly executed scaleup of public investment projects that could weigh negatively on the near-term outlook.
“Risks to the mediumterm outlook include complacency in reform implementation and spillovers from deepening geoeconomic fragmentation,” the IMF report said.
Furthermore, pressures in the forex market have reemerged after easing in the fourth quarter of last year. A widening current account deficit in 2022 and in the first half of last year led to the emergence of pressures in the forex market in mid-last year.
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The BoT initially responded with heavy interventions in the interbank foreign exchange market (IFEM) and administrative measures while keeping the exchange rate stable.
More exchange rate flexibility and limited interventions by the BoT along with improvements in the current account deficit led to a modest pickup in the IFEM towards the end of last year.
However, FX market pressures have re-emerged this year, with anecdotes of persisting forex shortages and parallel market transactions.
“The IFEM has been largely inactive, while the BoT has recently implemented sizable FXI (foreign exchange intervention) mainly through auctions,” the report said.
To address re-emerging forex pressures, IMF said, the BoT should allow exchange rate flexibility and take additional steps to revive the IFEM.
“If left unaddressed, reemerging pressures in the forex market could undermine Tanzania’s hard-earned macro-financial stability,” IMF said.
Minister for Finance Dr Mwigulu Nchemba said when tabling the 2024/25 budget that among solutions to strengthen the shilling was to increase production and quality of exports and embrace the use of domestically produced goods and services.
“It should be noted that the value of our currency reflects the ability of the economy to meet its fundamental needs,” Dr Nchemba told the House.
The country’s fundamentals include importation of necessary goods and services, and by so doing, the shilling currency will be stabilised.
