- Feb 11, 2006
By A STAFF REPORTER
Is the Tanzanian shilling really overvalued? A new study by the International Monetary Fund has concluded that the countrys exchange rate is currently modestly undervalued.
But the study predicts a slight strengthening of the currency vis a vis the hard currencies in the medium term, at levels consistent with a projected high GDP growth rate and expected recovery in the countrys terms of trade.
It bases its optimistic view of the countrys currency on the grounds that capital inflows into Tanzania could be higher than currently expected, with investors keen to take advantage of Tanzanias natural resources and strong macroeconomic policies.
Tanzanias exchange rate has appreciated modestly in recent years, after a significant depreciation between 2000 and 2006.
In the period when the currency was weak, it was mainly a reflection of Tanzanias higher inflation relative to its trading partners.
But with inflation having hit single-digit levels, the currency started moving towards the real and effective level.
Following the sharp real appreciation of the currency in the second half of the 1990s, the Bank of Tanzania moved by reducing aid absorption in 2001, while the government continued to fully spend increasing levels of aid.
This contributed to a rapid raise in the countrys international reserves and encouraged depreciation of the exchange rate, particularly during 2002 and 2003.
Since 2004, however, aid has been fully absorbed, and the coverage of the reserves has gradually declined.
The current account deficit has widened, rising to 14 per cent of GDP in 2006/2007, but remains largely financed by highly concessional donor assistance.
During April-July, Tanzania experienced significant portfolio inflows mainly in the form of receipts from privatisation transactions estimated at about $250 million.
The country absorbs aid at the level of 8.5 per cent of GDP compared with 4.5 per cent of GDP for FDI inflows.
But the Bank of Tanzania responded by purchasing most of these additional inflows, thereby resisting pressures for appreciation of the shilling. BoT also resorted to aggressive sale of Treasury bills.
Starting from September 2007, BoT has relied mostly on sales of foreign exchange as opposed to T-bills, to mop up aid-related liquidity injections.
As a result, the shilling appreciated markedly during the period September- December last year, but has recently returned to its August 2007 levels.
Overall, the IMF continues to be upbeat about Tanzanias economy, predicting that growth was expected to reach 7.5 per cent this year, rising to eight per cent a year over the medium term.
It says that the budget Tanzania is scheduled to table next week will aim at lowering the overall budget deficit from an expected 11.2 per cent of GDP this year to 10.3 per cent next year.
Following the recent rise in inflation, which reflects mainly the pass-through of global food and fuel prices, year-on-year inflation is targeted to fall to seven per cent by this month and to 5.5 per cent by mid-2009