Tanzania Macro Update: Tanzanian Shilling’s Comeback - How Policy Reforms, Investment, and Market Forces Are Driving a Consolidation
After a tumultuous period for the Tanzanian Shilling (TZS), the summer months have brought some salvation to the market and the Shilling has been regaining ground. This report will dive into the latest drivers alongside some of the groundwork that has been put in place to stimulate this. Outside of the fact that next year’s general election is impending, and the local election is earmarked for the 27th of November 2024, the macroeconomic landscape of Tanzania has been changing of late. President Samia Suluhu Hassan’s leadership so far has brought a focus on encouraging investment and improving foreign relations. Her party, Chama Cha Mapinduzi (CCM), won 99% of votes across local elections in 2019, and 84% in the following general election, inherited mid-term from Ex-President Magufuli. Despite this, there is still a lot to be done in order to achieve the financial goals laid out by the current administration. The potential second term is an opportunity for President Samia to create a lasting legacy.
TZS Surges Amid Dollar Inflows
The Tanzanian Shilling (TZS) has recently experienced a strong period in the secondary market. Recent dollar inflows have breathed new life into the currency after a frustrating year up until the summer months. This appreciation has driven an aggressive convergence toward the bank rate, which was quoted at 2730 around the time of this report—a 12% decline from this time last year. The secondary market has been volatile over the past 12 months, but this period represents the most significant break below 2800 seen since last year. The appreciation has been driven by peak tourism season and agricultural export proceeds, with confidence in the economy—and thus economic policy—following suit.
Price discovery can be relatively difficult due to the existence of a secondary market, meaning that during periods of sharp appreciation, corporates without urgent payments tend to hold off, expecting further strength. Nonetheless, recent two-way quotes from brokers are in the range of 2750-2800 or 2800-2850, compared to 2850-2950 earlier in the year—a marked positive that local corporates hope will continue, indicating a more liquid market. Will this strength withstand the inevitable slowdown in seasonal flows? Forecasters expect the end of Q4 and the start of Q1 to be revealing, but for now, confidence in the market is growing as the Shilling strengthens day by day.
Despite the growing momentum compared to major currencies, TZS has experienced a period of depreciation against regional counterparts. For instance, over the last 12 months, the Tanzanian Shilling is officially quoted as 24% weaker against the Kenyan Shilling. However, the Kenyan Shilling was the best-performing currency in East Africa for the first seven months of 2024.
The Bank of Tanzania Tightens Forex Controls
The Bank of Tanzania (BoT) played a role in the Shilling's recent consolidation, issuing circulars that have tightened the grip on local banks. It is believed that banks had been benefiting from the Shilling's weakness by holding significant foreign exchange reserves and finding ways to trade outside of the BoT's exchange rate. Two weeks ago, the BoT issued a circular requiring daily reporting from local banks for all FX transactions and enforcing banks to publish their two-way quotes daily online for price discovery, in both USD and EUR. It was thought that banks were circumventing scrutiny applied to USD/TZS pricing by quoting EUR/TZS in line with the secondary market level instead. Closing this loophole seemed to have an immediate effect, and banks were forced to align with the official market. Further alignment between the official and secondary exchange rates is expected throughout September. Late last week, new provisions were made to the Bank of Tanzania Act, criminalizing local transactions not made in the home currency (TZS). While there has been no immediate impact on the Shilling at the time of this report, this move may have the counterproductive effect of driving liquidity offshore due to fears of repercussions. Naturally, international businesses, homegrown Tanzanian companies, and those paying into Tanzania will be affected by this change in strategy, leading to higher costs and inefficiencies as businesses navigate the new legislation. The next couple of weeks will be interesting, with potential short-term appreciation as speculators lay low, but long-term, this strategy seems counterproductive.
Foreign Policy Overhaul Spurs FDI Surge
Earlier in the year, the first official review of foreign policy strategy in over 20 years was announced, aimed at reestablishing Tanzania on the international stage. This aligns with the “Five-Year National Development Plan 2021/22 - 2025/26,” all serving to encourage both foreign and domestic investors. Tanzania saw a 21.6% year-on-year increase in investment (June 2023 - June 2024), totaling $6.56 billion. In fact, Tanzania’s FDI has been increasing since 2016. This statistic is even more impressive considering it contrasts with the rest of East Africa, which has witnessed a year-on-year decline since 2017. FDI is primarily attracted through mining, manufacturing, and energy, while the tourism and agriculture sectors are beginning to gain traction. The current administration introduced The Investment Act back in 2022, which reduced the capital threshold for local investors to $50,000 and introduced additional functions for the National Investment Steering Committee (NISC) and the Tanzania Investment Centre (TIC). Earlier this year, TIC acknowledged a 91.6% spike in project registrations compared to the previous year, rising from 369 projects to 707.
Although some elements from the previous administration remain, including concerns over Tanzania’s sovereignty due to foreign investment—a sovereignty that former President Magufuli fought hard to protect—these concerns naturally create friction. Foreign investors often highlight the costs associated with obtaining permits and the complexity of tax laws, but the progress is clear. President Samia disbanded the previous administration's tax task force, which had been responsible for pressuring multinational corporations by detaining local directors and imposing unfeasible fines, as in the case of Acacia Mining, which was fined $190 billion. Yet, Tanzania’s GDP per capita remains among the lowest 30 worldwide. A continued focus on encouraging foreign investment is needed to modernize both mature and emerging industries.
Strengthening Ties with China Amid Major Investments
The lion's share of foreign investment comes from China, who currently maintains a total value of $9.6bn across 1,098 investment projects. Despite China’s energetic approach to the belt and road initiative (BRI) somewhat waning, last week's China-Africa summit held in Beijing rebolstered ambitions. Officials committed to upgrading the Tanzania-Zambia railway, a project the Chinese originally spearheaded and completed in 1976, which has long since been falling into disrepair. Said railway serving to connect the port of Dar Es Salaam to Zambia’s copper belt. Moreover on President Samia’s last trip to China in 2022, 15 agreements were signed between the two nations - showing the mutual efforts to progress the relationship.
After a decade of dishing out billions across the continent, alongside their stuttering domestic growth and a stubborn hangover from covid, it's becoming more selective with beneficiaries. Tanzania must continue to keep China onside. Mega projects like the Chinese led Sino-Tan industrial park, expected to bring 100,000 jobs to the Kibaha district are like gold dust to the local economy, easing a stubborn narrative that only 1/5th of young people entering the workforce in Tanzania will immediately find employment. More projects on this scale are needed. Furthermore a few weeks ago approved direct entry of Tanzanian avocados into the market, continuing to bolster a 350% increase of trade between the two nations over the past decade. Ways to encourage more trade between the two nations could potentially be through conducting bilateral trade through the Yuan rather than the Greenback and to encourage Chinese tourists into hotspots like Zanzibar. For example, in 2023 only 33,541 tourists travelled from China - despite tourism representing 17% of GDP. Tanzania could even go as far to offer citizenship or ease the visa process for certain nationalities.
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Get startedLNG Project at Risk of Becoming White Elephant Amid Negotiation Delays
Tanzania is already the 14th largest producer of natural gas in the world, with total reserves estimated at 57tr cubic feet. The government is currently negotiating its flagship project with joint operators, Shell and Equinor, who hope to finalise within the next 12 months. However, the government has stalled final negotiations. This LNG project was expected to generate returns to the tune of $40bn by 2029. Following the relatively recent discovery of LNG rich deposits, the government is pushing to apply amendments to the Host Government Agreement in order to ensure that “truly both sides benefit fairly in the whole deal”. It has the potential to dramatically change Tanzania’s fortunes. However, with fossil fuels' immortal status starting to ebb, this golden opportunity may lose its shine and this LNG project risks becoming a white elephant if stalled for too long. The project, alongside expected returns, were an intrinsic part of Fitch’s B1 rating on Tanzania’s debt. The even bigger fear is that investors may start to detract from this project and we could see a general pullback if investor appetite really drops off. The initial plans were proposed a decade ago - something's got to give - particularly as other emerging economies expedite their entry into the LNG market.
Agricultural Vulnerability Amid El Niño Threats
Tanzania’s low urbanisation outside of Dar Es Salaam and a few regional hubs creates a reliance on agricultural and seasonal employment. The World Bank states that 65.51% of Tanzania’s working population were employed in agriculture, despite agriculture contributing just 25% to the economy. Notwithstanding this, the reliance on agriculture makes Tanzania prone to external shocks. Periodic bombardments of El Niño across East Africa have been having a detrimental effect on farmers yields, leading to crop failure, outbreaks of disease, and a general threat to quality of life. Earlier this year, 155 Tanzanian’s were killed during an outburst of flooding - with hundreds of thousands displaced during record breaking rains. El Niño is expected to only get more frequent, and volatile. This looming threat naturally sullies the export market. A bad crop has a domino effect on the level of liquidity entering the country.
Yet despite uncertainty surrounding the climate, Tanzania’s economy has stayed remarkably buoyant. The IMF are onside post-changing of the political guard, with President Samia championing their reformist agenda. The IMF recently approved over $900m of further support, the majority of which under the pretext of shoring resilience to climate change. The principal sum, $786.2m, is to be disbursed over a period of two years through the Resilience and Sustainability Facility. This position is understandable, inflation falls comfortably at 3.0% (July 2024), Fitch recently upgraded Tanzania’s debt to a B1, and early estimates across the 24/25 fiscal year that a modest 27% of the administration's budget will go towards debt servicing.
Conclusion
The Government and BoT have made some easy decisions, some harder, that have firmed up the qualitative and quantitative which is to some extent feeding into the macroeconomic picture. There is no time for admiring their work. The expectation is that the CCM will be returned to parliament, and this outcome would serve to give President Samia an opportunity to consolidate the efforts made the first time round. The aims are socioeconomic development, easing friction for foreign investment, and continued political reform. With institutions starting to wholeheartedly come back on side and investors following suit, a period of stability is key. The likelihood of achieving these goals is growing, and the opportunity for Tanzania to become a guiding voice on the continent again, and beyond, is returning.
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