Shilling stability masks stronger forex’s activity

 

By Guardian Reporter , The Guardian

Tanzania’s financial markets entered September with the shilling showing renewed stability against the US dollar, even as activity in the foreign exchange market increased sharply,

signalling stronger demand for foreign currency across key productive sectors of the economy. According to Bank of Tanzania financial market report for the weekend ending September 4, the shilling appreciated by 0.16 percent during the week ended September 4, closing at 2,638.96/- per US dollar, compared with 2,643.26/- a week earlier.

The movement, though modest, comes against a backdrop of significantly higher foreign exchange transactions, suggesting that improved market liquidity is helping absorb demand without putting substantial pressure on the domestic currency.

The most notable development was the increase in activity at the Interbank Foreign Exchange Market (IFEM), where transactions rose to $35.05 million from $24.90 million in the previous week.

That represents an increase of more than 40 percent and points to a considerably more active market for banks exchanging foreign currencies.

More importantly, retail foreign exchange turnover climbed to $668.24 million from $544.24 million, an increase of about 23 percent in just one week. Trade, mining and oil and energy accounted for $398.51 million, or nearly 60 percent of total retail turnover.

The sectoral composition provides an important reading of Tanzania’s foreign exchange pressures.

Trade generated the largest turnover at $173.02 million, followed by mining at $114.70 million and oil and energy at $110.79 million. Mining was particularly significant because its turnover more than tripled from $35.17 million in the preceding week to $114.70 million.

This suggests that the foreign exchange market is being driven not only by traditional import demand but also by transactions associated with Tanzania’s expanding mining and energy activities.

For an economy heavily dependent on imports of fuel, machinery, industrial inputs and consumer goods, these sectors can generate substantial foreign currency requirements.

At the same time, the relatively balanced overall retail market is significant. Purchases stood at $341.27 million while sales reached $326.97 million, indicating that demand for foreign currency was high but did not create an extreme imbalance during the week.

Over the preceding month, daily retail transactions averaged $132.02 million, with purchases and sales averaging $65.96 million and $65.14 million respectively.

The money market also points to a relatively controlled liquidity environment. The Interbank Cash Market weighted average rate closed at 6.72 percent, unchanged from the previous week, while seven-day trading volume declined from 652.25bn/- to 597.85bn/-.

The weekly weighted average rate of 6.41 percent remained within the Central Bank Rate corridor of 4.75 percent to 7.75 percent and was 16 basis points above the 6.25 percent Central Bank Rate.

The Bank of Tanzania also injected 756.50bn/- through seven-day reverse repo operations, down from 893bn/- previously.

Government securities, meanwhile, continued to attract substantial investor interest. Outstanding government securities stood at 33.01trn/-, with Treasury bonds accounting for 90.3 percent. Banks held the largest share at 33.07 percent, followed by pension funds at 30.42 percent and retail investors at 17.78 percent.

The September 2 auction of the 10-year Treasury bond further demonstrated demand for government paper. The government received bids worth 364.96bn/- against 182.90bn/- offered, producing an oversubscription of 182.06bn/-.

However, the weighted average yield to maturity rose to 10.69 percent from 10.39 percent at the previous auction of the same tenor.

Taken together, the data portray a financial system characterised by stronger foreign exchange activity, stable short-term interest rates and continued demand for government securities.

The immediate positive signal is currency stability despite increased forex turnover. The emerging issue to watch, however, is whether stronger demand for foreign currency—particularly from trade, mining and energy—will remain matched by foreign exchange supply.

For Tanzania, sustained stability of the shilling will therefore depend not simply on market intervention, but increasingly on the economy’s ability to generate export earnings and foreign currency inflows sufficient to finance its growing import and investment requirements.