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 one of the greatest English poets. Through these words he sought to convey 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. I had 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 ideally the rate should reflect underlying fundamentals and trends but acknowledging 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.

The context to my question was 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 an IMF press release (of 23 February 2023) referenced “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”) (of 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 in context, it followed a long period of minimal adjustment; for example, the seven years to 31 March 2023 saw cumulative depreciation 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”.

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 projections are caveated by reference to various risks and uncertainties, many of which are regional or global, and perhaps can best be summarised by a rephrased idiom that “no economy is an island”!

By David Tarimo, Country Senior Partner, PwC Tanzania