Financial experts and economists have already nodded to the trend, describing it as healthy to the country's economic growth. They say the high supply of money into the economy, coupled with falling inflation, could translate into increased saving should consumers maintain their spending.
The 2016 report on Financial Trends Expected in Tanzania published by financial experts in the country states that due to challenging 2015 economic conditions, Tanzania is set to improve modestly over the coming quarters of the year with real Gross Domestic Product (GDP) growth climbing to above 6.0 per cent this year from an estimated average of 5.7 per cent last year.
In the report, Godfrey Ndalahwa and Pascal Machango who are financial experts at Kenya Commercial Bank (KCB), say the inflation trend has been consistently going above BoT’s 5 per cent target over the past decade (averaging over 9 .0 per cent) and that they expect the trend to continue over the next few years.
Ndalahwa, KCB Head of Finance said that inflation set to range between 6 .0 and 8 .0 percent over the coming months. Despite the shilling's heavy sell-off and associated inflation pass through, the inflation has been contained thanks to favorable food and fuel prices, he says, adding; “These benign price conditions are set to continue through 2016.”
“Having sold off aggressively through the first half of 2015, the Tanzanian shilling has stabilized against the dollar over the past 5-6 months,” he says.
According to him, external dynamics, notably a strong US dollar and related shifts in investor perceptions towards the Emerging Markets currencies, have been the dictating factors in the shilling's performance over recent quarters and this trend will remain in place over the coming three-to-six months.
He says other East African currencies such as Kenya and Uganda, for instance, have exhibited similar stability over this period. With the US dollar rally now mostly exerting pressure on the shilling, it will lighten and augur a far more modest pace of Tanzanian shilling depreciation over the coming 12 months. “We forecast average deprecation of around 12 per cent in 2016 compared to 23 per cent in 20 15,” he says.
Machango, KCB head of Treasury outlines on the Long-Term Outlook (Six-To-24 Months) where he says weak balance of payment dynamics and uncertainty in the energy sector will drive further shilling depreciation over the next couple of years.
He says external imbalances arising from a shortage of domestic productive capacity are reflected in Tanzania's g aping trade in goods deficit and this will ensure that the country’s current account balance remains deep in the red - at the equivalent of between 9 .0 per cent and 11.0 per cent of GDP over the next two years and that the imbalances will remain the key pressure point for the shilling.
“Tanzania will continue run a large structural deficit for the duration of our 2015-2019 forecast period. The latest data from the BoTconfirms that in the year through September 2015, the current account deficit narrowed by 14 per cent to US$4 .2bn thanks to a jump in exports and a sharp deceleration in imports,” he says.
The report also says that Tanzania’s banking sector remains in a relatively good health. Asset quality has continued to improve in recent quarters, as illustrated by the ratio of nonperforming loans (NPLs) to total loans.
It says the latter decreased from 8 .5 per cent in September 2014 to 6 .5 per cent in March 2015, reflecting write downs and efforts made by banks to recover NPLs. Overall the sector benefits from relatively healthy asset quality which should continue to benefit from a robust economic outlook.
The Tanzanian banking sector's funding structure is relatively strong. The sector's loan-to-deposit ratio sat at 78 per cent in 20 15 which though higher than its five year average of 69 per cent, remains comfortable, according to the report.
This implies that Tanzania's banks are predominantly domestically funded, less reliant on external financing, and thus less exposed to external shocks.
The report also says the banking sector has robust levels of capital adequacy, with capital above regulatory requirements, remaining in line with Tanzania's long-term average, coming in at 12.6 per cent in December 2014 compared to an average of 12 per cent of assets since 2009.
“We do not see scope for a significant increase in leverage over the coming quarters, as tighter monetary conditions and economic uncertainty cause lenders to remain relatively risk averse. Meanwhile, efforts to improve banking sector supervision are likely to ensure that banks' average capital ratios remain strong in the coming years,” Machango says.
The Tanzanian banking authorities continue to strengthen financial sector supervision to ensure financial stability and soundness. These efforts have been stepped up following investigations by US authorities into Tanzania headquartered FBME Bank - the country's largest by asset size albeit with most of its operations based in Cyprus - which was labeled as of 'primary laundering concern', the report says.
In light of these developments, BoT is developing its supervision framework, issuing consolidation supervision regulations and issuing memorandum of understandings with other foreign regulators and central banks.
During 2015, US dollar traded at the level ranging between Sh1,674 and Sh 2,160 which is almost 30 per cent drop of its value. This drop was contributed by many factors such as decrease of exports, increase of importation of necessity goods, perceived political instability during general election,and decrease of donor funds, according to the report..
The Tanzanian shilling is expected to trade at 2,180 by the end of this quarter, according to Trading Economics global macro models and analysts’ expectations. “Looking forward, we estimate it to trade at Sh2266 in 12 months’ time,” say the analysts.
Interest Rate in Tanzania is expected to be 12 per cent by the end of this quarter, according to Trading Economics global macro models and analysts’ expectations.
“Looking forward, we estimate Interest Rate in Tanzania to stand at 12 per cent in 12 months’ time, but inthe long-term, the rate is projected to trend around 12 per cent by 2020,” say analysts the econometric models report.