THE shilling's current gain against major world currencies is a temporary trend because of the huge revenue deficit between imports and exports.
The shilling gain, according to financial analysts, the shilling will be defeated in the short-term as the country's imports mismatch with exports and the little generated income, about one-third, consumed by the energy sector alone.
Analysts urged that the shilling's appreciation should be followed by an increase in exports and reduction on the oil bill, especially for electricity generation. Tanzania Securities Chief Executive Officer, Mr Moremi Marwa, said the shilling sustainability depends "very much" on increasing foreign currencies inflows by exporting more industrial goods.
"Foreign currency fundamentals are key issue. The Exports/imports mismatch has to be addressed by increased sales abroad of industrial goods," Mr Marwa said. The CEO said last year when the shilling dropped to the worst level in history intervention failed to correct the market until other measures were applied.
"BoT (Bank of Tanzania) cannot always intervene in the market. It failed last year; it won't work this time around. " Last year the central bank intervene bid to the market to rescue the shilling by pumping more money when depreciated to historical lowest level of 1,800/- failed.
The intervention only worked after tightening liquidity in circulation and reducing foreign currency reserves ratio. But in return, the measures pushed up other market interest rates.
Under normal circumstances, when the central bank interventions are short lived, the market slid back to disequilibrium once foreign currency demand popped up, especially from oil and heavy equipment importers. "The best practice is to reduce oil dependence for generating electricity while at the same time increase value added exports," Mr Marwa said.
In the last two months the shilling depreciated amicably due to demand from oil sector for generating power to cover hydro-deficit. But the best practise is to look for other sources like gas, wind, coal and so forth.
This will help stabilising the shilling. BoT said the total import bill grew to 12.78billion US dollars (about 20.45tr/-) for the year ended August 2012 from 10.82billion US dollars (about of 17.3tr/-) in August 2011 largely due to an increase in "domestic demand particularly for thermal power generation."
According to BoT oil alone consumes 3.46billion US dollar (about 5.54tr/-) or 27.05 per cent of total imports. Total exports for the year ended August clocked 8.28 billion US dollars (about 13.25tr/-). On the other hand, the current account deficit widened to 3.6 billion US dollars at the end of August from a deficit of 3.01billion US dollars recorded in August 2011.
"The widening deficit was largely associated with an increase in imports of oil and machinery," BoT said in its monthly economic review for September. Traditionally, the shilling gains at the end of the month due to increased demand from companies to foot the cost for taxes and salaries. It starts losing in the first week of the new moon.
Standard Chartered Bank said the shilling continued gaining against the dollar in yesterday's trading session follows increased inflows from the corporate sector. "Today (yesterday) we expect the shilling to further appreciate on the back of increased month end inflows.
The market is expected to remain moderately volatile. "Tightening in liquidity being observed as we move towards month end tax outflows estimated at over 150bn/-," the bank said on its Daily Market report.