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Economic Analysis: How Inflation and Capital Flight are Harming the Economy – Eurasia Review


Sep 11, 2023

Tanzania is currently facing a fuel crisis that has been largely overlooked by the rest of the world. Within a short period of time, fuel prices have increased by 17%, causing a surge in transportation costs. The National Oil Producer Association had predicted this shortage since January and has blamed the government for not taking immediate action. On the other hand, the government has shifted blame onto hoarders and others have pointed to a shortage of US dollars as the primary cause of the crisis.

This fuel crisis in Tanzania is not a recent development, but rather a long-standing issue that highlights the country’s ongoing shortage of US dollars. A significant trade deficit and growing international debt have put immense pressure on the government’s spending. Additionally, the increasing value of the US dollar has further compounded the government’s vulnerable position. As a result, the Tanzanian government has been forced to dig deeper into its pockets to cover the nation’s expenses amidst rising worldwide prices.

Tanzania’s financial situation has been made more vulnerable due to its trading structure. Imports exceed 17% of the country’s GDP, while exports lag behind. This has resulted in a trade deficit of $4.4 billion in 2021, with foreign currency reserves totaling $6.3 billion. The fuel industry, in particular, heavily relies on imports due to a lack of infrastructure despite having oil and natural gas resources. Major trade partners like the UAE and Saudi Arabia are major fuel importers to Tanzania, with imports reaching over $2.2 billion in the previous year.

Furthermore, the alarming debt structure in Tanzania has contributed to the shortage of US dollars. The country’s debt levels have risen significantly, and the government’s burden in repaying these debts has increased as well. Two-thirds of Tanzania’s debt is in US dollars, putting a strain on the country’s foreign reserves. Although the debt level is relatively safe at 40% of GDP, the dominance of US dollar-denominated debt will continue to drain Tanzania’s foreign reserves.

The shortage of US dollars in Tanzania has been exacerbated by rising interest rates in the United States and ongoing capital outflows. The US dollar’s appreciation in international markets due to the Federal Reserve’s rising interest rates has led to more dollars flowing back to the US, creating downward pressure on other currencies. This cycle is expected to continue, as the Federal Reserve plans to increase interest rates further. Consequently, Tanzania’s stable exchange rate of 2,300 Tanzanian shillings to 1 US dollar has jumped to 2,500 Tanzanian shillings, reducing the country’s foreign exchange reserves.

The skyrocketing prices in the global market since the pandemic have also contributed to Tanzania’s dollar shortage. Disruptions in the worldwide supply chain and conflicts between Russia and Ukraine have led to significantly higher prices for goods, including grains and manufactured products. This rapid decline in Tanzania’s forex reserves exemplifies the increasing expenditure of the nation. Moreover, rising prices have negatively impacted production in Tanzania, particularly in agriculture. The country heavily relies on imported fertilizer and machinery, but the unstable international fertilizer supply and increased prices have hindered agricultural productivity and raised export costs.

The implications of the dollar shortage are evident both on a macroeconomic level and in everyday life. Fuel traders in Tanzania have reported a 24% decline in fuel imports compared to the previous year due to the lack of US dollars. This shortage directly affects ordinary people due to the country’s heavy reliance on land transportation for goods, leading to increased living expenses. Additionally, the appreciation of the US dollar has caused significant growth in debt levels, making it more challenging for Tanzania to repay its loans, especially in the private sector.

To address the dollar shortage, the Tanzanian government has implemented various measures, such as imposing a cap on oil prices and issuing letters of credit to oil companies for purchasing oil. They have also cracked down on unregistered foreign exchange services and limited withdrawals in US currency. However, the ongoing economic crisis in Tanzania serves as a warning for other African countries facing similar challenges. Many countries share similar economic structures and heavy dependence on imports, making them susceptible to skyrocketing international prices and US dollar outflows. Kenya and Malawi have already experienced fuel shortages driven by similar factors.

It is important to note that the views expressed in this article belong solely to the author and do not necessarily reflect those of Geopoliticalmonitor.com.

By Editor

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