Bloomberg News

Tanzania Follows Kenya Move to Help Currency, Ecobank Says

October 19, 2011

(Updates with comment from analyst in third paragraph.)

Oct. 19 (Bloomberg) -- Tanzania’s central bank followed neighboring Kenya by introducing measures that include limiting the amount of foreign currency lenders can buy in an attempt to curb the shilling’s drop, according to Ecobank Ltd.

The Bank of Tanzania informed commercial lenders yesterday that their net open-position limit will be lowered to 10 percent from 20 percent in a week’s time, Eric Mushi, Ecobank Tanzania’s country treasurer, said by phone from Dar es Salaam today. Minimum reserves will be raised to 30 percent from 20 percent, he said. The central bank may issue a statement later, Joseph Masawe, director of economic research and policy at the regulator, said by phone.

“As an immediate impact we could see the shilling appreciate because of the mop-up of excess liquidity,” Mushi said. “Inflation could also ease in the medium term, because of absorbing currency from circulation.”

Tanzania’s shilling has slipped 8.8 percent against the dollar in the last three months and reached a record-low 1,722.5 today. The worst regional drought in 60 years boosted prices, driving the inflation rate to 16.8 percent in September from 14.1 percent in the month before. Central banks in Kenya and Uganda have also moved to protect their currencies, which are the world’s worst performers against the dollar this year and are trading near the weakest since at least 1993.

Borrowing Costs Surge

Kenya’s shilling has weakened 9.9 percent against the dollar in the same period, helping push consumer prices rises to 17.3 percent, while the Ugandan currency depreciated 9.2 percent in that time, raising inflation to an 18-month high last month. Both central banks increased their benchmark interest rates by 400 basis points to record levels at their most recent policy meetings to help stem the currencies decline and cut price growth.

Soaring inflation has forced borrowing costs in the East African countries to record highs. Kenyan three-month bill yields were 14.997 percent last week, their highest in a decade, while Uganda last week sold three-year bonds at yield of 23.8 percent, the strongest on record.

Uganda’s central bank will take “appropriate” steps to support the shilling, though it hasn’t decided on whether to follow neighboring Kenya in limiting the foreign exchange exposure of commercial banks, Elliot Mwebya, spokesman for the bank, told reporters in the capital, Kampala, today.

Kenya’s government on Oct. 13 lowered foreign-exchange exposure limits for commercial banks to 10 percent of core capital from 20 percent.

The Bank of Tanzania raised its repurchase rate to 9.58 percent from 7.58 percent, Mushi said. Commercial banks were also told they must immediately stop lending local currency to non-resident borrowers or offshore investors, he said.

--With assistance from Fred Ojambo in Kampala. Editors: Ana Monteiro, Karl Maier

To contact the reporters on this story: David Malingha Doya in Dar es Salaam at dmalingha@bloomberg.net; Franz Wild in Johannesburg at fwild@bloomberg.net

To contact the editors responsible for this story: Andrew J. Barden at barden@bloomberg.net; Antony Sguazzin at asguazzin@bloomberg.net


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