Tanzania and Uganda have resorted to loans and repurchase agreements in a bid to shore up their declining foreign reserves.

The two countries have seen a fall of more than $1.1 billion in foreign reserves in the past 12 months as a result of public spending on imports and currency interventions.

Tanzania last week said it had signed $800 million in loans from Rand Merchant Bank in South Africa and China Development Bank Corp to bolster its foreign-exchange reserves, as it shores up a weakening currency and plugs the budget deficit of $2.99 billion.

According to Bloomberg, the negotiations for the loans are complete; the Johannesburg-based Rand Merchant Bank will raise $600 million through private placements while $200 million will come China Development Bank.

“We are expecting about $800 million and we should receive it from both banks before the end of June. We are hoping this will improve the supply of foreign currency in the market,” Joseph Masawe, Bank of Tanzania’s head of economic research and policy told Bloomberg.

The Tanzania shilling has weakened 21 per cent so far this year and is Africa’s second worst-performing currency, after Ghana’s cedi. Tanzania has scaled down its sales of foreign currency to banks.

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As at the end of last week, its foreign reserves stood at $4.07 billion, down from $4.61 billion a year ago.

Tanzania’s central bank has sold $339 million to lenders in the past five months to support the shilling. It also spent $380.3 million on its external debt obligations as repayment on interest and principal in the 2014/15 financial year.

“Currency depreciation has been caused by the strengthening of the US dollar, while the government’s external obligations and speculation inthe treasuriesmarket are also to blame,” Mr Masawe said.

It is however not clear at what rate Tanzania will be borrowing from South Africa and China and why it opted for private bank financing rather than getting a precautionary facility from the International Monetary Fund like Kenya did.

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An economist at the Central Bank of Kenya said that Tanzania opted for private bank borrowing because it has reached its borrowing limits with the IMF.

“The country could also want to avoid paying for its imports using the dollar, hence looking at paying with the currency of the source of imports like China, which it has a lot of development agreements with. That reduces the currency exchange losses it would incur,” he said.

In this case, Tanzania’s central bank is not just taking the money to keep in the reserves but will be using it as part of its public expenditure import bill. This means that it will cushion its reserves from further depletion.

The other argument is that it wants to assure the market that it still has enough reserves to cover for its imports as opposed to being caught flat footed in case of any unprecedented spending need or mopping up exercise.

Midweek, Uganda for the second time this year raised its Central Bank Rate (CBR) from 12 to 13 per cent due to high inflationary pressures and the expected strengthening in demand even as the shilling hit a new low of 3,170/3,180 due to dollar demand pressure.

Prof Emmanuel Tumusiime-Mutebile, Governor of the Bank of Uganda, said that the move to increase the CBR was to ensure that medium term inflation converges towards the BoU policy target of 5 per cent during the course of 2016/17.

Prof Mutebile said they increased the base lending rates to stem the volatility of the shilling.

“The forecasts showed volatilities and a high likelihood of increases in core inflation in the medium term. We hope that this raise will help strengthen the shilling against the dollar,” Prof Mutebile said.

BoU Deputy Governor Dr Louis Kasekende said that the drop in foreign reserves can be attributed to spending on public projects and mopping up exercises.

“We spent close to $300 million during the 2013/2014 financial year on import payments for the Karuma and Isimba dam projects and currency stability activities,” Dr Kasekende said. “We now have agreements with several commercial banks for a daily purchase of repo bills of $4.2 million, which we are using for reserve build-ups.”

Uganda’s current foreign reserve stands at $2.91 billion, down from $3.65 billion a year ago. The reserves have shrunk more than $600 million.

Despite the increase in its CBR, inflation figures for May show an increase to 4.9 per cent, up from 3.6 per cent in April. By the end of last week, the Ugandan shilling had shed 13 per cent against the dollar.

The choice by Uganda to have a repo arrangement of $4.2 million is also unconventional, but analysts say that it works for both the country and the banks involved in the arrangements.

“We have seen the raising of the CBR twice but it hasn’t shown any effect on either the shilling or inflation,” said Stephen Kaboyo of Alfa Capital.

Grace Alupo, director of communications at the bank however clarified that when the BoU changes the CBR, it does not seek to cause any specific “reaction of the shilling to the dollar.”

“Conceptually and practically, there should not be any direct link between the CBR changes and the exchange rate of the Uganda shilling to the US dollar. Changes in domestic interest rates may attract or have a benign effect on portfolio flows and therefore, alter the exchange rate. But that is neither the direct nor indirect plan of the central bank,” Ms Alupo said.