22 January 2013

Tanzania: BoT to Switch to New Economic Management Approach

FAST growth of Tanzania's economy has made the central bank switch from reserve money to interest rate targeting policy, which economists claim to be a more beneficial approach.

The growth has driven the country's into a more sophisticated economy, to create challenges under money targeting policy on tackling liquidity supply in circulation slowing down effort to curb inflation at a desired pace.

The Bank of Tanzania (BoT) Director of Economic Research and Policy, Dr Joseph Masawe, said although money targeting works well, it is still not perfect than interest rates policy.

"The economy now works at the different era, (thus) spearheading migration to targeting interest rates from money, which has positive challenges," Dr Masawe told the 'Daily News'.

The challenges including developing further the money markets such as Dar es Stock Exchange and Foreign Exchange Market, that normally fluctuate in either direction on central bank interest rates. The director said during this transit period they would gradually phase out reserve money while at the same time introduce interest rate target policy, trying to avoid money market interest rates disequilibrium.

"Actually we (BoT) are phasing out reserve money policy and phasing in interest rates policy (and) to sensitize the money markets players on the shift," Dr Masawe said. He said the idea during the transitional period is to enable banks and other money markets players to understand when BoT tightens and eases interest rates.

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