Tanzania Daily News (Dar es Salaam)

Tanzania: Central Bank Initiates Monetary Policy Shift

INCREASED economic activity and expansion of money markets have forced the central bank to shift goal posts in curbing excess liquidity in the economy.

This follows the rapid expansion of the economy and the Bank of Tanzania (BoT) has gradually migrated from reserve money to interest rate targeting policy which, according to economists, has many benefits.

The growth drove the country into a sophisticated economy thus creating challenges under money targeting policy on tackling supply in the financial system, thus slowing down efforts to restrain inflation at a desirable pace.

BoT Director of Economic Research and Policy, Dr Joseph Masawe, said though money targeting works, its efficiency on expansion of economy is not that perfect than interest rates policy.

"The economy now works in the different era, therefore making it necessary for migration to targeting interest rates, which has positive challenges as well," Dr Masawe told the 'Daily News' over the phone yesterday.

The challenges include developing further the money markets such as Dar es Salaam Stock Exchange (DSE) and Inter-bank Foreign Exchange Market (IFEM) 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 introducing interest rate target policy, trying to avoid money market interest rates disequilibrium.

"Actually we (BoT) are phasing out reserve money policy and bring in interest rate policy 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 market players to understand when BoT tightens and eases interest rates.

"When we tighten, we want banks with surplus balances to lend BoT and when we ease up we want them to borrow from us, thus injecting money in the economyÉ just like what countries in the first world are practising," Dr Masawe said. He added: "We want the central bank rate to be an important benchmark in financial markets."

According to monetary theory, it provides insight into how to craft optimal monetary policy by either being expansionary or contractionary. The former policy increases the total supply of money in the economy more rapidly than usual, and the latter expands the money supply more slowly than usual or even shrinks it. But both control inflation.

Monetary policy, as the Wikipedia. org puts it, uses a variety of tools to control one or both of these, to influence outcomes like economic growth, inflation, exchange rates with other currencies and unemployment.

"Where the currency is under a monopoly of issuance, or where there is a regulated system of issuing currency through banks which are tied to a central bank, the monetary authority has the ability to alter the money supply and thus influence the interest rate to achieve policy goals," the website shows.

International Monetary Fund (IMF) said last week when answering the country's letter of intent that it supports the government endeavour to make interest rate key monetary policy. The move, according to IMF, points to the desirability of curbing inflation before it becomes ingrained in the system,

"so as to avoid larger disinflation costs in subsequent years". Despite gradually phasing out of reserve money as a key instrument to money policy, the exchange rate will continue to be market determined, and interventions will be limited to smoothing short-term fluctuations. "In the face of sticky core inflation, the BoT will continue to pursue a tight monetary policy, with average reserve money remaining the operating target," IMF said.

In a bid to bring the new policy operational, and use the interest rates as a tool for managing liquidity, BoT is collaborating and seeking the assistance from the East AFRITAC. According to the BoT, the central bank rates would be computed based on Treasury Bills, liquidity stance and other market rates under supervision of Monetary Policy Committee which will issue the interest rate after space of time.

Looking ahead, IMF said, the BoT is also in the process of developing a web based questionnaire for evaluating business conditions and inflation expectations, and develop indices of leading economic indicators in order to further strengthen its monetary policy framework. The beginning of monetary policy as such comes from the late 19th century, where it was used to maintain the gold standard.

Ads by Google

Copyright © 2013 Tanzania Daily News. All rights reserved. Distributed by AllAfrica Global Media (allAfrica.com). To contact the copyright holder directly for corrections — or for permission to republish or make other authorized use of this material, click here.

AllAfrica publishes around 2,000 reports a day from more than 130 news organizations and over 200 other institutions and individuals, representing a diversity of positions on every topic. We publish news and views ranging from vigorous opponents of governments to government publications and spokespersons. Publishers named above each report are responsible for their own content, which AllAfrica does not have the legal right to edit or correct.

Articles and commentaries that identify allAfrica.com as the publisher are produced or commissioned by AllAfrica. To address comments or complaints, please Contact us.