Banks excess reserve is declining, reflecting the efforts of the Bank of Tanzania (BoT) to tighten liquidity, says the International Monetary Fund (IMF) 2023 Country Report.

The report released on Tuesday showed banks' excess reserves averaging 12 per cent of reserve money reflecting significant monetary financing of the budget.

"The reserve money growth and banks' holding of excess reserves have declined significantly as the BoT reduced its net claims against the government," the report says.

The excess reserves refer to the cash and deposits held by a financial institution and are exceeding the reserve requirement that an authority (central bank) sets.

Since banks have little incentive to maintain excess reserves because cash earns no return and may even lose value over time due to inflation, they normally minimise their excess reserves, lending the money to clients rather than holding it in their vaults.

Despite the decline, the IMF country report showed that the financial sector in the country remains broadly stable with pockets of vulnerabilities persisting in some areas.

Overall, the banking sector is well-capitalised, profitable and liquid, although performance is uneven across banks.

Additionally, credit risk continued to improve with non-performing loans (NPLs) decreasing to 5.2 per cent until last September from 7.3 per cent in the prior year.

"The ratio of restructured loans to gross loans stabilised to 7.4 per cent until June from 8.2 per cent of December last year," stated the report.

Nevertheless, rapid credit growth, high credit concentration, financial dollarisation and loss of correspondent banking related to deficiencies in the effective anti-money laundering and combating the financing of terrorism (AML/CFT) framework remain key vulnerabilities.

The unfavourable global economic environment and domestic factors continue to weigh on Tanzania's economic recovery.

Growth rebounded during the first half of 2023 but is expected to slow down in the second half amid headwinds from a weak global outlook and forex liquidity shortages.