Tanzania: Selected Issues and Statistical Appendix
Author: International Monetary Fund
Publication Date:
07 Jan 2003
eISBN:
9781451838343
Language:
English
Keywords:
ISCR; CR; Tanzania; enterprise; BoT hope; aggregate demand; terms of trade; lending rate; inflation rate; Bank credit; Monetary base; Commercial banks; Trade balance; Credit
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This Selected Issues paper reviews developments in Tanzania in the main fiscal indicators and related structural reforms to explain the success in fiscal management. The paper contains a brief overview of the structure of the public sector. Main developments in revenue and expenditure are covered. The paper concludes that the rationalization of expenditure programs and the progressive shift from domestic to foreign financing were at the core of Tanzanian macroeconomic stabilization in the second half of the 1990s, contributing to a sharp reduction in inflation.

Abstract

This Selected Issues paper reviews developments in Tanzania in the main fiscal indicators and related structural reforms to explain the success in fiscal management. The paper contains a brief overview of the structure of the public sector. Main developments in revenue and expenditure are covered. The paper concludes that the rationalization of expenditure programs and the progressive shift from domestic to foreign financing were at the core of Tanzanian macroeconomic stabilization in the second half of the 1990s, contributing to a sharp reduction in inflation.

II. Recent Issues in the Implementation of Monetary Policy17

A. Background

33. Tanzania’s commitment to prudent macroeconomic policies in recent years provided a strong basis for non-inflationary growth and earned the support of many donors. Annual inflation averaged 6 percent during the 1999-2002 period, down from 20 percent during the period 1995 to 1998. Donor inflows, on average about 6 percent of GDP over 1999-2002, supported the budget and contributed to a significant buildup of gross international reserves to the equivalent of more than six months of imports of goods and nonfactor services

34. Recent monetary developments were characterized by strong monetary expansion, as large foreign inflows were not fully sterilized and the demand for broad money expanded with the gradual deepening of the financial system. Partly reflecting the lack of suitable lending opportunities, the banking system developed an increasingly large structural liquidity surplus, which triggered an excess demand for treasury bills and, consequently, a decline in interest rates on bills and deposits. Interest rates on loans, however, remained high, mainly on account of impediments to bank lending and weak competition in the banking system. The Bank of Tanzania (BoT) has been slow in mopping up excess liquidity out of concern over rising interest rates and adverse effects on Tanzania’s competitiveness. The downward trend in interest rates, which has become negative in real terms, raises concerns about excessive monetary easing and possible inflation, and contributes to a continuing increase in foreign currency deposits.

35. This paper reviews the objectives and recent implementation of monetary policy by the BoT, when the stance of monetary policy was significantly modified, in part to address structural changes in the financial sector. It also discusses impediments to bank lending—in large part responsible for high lending rates—and how they can be removed so as to promote a more dynamic financial sector development. The paper is organized as follows: Subsection B lays out the framework of monetary policy. Subsection C reviews recent monetary developments, including interest rates, exchange rates, and credit policies. Subsection D discusses impediments to bank lending, and Section E concludes.

B. The Monetary Policy Framework

Monetary policy objectives

36. According to the Bank of Tanzania Act of 1995, the primary objective of monetary policy is … to formulate and implement monetary policy, directed to the economic objective of maintaining price stability, conducive to a balanced and sustainable growth of the national economy of Tanzania.” The BoT’s Monetary Policy Statement of June 2002 states that “inflation control is not an end in itself, but rather, is the means by which monetary policy contributes to overall economic performance.”18 While these statements are consistent with a strong focus of the BoT on price stability, the policy statement further states that monetary policy objectives for 2002/03 aim at “allowing credit to the private sector to grow by 21.5 percent at end-June 2003 from the stock of June 2002,”19 indicating that it also pursues other objectives.

37. The choice of a single versus multiple objectives of monetary policy remains a controversial subject in the literature. The arguments for a single objective—in particular, price stability—are based on the view that monetary policy cannot affect the long-term growth of the economy20 In this view, efforts to stimulate growth above its potential rate lead to higher inflation. Accordingly, monetary policy can at most only moderate short-run fluctuations in output. Others even doubt that discretionary monetary policy can effectively dampen economic fluctuations, given that lags in recognizing turns in the business cycle, and subsequent lags in the response of the economy to changes in monetary policy, make it difficult to time policy actions accurately enough to moderate business cycles. Therefore, some central banks find it useful for purposes of transparency, accountability, and independence to be restricted to price stability alone, since this reduces their vulnerability to political pressure for an expansionary policy Moreover, focusing on price stability also makes it easier to observe the channels of transmission of monetary policy and, therefore, easier to determine the right instruments.

38. In practice, many central banks in both advanced and developing countries tend to pursue multiple objectives, in particular employment and growth, in addition to price stability. In developing countries, pressure to pursue a growth-oriented monetary policy arises from the concentration of output in a few commodities, which, coupled with underdeveloped financial markets, makes such countries more vulnerable to destabilizing shocks, both internal and external. Furthermore, the limited access to international capital markets and the often large but uncertain inflows of foreign aid faced by developing countries may also lead their monetary authorities to give a larger weight to external equilibrium in their monetary policy objectives. Finally, where financial systems remain particularly rudimentary, the authorities may seek to use monetary policy to direct credit to sectors regarded as central to the nation’s development strategy.

The Monetary Policy Framework

39. The preparation of Tanzania’s monetary policy framework starts with the Monetary Policy Statement, which is presented twice a year by the Governor of the BoT to parliament. This document reviews recent developments and lays out, for the period ahead, policies to be implemented, the reasons for adopting them, and the means by which the BoT intends to achieve them. The Monetary Policy Standing Committee of the Board of Directors is responsible for implementing monetary policy. Annex I summarizes the process of monetary policy formulation in Tanzania.

40. The BoT conducts monetary policy by managing base money as the operational target, with a view to attaining a level of broad money that is consistent with its macroeconomic objectives, including GDP growth, inflation, and an adequate level of international reserves. Given that fiscal deficits have largely been covered by external grants and loans, the central bank intervenes in the money market to manage liquidity so as to maintain the desired path for base money. The central bank also intervenes in the foreign exchange market in order to ensure orderly market conditions consistent with its exchange rate policy.

41. Based on a money demand function, the BoT determines the growth of broad money (M2, which excludes foreign currency deposits).21 M2, which serves as the intermediate guide for monetary policy, is translated into an operational target for base money (MO) by using an assumed money multiplier that is set on the basis of a three-month moving average of the multiplier:22 the percentage growth target for MO is thus expressed as a band of ± 1 percentage point around the center value. Thus, the framework aims at managing base money to attain the target for broad money consistent with the inflation objective. In the process, interest rates and the exchange rate are expected to respond endogenously to the behavior of base money. The supply of base money is managed by adjusting the amount of treasury bills auctioned each week for liquidity management purposes and engaging in repurchase operations with the commercial banks. Annex II presents the central bank’s approach to liquidity forecasting. The BoT relies on treasury bills, foreign exchange, and repurchase operations as the primary instruments for conducting monetary policy.

C. Implementation of Policy

Taming inflation

42. The Tanzanian financial system underwent a substantial transformation in the 1990s. While in the beginning of the decade the system was monopolized by state-owned commercial banks and characterized by government-determined interest rates and directed credits (backed by central bank lending to the banks), by 1996 private-owned banks—including subsidiaries of well-known international institutions—were in operation, interest rates were fully liberalized, government interventions in credit allocation and central bank financing of the commercial banks had ceased, regular treasury bill auctions had started, and an interbank foreign exchange market had been introduced.

43. Thereafter, helped by declining financing requirements of the government,23 the central bank implemented its reserve money program with the sole objective of taming inflation. The framework served well in bringing inflation down to single digits in 1999. Actual growth in base money and broad money was mostly below their upper bands (Figure II.1). The tighter liquidity conditions were also evidenced by the amount of 91-day treasury bills offered and total bids received during this period (Figure II.2). As a result, the 12-month inflation rate declined from 15 percent in December 1997 to 7 percent in June 1999 (Figure 11.3).

Figure II.1.
Figure II.1.

Tanzania: Deviations of Base Money and Broad Money from Their Upper Bands,

June 1997-June 2002

Citation: IMF Staff Country Reports 2003, 002; 10.5089/9781451838343.002.A002

Source: Bank of Tanzania (BoT).
Figure II.2.
Figure II.2.

Tanzania: Subscriptions for 91-Day Treasury Bills, January 1998-June 2002

Citation: IMF Staff Country Reports 2003, 002; 10.5089/9781451838343.002.A002

Source: National Bureau of Statistics (NBS)
Figure II.3.
Figure II.3.

Tanzania: Price Developments, June 1996 - June 2002

Citation: IMF Staff Country Reports 2003, 002; 10.5089/9781451838343.002.A002

Source: National Bureau of Statistics (NBS).

Monetary policy in support of growth and development

44. With inflation in the single digits, the BoT turned increasing attention to promoting economic growth and development. In 1999, the rate of growth of credit to the nongovernment sector, especially the agriculture sector, and real GDP were sluggish (Table II.1), which the BoT interpreted as evidence for an increase in the output gap. The external terms of trade also deteriorated (Table II.1), as a result of a sharp drop in international prices of Tanzania’s export crops. Meanwhile, foreign inflows of about 7 percent of GDP were increasingly being channeled through the budget to finance social sector expenditures (mainly nontradable goods). In the face of these new challenges, the central bank loosened monetary policy by accumulating foreign reserves at a rate faster than programmed and not sterilizing them.24 In addition to the foreign inflows channeled through the budget, the BoT bought foreign exchange on a net basis on the interbank foreign exchange market, thereby putting pressure on the exchange rate to depreciate (Table II.2). The monetary authorities also cut back on the issuance of treasury bills in order to lower interest rates (Figure II.4), all of which contributed to the base money exceeding its target and to a growing liquidity overhang (Figures II. 1 and II.2).

Table II.1

Tanzania: Selected Economic and Financial Indicators, December 1996 - June 2002

article image
Sources: National Bureau of Statistics (NBS); and Bank of Tanzania (BoT).

The decline in 1996 reflects loan write-offs of T Sh 112 billion by the National Bank of Commerce and the Cooperative and Rural Development Bunk.

Table II.2.

Tanzania Turnover in the Interbank Foreign Exchange Market, January 1999 - June 2002

(In billions of US. dollars)

article image
Source Bank of Tanzania (BOT).
Figure II.4.
Figure II.4.

Tanzania: Interest Rate Developments, January 1999 - June 2002

Citation: IMF Staff Country Reports 2003, 002; 10.5089/9781451838343.002.A002

Source: Bank of Tanzania (BoT).

45. Reflecting the larger-than-anticipated monetary expansion, foreign currency deposits increased substantially (Figure II. 5). The buildup of excess liquidity prompted the Fund to make reserve money a benchmark under the program supported by the Poverty Reduction and Growth Facility (PRGF) in 2001. To meet the reserve money target, the central bank started to rely heavily on repurchase operations (Table II.3); however, insufficient action by the monetary authorities caused the reserve money benchmark for end-June 2002 to be missed by a wide margin (Figure II.1).

Figure II.5.
Figure II.5.

Tanzania: 12-Month Growth of Broad Money, Foreign Currency Deposits, and Reserve Money, June 1997-June 2002

Citation: IMF Staff Country Reports 2003, 002; 10.5089/9781451838343.002.A002

Source: Bank of Tanzania (BoT).
Table II.3.

Tanzania: Repurchase Operations, January 1998 - June 2002

(In millions of Tanzania shillings, unless otherwise indicated)

article image
Source: Bank of Tanzania (BOT).

46. As a result of this excess liquidity, the ratio of net foreign assets of the banking system to broad money (M3, including foreign currency deposits) increased from 50 percent at end-December 1999 to 74 percent at end-December 2001 (Table II.1). In 2002, mindful of the fact that liquidity developments were eroding its control over monetary conditions, as well as unfavorably affecting savings mobilization, the central bank began securitizing the government’s nonmarketable debt and placing it in the market; at the same time, it began diversifying the maturity profile of available securities by introducing seven-year and five-year treasury bonds. With these instruments, the BoT hopes to more effectively mop up the excess liquidity.

47. Inflation. Even though base money rose substantially above its upper band during the period August 1999 to June 2000 (Figure II.1), both headline and nonfood inflation continued to decline (Figure II.3). Headline inflation declined steadily from 7 percent in 1999 to 4.5 percent in 2002. The 12-month nonfood inflation rate rose sharply from 1.5 percent at end-December 2001 to 6 percent at end-April 2002, primarily on account of an upward revision to electricity tariffs. While recent liquidity developments and currency depreciations may have also put some upward pressure on nonfood inflation, the magnitude of these effects and the lags involved are not known. The effect on aggregate headline inflation was mitigated by favorable weather conditions—agriculture-related products make up about 70 percent of the consumer price index.

48. Interest rates. The deviations above the reserve money target made liquidity conditions unstable in the money market. Initially, the benchmark rate (91-day treasury bill yield) rose sharply during June-December 1999 (Figure II.4), reflecting the BoT’s efforts to mop up liquidity (Figures II.2). Subsequently, the loosening of monetary policy caused the benchmark rate to fall by 720 basis points between March and June 2000. Thereafter, the growing excess liquidity in the banking system—as measured by deviations from the reserve money and broad money targets (Figure II.1) and oversubscription in the treasury bills market (Figure II.2)—coupled with a further decline in inflation (Figure II.3), contributed to the downward trend of interest rates (Figure II.4). Interest rates have been negative in real terms since early 2001, but so far have not had a significant impact on the spread between deposit and lending rates—which remained wide at about 15 percent on average (Figure II.6). Lending rates remained rigid on account of structural impediments to bank lending, which are discussed in Subsection D below. Interest rate adjustments throughout the banking system were led by the National Bank of Commerce (NBC), the most important bank in the loan and deposit segment of the market.

Figure II.6.
Figure II.6.

Tanzania: Weighted Treasury Bills and Bank Rates, October 1999 - June 2002

Citation: IMF Staff Country Reports 2003, 002; 10.5089/9781451838343.002.A002

Source: Bank of Tanzania (BoT).

49. Exchange rate. While Tanzania’s terms of trade continued to decline (Table II.1), donor inflows exerted upward pressure on the exchange rate, as aggregate demand and the absorptive capacity of the economy failed to grow apace. In response, the monetary authorities began to manage the exchange rate so as to maintain external competitiveness (Figure II.7). During the period 1999-2001, the central bank’s intervention in the foreign exchange market amounted to annual average net purchases of US$ 30 million (Table II.2),25 and the exchange rate vis-à-vis the U.S. dollar remained virtually unchanged from July 1999 to January 2001 (Figure II.7). Since then, the nominal exchange rate has depreciated by about 15 percent, reflecting not least the BoT’s efforts to restore price competitiveness.26 While central bank interventions may have helped in preventing a deterioration of the competitiveness of the economy, they contributed to the build-up of excess liquidity, which could eventually conflict with the paramount objective of price stability.

Figure II.7.
Figure II.7.

Tanzania: Exchange Rates, January 1997-July 2002

(1995=100; foreign currency per Tanzania shilling)

Citation: IMF Staff Country Reports 2003, 002; 10.5089/9781451838343.002.A002

Sources: Tanzanian authorities; and EMF, Information Notice System.

50. Bank lending. As mentioned in Subsection B, the BoT explicitly monitors credit growth in evaluating the stance of monetary policy, owing mainly to the special role credit is expected to play in the government’s strategy of promoting agriculture, exports, and economic growth. Perhaps because the private market for credit is poorly developed in Tanzania, the monetary authorities may hold the view that monetary policy is more likely to affect aggregate demand by influencing the quantity or availability of credit than through the direct or indirect effects of changes in interest rates. More likely, however, low bank credit to the private sector reflects structural impediments to lending. Table II.1 shows that credit to the agriculture sector as a whole has failed to recover since the mid-1990s. From a small base in 2000, credit to the nongovernment sector grew by 19 percent in 2001, of which more than 8 percentage points was attributable lo a switch from foreign to domestic financing of working capital by a foreign-owned company. The relatively strong increase in credit to the nongovernment sector in 2002 reflected a growing willingness by banks to negotiate their lending rates in order to deploy excess liquidity.

51. The BoT does not convey any sense of urgency in acting to sterilize the foreign inflows. Insofar as the inflows are not interest rate responsive, restoring positive real interest rates would have no impact on the level of such inflows; however, it would be important to encourage further financial deepening and demand for deposits. Meanwhile, it is imperative that efforts to remove impediments to bank lending be accelerated, in order to promote a more dynamic development of the financial sector and raise the productive capacity of the economy. The remainder of this paper discusses impediments to bank lending and the authorities’ efforts to remove them.

D. Impediments to Bank Lending

52. As a sign of the unfinished financial sector reform agenda, commercial banks find it difficult lo lend owing to high risks and operating costs. Financial holdings as measured by the M3-to-GDP ratio remain very low (20 percent at end-2001). The banking system provides a narrow range of financial products, usually limited to demand, savings, and time deposits, while loan portfolios tend to be confined to crop financing, trade credit, and working capital for well-established firms. The risks and costs associated with bank operations are reflected in a wide interest rate spread and the prevalence of overdraft and short-term lending (Table II.4). Term financing is rarely available, and the usual practice is to continue rolling over short-term loans. Some of the factors behind the banks’ narrow loan portfolio—33 percent of the deposit base on average at end-2001—that need to be addressed include (i) obstacles to the use of land as collateral for bank loans; (ii) the weak legal and financial infrastructure; (iii) the inadequate legal, regulatory, and supervisory framework for microfinance operations; and (iv) the limited human resource capacity.

Table II.4.

Tanzania: Total Loans and Overdrafts, January 1996 - June 2002

(In percent of total)

article image
Source: Bank of Tanzania.

Obstacles to the use of land as collateral for bank lending

53. Until 1999, land ownership in Tanzania was defined by the Land Ordinance of 1923, under which ownership was in the form of leases of 33, 66, or 99 years. This policy was changed in the Land Act of 1999, which states that “all land in Tanzania is public land vested in the president as trustee on behalf of all citizens.” This act recognizes two forms of ownership: the granted right of occupancy for 99 years, and a derivative right—derivative of a granted right of occupancy. The act further restricts occupation of land by noncitizens unless it is for investment purposes, as defined under the Tanzania Investment Act of 1997. This implies that citizens and noncitizens can own a house but not the land on which the house is built. Furthermore, the owners of a house cannot sell or transfer the rights of occupancy. Public tender provides the only exception to this principle under the act, in which it is left to the Minister of Lands to decide to auction rights of occupancy.

54. Mortgages, elsewhere the most commonly accepted collateral for bank loans, are also regulated under the Act. Section 112 allows individuals or corporations to create a mortgage under the right of occupancy or lease.27 Section 115 further states that a mortgage does “not operate as a transfer of any interests or rights” in land but rather confers to the lender the power and remedies in the event of default by the borrower, subject to the latter’s equitable right to redemption. The lender is required to observe certain conditions to facilitate recovery of interest and payments. Generally, these conditions include provision of (i) security documents at the Registrar of Titles; and (ii) a 30-day notice to the borrower and such other persons as the Commissioner of Land or Village Council, spouse of borrower, guarantor, etc., stating the nature, extent, and consequences of the default. In addition, the lender must allow a period of not less than 90 days (inclusive of the 30 days’ notice) for the borrower to honor his debt, after which the lender is entitled to sue the borrower for monies due, appoint a receiver of income arising from the mortgaged property, and enter into possession of or sell the mortgaged property (Sections 125 to 128).

55. The Land Act makes land as a collateral illiquid and costly for a creditor to realize through foreclosure or other legal means. Provisions under Section 124 grant the borrower the right to redeem the property pledged as mortgage at any time before its sale is effected; according to Section 131 (2), a pledged mortgage can be sold only after the lapse of a forty-day notice. Even when sale of the mortgaged property is pursued, Section 132 (2) requires that the lender obtain the highest market price achievable, and, by virtue of Section 112 (3), a mortgage of a matrimonial home is valid only if all documents or forms used in applying for such a mortgage are signed or consented to by both the borrower and spouse. In the event that the lender pursues the defaulting borrower, provisions under Section 139 allow the borrower to sue for relief against the exercise of remedies available to the lender. The borrower may exercise this right at any time following the service of the notice of default by the lender. Owing to abuse by defaulters of these provisions, banks tend to discount the value of mortgages to reflect the cost of sale and delays in realizing the proceeds—a practice that lowers the creditworthiness of potential borrowers and hampers the development of mortgage-based lending, as well as the flow of credit to small and medium-sized enterprises.

56. Overall, the mortgage-related provisions of the Land Act entail a considerable bias in favor of the borrower. As a result, views on whether and how the Land Act should be amended differ widely. The Tanzania Bankers’ Association (TBA) wants the law to be amended so that lights of occupancy can be taken over or sold. The TBA presented its recommendations to the government along these lines The authorities acknowledged the validity of the TBA’s case and expressed the intention to propose legislative changes by early 2003. The Fund staff is of the view that, for the legislative changes to be effective, they will have to be complemented by broader reforms of the judiciary system to ensure that borrowers’ and lenders’ rights are protected in an equitable and timely manner.

Weak legal and financial infrastructure

57. Tanzania’s legal system is still weak, and so the enforceability of legal contracts is uncertain and banks find it difficult to enforce collateral security. First, there is no adequate valuation and registration system for collateral that would establish lenders’ rankings in secured property. Second, administrative and court-related costs in foreclosure are very high, owing especially to liberally granted court injunctions that are prone to delay the process for several years. Third, there is limited expertise in commercial law at the judicial level, and, as a consequence, judgments and decisions are sometimes flawed and inconsistent. Fourth, loans that are six months’ overdue must be fully provisioned for, irrespective of collateral. Finally, loan loss provisions are not fully tax deductible. As a result of these factors, many potentially good loans, which would otherwise have acceptable security, are not made because banks lack faith in the courts to look after their interests should it become necessary to liquidate the security In addition to taking regulatory or legislative action to improve the procedures affecting the commercial foreclosure process, the authorities intend to take measures aimed at strengthening the capacity of the land registry and of the commercial court, the latter with a view to keeping the average case resolution period below six months.

58. Furthermore, there is no credit information bureau, a situation that impedes bank lending by allowing uncertainty over asset quality to persist. Likewise, firms’ financial statements are not reliable because no common accounting standards are enforced. Smaller borrowers are particularly discriminated against because of the high cost of gathering information about them. In 2002, two private reference bureaus were established, and the TBA intends to use their services instead of establishing its own.

Inadequate framework for microfinance operations

59. Tanzania’s agriculture- and livestock-based rural economy accounts for about half of GDP and almost two-thirds of foreign exchange earnings, and it provides employment to more than 80 percent of the productive workforce. Its further development is held back, among other things, by poor access to credit facilities—commercial banks find it expensive to serve small and widely dispersed customers, while the latter find the transaction costs, accessibility, and conditions for borrowing from formal financial institutions prohibitive. In the absence of commercial banks, microfinance institutions (MFIs) such as savings and credit cooperative societies (SACCOs), savings and credit associations (SACAs), and nongovernmental organizations fill the void. These community-based institutions are generally very small (on average, membership ranges from 20 to 200) and often lack professional staff. Leading members handle very limited operations on a voluntary basis, struggle to raise capital from members in the form of membership fees and share capital, and to a very limited extent mobilize financial savings for on-lending, mostly, however, they are not capable of maintaining accounts and drawing up a balance sheet.

60. In 2002, the commercial bank CRDB, with support from the Danish International Development Agency (DAN1DA), has started a pilot project aimed at providing training for the MFIs to manage their own lending operations and assess lending risks. The goal is to extend a credit line to selected SACCOs for on-lending to their members, while the CRDB does off-site and on-site monitoring. Other commercial banks are planning to establish microfinancing units, but, so far, this constitutes only a small part of their loan portfolios owing to a lack of appropriate outreach technology, know-how, and of a legal, regulatory, and supervisory framework for microfinance operations.

61. Lack of a unified regulatory and supervisory framework prevents the effective supervision of MFTs. SACCOs are registered under the Cooperative Societies Act of 1991 and are supervised by the Cooperative Department of the Ministry of Cooperatives and Marketing, while SACAs are registered by the Ministry of Home Affairs but supervised by the Ministry of Community Development, Women and Children’s Affairs, thus leaving them outside any effective supervision. Furthermore, poor record keeping and a lack of regular and adequate reporting handicap any attempt at supervision.

62. In an effort to establish an enabling environment for the development of microfinance, the authorities approved a National Microfinance Policy in May 2000 and set up a task force for the preparation of a legal, regulatory, and supervisory framework for microfinance operations. The task, divided into three phases, was contracted to a consultant, who started work in July 2002. The first phase is aimed at developing an appropriate legal framework for microfinance operations. A draft report on the findings and recommendations for amendments to the Banking and Financial Institutions Act of 1991, the Bank of Tanzania Act of 1995, the Cooperative Societies Act of 1991, and other related legislation was submitted to the authorities in September 2002. The second phase, which is expected to be completed in early November 2002, involves the development of an effective regulatory framework for microfinance operations, including appropriate accounting principles and reporting guidelines. The third phase of the project concentrates on the development of a harmonized supervisory framework for microfinance operations. The final product is expected to be submitted for parliamentary approval in February 2003 and issued in May 2003.

Limited human resource capacity

63. Banks have difficulties in finding and recruiting suitable personnel—not least because of Tanzania’s legacy of government-directed credit—while labor laws are not sufficiently flexible to dismiss nonperforming employees. For available working-level staff, extensive training is required in basic banking operations, such as credit analysis, loan monitoring, and problem loan management. Individual banks currently provide on-the-job training for their employees, as well as external training through institutions within the country and abroad.

E. Concluding Remarks

64, This paper argues that, while monetary policy in Tanzania has been successful in bringing inflation down, it has been much less effective in pursuing other objectives. Thus the expansionary policies pursued by the BoT since 1999 have not sufficiently boosted aggregate demand, owing mainly to impediments to bank lending. Uncertainty as to whether the legal due process will prevail prevented many applicants from obtaining bank loans; it also prevented a narrowing of the interest rate spread and impeded the development of term lending. As a result, banks have so far not played an important role in promoting private sector growth. There is no doubt that, if the impediments to bank lending were to be removed, the number of viable borrowers would increase substantially and the loan-to-deposit ratio would rise. The costs of these impediments to the Tanzanian economy are clearly high. Unresolved, they will act as a significant brake on growth. Meanwhile, a tighter monetary stance aimed at restoring positive real interest rates is called for to promote financial deepening and prevent the quality of commercial bank loan portfolios from deteriorating.

Monetary Policy Process

Liquidity Forecasting

17

Prepared by Koffie Ben Nassar.

18

Bank of Tanzania, “Bank of Tanzania’s Inflation Control Strategy,”Monetary Policy Statement (Dodoma: Bank of Tanzania, June 2002), p. ix.

19

Bank of Tanzania, Monetary Policy Statement, June 2002, p. 36.

20

See Steven Kamin, Philip Turner, and Jozef Van’t dack, “The Transmission Mechanism of Monetary Policy in Emerging Market Economies: An Overview” in The Transmission of Monetary Policy in Emerging Market Economies, BIS Policy Papers, No. 3 (Basel: Bank for International Settlements, 1998), pp. 5-64.

21

The existence of a stable long-run relationship between money and inflation is supported by the results of a study conducted by the BoT research staff, which examined the demand for money in Tanzania for the period 1987-97. See J.J. Nyella, “Demand for Money” (unpublished, Dar es Salaam: Bank of Tanzania, 1998). However, there is evidence that in recent years the money demand function has shifted and become unstable. As a result, the BoT uses its judgment in order to arrive at a reasonable projection of velocity.

22

The money multiplier has not been stable in the past. A study by BoT staff suggests that the estimation of the multiplier could be improved by exploring more fully the time-series properties of the multiplier. See M.M. Mbawala, “The Money Multiplier” (unpublished; Dar es Salaam: Bank of Tanzania 1998).

23

See Section I of this issues paper.

24

According to the Taylor rule, [Rt*=constant + αEt(πt+1) + γyt], and the output gap and a fall in expected inflation Et(πt+1) call for a loosening of monetary policy so as to lower desired interest rates (Rt*)

25

Developments in the interbank foreign exchange market (1FEM) reflect the seasonality of economic activity in Tanzania, The first half of the calendar year is a lean period, when the demand for foreign currency exceeds supply and the central bank intervenes to provide foreign exchange. During the second half of the year, exports pick up, and the BoT intervenes to purchase foreign exchange.

26

Section III of this issues paper evaluates the competitiveness of the Tanzanian economy.

27

Section 112 stipulates that “[a]n occupier of land under a right of occupancy and a lessee may, by an instrument in the prescribed form, mortgage his interest in the land or a part thereof to secure the payment of an existing or a future or a contingent debt or other money or money’s worth or the fulfillment of a condition.”

Same Series

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Cover IMF Staff Country Reports
Tanzania: Selected Issues and Statistical Appendix
Author: International Monetary Fund
Volume/Issue:
Volume 2003: Issue 002
Publisher:
International Monetary Fund
ISBN:
9781451838343
ISSN:
1934-7685
Pages:
137
DOI:
https://doi.org/10.5089/9781451838343.002

Tanzania: Deviations of Base Money and Broad Money from Their Upper Bands,

June 1997-June 2002

Tanzania: Subscriptions for 91-Day Treasury Bills, January 1998-June 2002

Tanzania: Price Developments, June 1996 - June 2002

Tanzania: Interest Rate Developments, January 1999 - June 2002

Tanzania: 12-Month Growth of Broad Money, Foreign Currency Deposits, and Reserve Money, June 1997-June 2002

Tanzania: Weighted Treasury Bills and Bank Rates, October 1999 - June 2002

Tanzania: Exchange Rates, January 1997-July 2002

(1995=100; foreign currency per Tanzania shilling)