The Bank of Tanzania (BoT) intends to move to a more active use of interest rates as a policy instrument, in a bid to improve management of liquidity and strengthen anti-inflationary measures, the International Monetary Fund (IMF) said recently.

Bank of Tanzania

IMF said over the weekend that sustained tightening of monetary policy in 2012/2013 was aimed at supporting efforts to lower, decrease in the rate of inflation, toward the authorities’ single-digit objective.

This means that the country will shift its policy from targeting foreign exchange to interest rates and by doing so easing the burden on monetary policy to assist in maintaining foreign reserves.

“The flexible exchange rate regime will ease the burden on monetary policy and help maintain adequate foreign reserves,” IMF’s head of the executive board of the fourth review under Policy Support Instrument (PSI) said.

The board led by Deputy Managing Director, Mr Naoyuki Shinohara,   at the end of the mission approves 224.9 million US dollars on Precautionary Arrangement under the Standby Credit Facility for 18 months.

According to IMF, the precautionary SCF arrangement is designed to provide Tanzania a financial cushion to withstand deterioration in external demand and access to global market financing.

“As the country is not facing any immediate balance of payment needs, the programme will form part of an overall strategy to stave off any adverse effects that Tanzania could be facing as a result of the uncertainties in the global economy.

“The authorities intend to treat the SCF as precautionary and will only draw the Fund resources should external demand deteriorate or access to international financial markets become more limited,” Mr Shinohara added.

On the 2012/2013 budget the team, which completed its mission last Friday, said it is appropriately targeted at further reducing the deficit, which is essential for rebuilding fiscal buffers and strengthening debt sustainability.

“Although the growth outlook remains positive, the volatile global economy poses risks to revenue collection,” Mr Shinohara said. He added: “(to) avoid a build-up of arrears, any revenue shortfalls would need to be offset by cutbacks in recurrent and non-priority capital expenditures, while safeguarding critical social and development spending.”

On imports it said the figures were up 37 per cent in the first nine months of 2011/2012, largely reflecting higher oil imports. Reflecting this trend, the current account deficit is projected at nearly 15 per cent of GDP in 2011/12, up from nine per cent of GDP range in recent years.

“The increased deficit is being financed through foreign direct investment and other private capital inflows,” Mr Shinohara said. The objectives under the SCF arrangement for Tanzania would match those under the PSI, which are enhancing fiscal and debt sustainability, reducing inflation, and resolving the power crisis to enhance growth prospects.

Source Tanzania Daily News