TANZANIA: FINANCIAL analysts are endorsing a series of recommendations put forth by the IMF aimed at refining the central bank rate (CBR).
According to the latest staff country report from the International Monetary Fund (IMF), the Brenton Wood Institution suggests that the central bank should maintain liquidity conditions that align the 7-day interbank rate with the CBR within a corridor of +/- 200 basis points, based on liquidity forecasts.
“While the +/-200 basis points corridor may be suitable during the initial phase of the new framework, the IMF advises narrowing this range over time,” stated the report.
The IMF further recommends that the Bank of Tanzania (BoT) ensure the Lombard facility effectively serves as a ceiling for the 7-day interbank rate, set at the Lombard rate (the interest rate at which central banks lend short-term funds to commercial banks) of CBR + 200 basis points.
“This measure is aimed at preventing the BoT from exposing itself to undue credit risk,” IMF said.
Additionally, the IMF encourages the BoT to enhance its modelling capabilities for generating and communicating inflation forecasts, while improving monetary policy communications and outreach efforts. Alpha Capital Head of Research and Financial Analytics,
Imani Muhingo, said the IMF advice is crucial, particularly on the development of the money market. “A robust money and financial market will enable an effective interest rate transmission into the economy.
“This is also crucial in the development of a yield curve which is essential in pricing fixed income securities,” Mr Muhingo told the Business Standard.
Moreover, transparency and timely data publication were other areas that the central bank needs to enhance, especially credit to the private sector, interest rates, fixed-income auctions, and interbank activities.
“For instance,” Mr Muhingo said, “the central bank’s Monthly Economic Review has a time lag of one month. That could be improved”.
Also read: IMF: Banking sector stable but vulnerable
The new framework sets the 7-day interbank rate as the operating target variable, which the BoT aims to align with +/-200bp of the CBR using its monetary policy instruments and standing facilities.
However, the 7-day interbank rate has been close to the top of the +/- 200 basis point (bp) band and has occasionally exceeded CBR+200bp.
“The anchor rate, the 7-days interbank rate, has throughout the quarter been in the upper half of the band, ranging between 6.5 per cent and 8.0 per cent…liquidity sufficiency at such rates may suggest that the CBR needs an upward adjustment,” Mr Muhingo said.
Tanzania Music Rights Society Operation Director Kelvin Msangi said the IMF’s recommendation highlights the need for ongoing adjustments and more robust analytical tools within the BoT to ensure that monetary policy changes achieve the desired economic outcomes.
“This alignment ensures that changes in the CBR effectively influence broader economic conditions, which is vital for controlling inflation and supporting economic growth.
“Precise alignment is essential for effective monetary transmission, controlling inflation and maintaining economic stability,” Mr Msangi said.
The Monetary Policy Committee (MPC) last decided to keep the CBR unchanged at 6.0 per cent, for the quarter ending September.
The committee’s assessment of the outlook of the economy and the balance of risks indicates that the implementation of monetary policy in the previous two quarters has successfully anchored inflation expectations well below the target of 5.0 per cent.
“This also is reinforced by a positive outlook for the global economy, especially expectations of falling inflation in most countries, easing financial conditions in international markets, and moderating prices in the world market,” the MPC statement shows.
Furthermore, the MPC expects the country’s economy to continue growing strongly, the food supply to be adequate, and exchange rate pressures to moderate owing to increased foreign exchange inflows from tourism, gold, as well as cash crops and food.
The economy continued to grow, recording a growth of 5.1 per cent in 2023, higher than 4.7 per cent in the previous year.
The main growth drivers were agriculture, mining, quarrying, construction and financial intermediation, mainly credit to the private sector.
The MPC forecast growth in the first and second quarters of this year also to be high, at around 5.0 and 5.4 per cent, respectively.
