IMF: BoT get prepared to tighten policy

INTERNATIONAL Monetary Fund (IMF) has advised the central bank to be prepared to further tighten monetary policy as needed to curb inflation.

The Benton Wood institution said that while inflation remains below the central bank’s target, the recent sharp increases in food and energy inflation could lead to second-round effects.

“While inflation remains below target, the Bank of Tanzania [BoT] should stand ready to tighten monetary policy as needed while allowing more exchange rate flexibility against external shocks,” it said in a latest report to Tanzania.

Tanzania’s annual inflation rate ebbed for the second month to 4.7 per cent in March 2023, from 4.8 per cent in the previous month, according to the National Bureau of Statistics.

IMF said in the report that inflation was relatively low because the government responded to the recent increase in inflationary pressures with temporary fuel and fertiliser price subsidies while tightening liquidity in the financial system.

IMF said the central bank’s liquidity mop-up operations, using Repo and the sale of liquidity papers, helped to reduce excess reserves from about 19 per cent of reserve money last August to 10.5 per cent by the end of last December.

“The BoT’s foreign exchange sales also contributed to the liquidity mop up,” IMF said adding:

“Against the backdrop of global economic uncertainties, the BoT should allow more exchange rate flexibility since the risks to inflation are contained by the low pass through.”

The institution also suggested that the completion of the ongoing transition to an interest rate-based monetary policy is key to enhancing the effectiveness of monetary policy.

The country’s process of introducing interest rate-based monetary policy to curb inflation dates over a decade ago.

Tanzania’s external position last year was assessed to have been broadly in line with the level implied by fundamentals and desirable policies and the level of international reserves is assessed to be adequate by the IMF’s Assessing Reserve Adequacy (ARA) metric.

“Continuing to maintain an adequate level of reserves and allowing more exchange rate flexibility would help cushion the economy against external shocks,” IMF said.

The central bank, however, still maintains its less accommodative monetary policy to tame the second-round effects of global shocks according to its monetary policy committee (MPC) latest statement.

“The MPC was satisfied that the implementation of less accommodative monetary policy in January and February succeeded to contain inflation within the target,” the statement issued in March said.

Also containing inflation assisted in supporting the recovery of economic activities by maintaining adequate liquidity and strong credit intermediation to the private sector.

The policy stance also helped to cushion the economy from adverse global economic shocks and heightened commodity prices, while supporting the attainment of agreed benchmarks under the IMF Extended Credit Facility (ECF) arrangement.

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