Tanzania’s monetary policy effective in managing liquidity

BUSINESS STANDARD Reporter

TANZANIA has a strong and effective monetary policy stance in controlling and managing liquidity in the circulation than most of the low income countries.

Its strength rest basically on the independence of the Bank of Tanzania (BoT), the nation’s financial landscape like the financial linkages with international financial markets, the choice of monetary instruments and the exchange rate regime.

Liquidity is the amount of money that is quickly available for investment and spending. High liquidity is when money is easy to get. Low or tight liquidity is when money is difficult or expensive to get. Monetary policy plays key role in managing inflation in the market.

According to the National Bureau of Statistics (NBS), annual headline inflation rate for the month of June, 2016 has further increased to 5.5 per cent from 5.2 per cent per cent in May. Also a good example is seen on how the policy has managed and controlled the present situation for which the market is experiencing tight liquidity stance although the economy has remained lubricant.

“Despite passing through a period of tight monetary stance, the money in the circulation is enough to keep the economy lubricant,” said the BoT’s Domestic Market Associate Director Mr Paul Maganga.

He said the dry money in the market is progressively recovering as the harvesting period has began to see most business people start spending substantial amount of money to buy crops like cotton, rice, coffee. This alone can help increase liquidity in the circulation.

This is seen as good news to the common people who have also been hit by the tight liquidity as most of the activities that could help generate incomes have seized thus leading to complains over the difficulties. Most low income countries have small and illiquidity financial markets with limited integration with external markets.

The financial sector is often small, dominated by less competitive banking sector. An uncontrolled and unmanaged liquidity situation can have a severe impact on inflation, rates of interest, stock markets, and foreign exchange rates.

According to the BoT, the decision to shift its funds held in commercial banks by ministries, public corporations and local government authorities is the contributing factor to the liquidity squeeze in circulation.

The move on the other hand has helped the Bank of Tanzania (BoT) to monitor and control money in circulation. The dry money in the circulation may have been contributed by the transfer from banks to the central bank balances that were held in current accounts.

Under the government directive, public corporations were required to transfer their levy and revenue collection accounts BoT estimated to be above 500bn/- while maintaining operational accounts.

Instead the public entities should maintain an operational account at their preferred commercial bank with a minimum of balance to cater for their monthly operational expenses as per their monthly cash flow projections.

Mr Maganga said also that the tight liquidity in the circulation is contributed by most corporates engaged in paying annual taxes last month thus cutting spending of funds that could have been directed to the investment.

Most commonly, quarterly or annual advance tax payments draw liquidity out of the system as a lot of liquid money gets locked with the government. On the other hand, any large payouts by the government or higher corporate sector spending can increase the liquidity in the system. In times of excess visible liquidity, the call rates hover around the reverse repo rate, whereas in times of tight liquidity, the call rate will hover around the repo rate.

Similarly, the present situation of dry money in the market is explained by the less government expenditure for both recurrent and development.

According to CRDB’s Financial Market Highlights liquidity was tight in the market on Monday as interbank volume fell by 67 per cent to 18bn/- while borrowing rates were up by 50 basis points to a weighted average of 14.22 per cent and a high of 16 per cent. Liquidity is expected to remain tight in the market with borrowing rates holding up at current high levels.