The IMF Executive Board that completed its second Policy Support Instrument (PSI) review last week said strengthening of the shilling should centre on using domestic-currency instruments to address excess liquidity.
The IMF Deputy Managing Director and Acting Chair of the discussion, Mr Min Zhu, said in a statement that the use of foreign exchange intervention should be restricted to smoothening volatility in the foreign exchange market.
“(But), with higher reliance on domestic-currency instruments to address excess liquidity situations,” Mr Zhu said after the discussion.
The shilling in the first half of this year plummeted by about 25 per cent to reach an historical low level of 2,400/- against the US dollar.
The Bank of Tanzania (BoT) pumped in 410 million US dollars but failed to smoothen volatility. However, the central bank also instituted monetary policy include raising minimum statutory deposit ratio by 2.0 per cent to 10 per cent but sent a negative impact on the money markets after experiencing tight liquidity.
IMF technically approved the PSI that supports the maintenance of macroeconomic stability, the preservation of debt sustainability, and the promotion of more inclusive growth and job creation. “Macroeconomic performance in Tanzania remains strong and medium-term prospects are favorable,” Mr Zhu said.
The statement said further that the performance under the PSI was satisfactory through December 2014, but weakened in early 2015 due to a range of factors, including delays in mobilizing external financing and donor support.
“Against this backdrop, the authorities’ corrective measures aimed at achieving the 2014/15 budget deficit target are commendable,” Mr Zhu said.
He added: “Though earlier expenditure ceiling adjustments could have helped preserve development spending”.
The fiscal target also puts Tanzania on a path to a 3.0 per cent deficit over the medium term, which is consistent with maintaining a low risk of debt distress.
“The authorities” plans to address verified domestic supplier arrears transparently through the budget are welcome,” Mr Zhu said, “commitment controls on expenditures and related sanctions for breaching rules need to be strengthened to ensure new arrears do not accumulate”.
IMF further said the strategy to address arrears to pension funds needs to be finalised quickly to allow for clearance of these arrears in 2015/16.
“The current monetary policy stance is appropriate, delivering high growth and low and stable inflation,” Mr Zhu said.
Daily News
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