Tanzania Investment and Consultant Group Ltd

| Economic Research Centre

How Tanzania Monetary Policy Committee's decisions will impact Economy
September 15, 2023  
In light of the global and domestic economic environment, the MPC decided to maintain the less accommodative monetary policy stance. Monetary policy measures will be used to align liquidity with foreign exchange demand and support the Extended Credit Facility Program's targets for the quarter ending September 2023. Hence, The Monetary Policy Committee (MPC) held its […]

In light of the global and domestic economic environment, the MPC decided to maintain the less accommodative monetary policy stance. Monetary policy measures will be used to align liquidity with foreign exchange demand and support the Extended Credit Facility Program's targets for the quarter ending September 2023.

Hence, The Monetary Policy Committee (MPC) held its 227th Ordinary Meeting on August 31, 2023, and made the following key observations and decisions:

  1. Monetary Policy Success: The MPC noted that the less accommodative monetary policy has effectively managed liquidity levels as intended.
  2. Private Sector Growth: The private sector has experienced high credit growth, which is expected to boost economic growth in 2023.
  3. Global Economic Situation: The global economy is gradually improving, with a revised growth projection for 2023 at 3 percent (up from 2.8 percent). Commodity prices are easing, and inflation is declining, leading to central banks in advanced economies reducing their monetary policy aggressiveness. This bodes well for economic activities in Tanzania.
  4. Domestic Economic Performance: Mainland Tanzania saw a GDP growth rate of 5.6 percent in the first quarter of 2023, in line with the annual projection. Key drivers included agriculture, construction, and mining. Zanzibar's economy also grew at a healthy rate in 2022. Inflation has been declining and is within the convergence criteria for EAC and SADC. Money supply and private sector credit growth exceeded their targets due to increased loan demand.
  5. Government Revenue and Expenditure: Government revenue performance was satisfactory in both Mainland Tanzania and Zanzibar. Expenditure was aligned with available resources.
  6. External Sector Challenges: The current account deficit widened due to a faster increase in imports than exports, influenced by global shocks. However, measures are being taken to address this imbalance, and the current account position is expected to improve as the global economy stabilizes.
  7. Foreign Exchange Reserves: Foreign exchange reserves remained at a sufficient level, covering about 4.8 months of projected imports.
  8. Banking Sector Health: The banking sector is liquid and adequately capitalized, with a decreasing non-performing loans (NPLs) ratio. This is expected to encourage banks to lend more to the private sector, further supporting economic growth.
  9. Foreign Exchange Shortage: There was a shortage of foreign exchange, particularly the US dollar, due to global shocks. However, measures were being adopted to increase supply and improve the situation.

The positive and negative impacts of Monetary Policy Committee’s decision to Tanzania Economy:

The Monetary Policy Committee's decisions aim to balance various economic factors to achieve stability and promote growth. The effects can be both positive and negative, and the ultimate outcome depends on the effectiveness of policy implementation, external economic conditions, and how well the economy adapts to the chosen policies. It's crucial for policymakers to carefully monitor these effects and adjust policies as needed to ensure long-term economic stability and growth in Tanzania.

Positive Effects:

  1. Price Stability: Maintaining a less accommodative monetary policy can help control inflation and keep it within the target range. This stability benefits consumers and businesses by ensuring the purchasing power of the currency remains steady.
  2. Private Sector Growth: A less accommodative policy stance encourages lending to the private sector. This can stimulate business investments, job creation, and overall economic growth.
  3. Improved Banking Sector: Adequately capitalized banks with lower non-performing loans (NPLs) ratios are more likely to provide loans to businesses and individuals. This can boost economic activity and increase access to credit.
  4. Foreign Exchange Stability: Measures to address foreign exchange shortages and maintain adequate reserves can stabilize the currency exchange rate and provide certainty for international trade.
  5. Government Fiscal Discipline: A well-managed monetary policy can support government revenue and expenditure alignment, ensuring fiscal discipline.

Negative Effects:

  1. Tightened Credit Conditions: A less accommodative policy can lead to higher interest rates and reduced credit availability. This may discourage borrowing for businesses and consumers, potentially slowing down economic activity.
  2. Potential for Reduced Consumer Spending: Higher interest rates may lead to increased borrowing costs for consumers, reducing disposable income and impacting consumer spending.
  3. Exchange Rate Risks: While stability is a goal, currency exchange rates can be affected by global economic conditions. A stronger local currency may negatively impact exports, which can affect trade balances.
  4. Impact on Government Borrowing Costs: If the government relies on borrowing to finance its operations, higher interest rates could increase the cost of servicing government debt.
  5. External Sector Challenges: A current account deficit, if not addressed effectively, can make the country vulnerable to external shocks and fluctuations in global markets.

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