 The establishment of bank OF Tanzania |
MFollowing the decision to dissolve the East African Currency Board and to establish separate Central Banks in Tanzania, Kenya, and Uganda, the Bank of Tanzania Act, 1965, was passed by the National assembly in December 1965, and the Bank was opened by President J. K. Nyerere on June 14, 1966.
The Act empowered the Bank of Tanzania to perform all the traditional central banking functions. However, within eight months of inauguration of the bank, in February 1967, The Arusha Declaration was proclaimed, and with it, the bank had to reorient its policies.
Most of the traditional instruments of indirect monetary policy stipulated in the Act became inoperative, as there was no longer an environment of the type which exists in a competitive system, where indirect instruments are effective.
The Annual finance and Credit Plan (AFCP), supported by a system of administered interest rates, was devised as the main instrument of monetary policy from 1971/ 72. Similarly, the Foreign Exchange Plan (FEP) was devised to control the use of foreign exchange in accordance with national priorities. The Plans were formulated in the Ministry of Development Planning, in consultation with the Bank. However, the bank and the banking system were responsible for their implementation. A system of direct controls was used for this purpose, as stipulated in the Exchange Control Ordinance and the Import Control Ordinance.
During the same period, several other developments occurred, e.g., a radical transformation of the rural economy, as a result of the villagization programme, industrialisation, and persistent weaknesses in the Balance of Payments. In order to enable the bank to better address these developments, the Bank of Tanzania Act was emended in 1978, with the result that additional developmental functions were vested in the Bank. As stipulated in this amendment, the Bank established four special Funds:
The Rural Finance Fund
The Industrial Finance Fund
The Export Credit Guarantee Fund
The Capital and Interest Subsidy Fund.
These funds were formed to provide refinance and to offer guarantee facilities to banks and other financial institutions against their loans and advances to specified sectors of the economy.
The amendment of the Act also incorporated the following changes:
The responsibility of financial planning was shifted from the Ministry responsible for Planning to the Bank, with the effect that the Bank became responsible for the preparation and implementation of the AFCP and the FEP.
It empowered the Bank to inspect and /or supervise banks and other financial institutions, which had not been the case previously.
| THE PRIMARY OBJECTIVE AND FUNCTION |
Because of the increasing evidence of the negative effects of inflation in recent years, there has emerged a growing consensus throughout the world.
It is a fact that a monetary policy geared towards the pursuit of Price Stability in the longer term is the Central Bank's most significant contribution to achieving maximum growth for a nation's economic prosperity.
Furthermore, experience suggests one important rule: a Central Bank with too many things to do, is likely to find itself doing none of them well. This is exactly what happened with the Bank of Tanzania, which did not succeed in achieving its multiple-policy objectives.
The international consensus is also reflected in the Bank of Tanzania act, 1995, in which, as compared to the Bank of Tanzania Act, 1965, there has been a move away from multiple-policy objectives to a single objective, i.e., Price Stability.
According to the Act " The primary objective of the Bank shall be to formulate and implement monetary policy, directed to the economic objective of maintaining price stability, conducive to a balance and sustainable growth of the national economy of Tanzania" . In other words, it is the primary responsibility of the Bank to establish monetary conditions conductive to Price Stability over time.
Empirical evidence throughout the world suggests that Inflation is mainly caused by excessive creation of money. Thus, in order to achieve Price Stability, Central Banks-by virtue of their ability to exert influence over the Money Supply process-have been given the task of regulating the quantity of money in circulation and of credit supplied to the economy, i.e., they have to conduct Money Policy.
In this connection, the following is needed:
a steady and acceptable rate of increase in the Money Supply
A rate of increase in domestic bank credit expansion that will not place under demand pressures on production resources and that must be consistent with the Money Supply objectives.
Realistic interest rates that must at least be above the level of the rate of inflation.
A level of foreign reserves sufficient to enable the Central Bank to intervene in the foreign exchange market from time to time to smoothen out reversible short -term fluctuations, to meet import requirements, external obligations, and unexpected foreign exchange requirements in times of crisis.
A relatively stable exchange rate for the national currency.
the protection and development of sound and well-managed banking institutions
The encouragement of well-functioning and effective financial markets, including an efficient payments system
Commensurate with the legal commitment of the Bank of Tanzania and realising the seriousness of the inflationary situation in the country, the Bank is pooling all its efforts towards achieving Price Stability and has declared Inflation the Nation's Economic Enemy Number One.
| SUBSIDIARY FUNCTIONS |
Apart from the primary function, the Bank of Tanzania has important subsidiary central banking functions.
 The Bank of Issue |
The Bank has the sole right to issue notes and coins in Tanzania for the purpose of directly influencing the amount of currency in circulation outside banks, thereby providing the economy with sufficient, but if possible, non- inflationary liquidity.
| The Bankers' Bank |
This function includes the acceptance of deposits to act as prudential reserves for these banks (i.e., the Minimum Reserves), the willingness to discount commercial and government paper, and the commitment to act as lender of last resort to these banks. It also involves the provision of central clearance facilities for inter bank transactions.
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Money Supply and its sources
| The Governments' Bank |
The Bank is the banker and the fiscal agent for the Governments, and may be the depository of the Governments. The Bank may make temporary advances to the Governments through its overdraft facility, subject to repayment within 180 days and through purchases (direct or rediscounting) of treasury bills issued by the Governments, which mature not later than 12 months from the date of issue.
The total amount outstanding at any time of advances made in this manner shall not exceed one eighth of the average budgeted revenues (average of the actual collected revenues of the previous three fiscal years, excluding loans, grants, other forms of economic aid, and all borrowing, whether short-or-long-term) of each Government.
| The advisor to the Governments |
The Bank may advise the Governments on any matter relating to its functions, powers, and duties. The bank may also be requested to advise the Governments on any matter related to its functions, powers, duties, the credit conditions in Tanzania, or any proposal, measures, and transactions relating thereto.
| The Guardian of the Country's International Reserves |
The Bank is the depository of the official external assets of Tanzania, including gold and foreign currency reserves.
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Guarding international reserves may imply the determination of buying and selling rates of gold and foreign exchange markets and /or the buying and selling of reserve assets for the purpose of sustaining the national currency's external value. It also includes reserve management, with a view to the prudential investment of the funds, with due regard to safety, liquidity, and profitability, and external debt management.
| Supervision of Banks and Financial Institutions |
In general, this activity involves ensuring that commercial banks and other financial institutions conduct their business on a sound prudential basis and according to the various laws and regulations in force. It includes the supervision of banking conduct and the licensing of financial institutions.
According to the Banking and financial Institutions Act of 1991, and the new BOT Act, the main responsibilities of the Bank of Tanzania are:
implementation of prudential controls concerning capital adequacy, liquidity, concentration of credit and risk diversification, asset classification and provisioning, and prohibited activities;
licensing of banks and financial institutions;
facilitation and monitoring of a Deposit Insurance Fund, the purpose of which is the protection of small depositors;
Modification and monitoring of the Minimum Reserve requirements and foreign exchange exposure.
| Promotion of Financial Development |
This refers to the establishment of an effective financial system, with the aid of which financial transactions necessary for the smooth functioning of the economy can be carried out with a minimum amount of cost and time involved.
In this connection, the Bank has to be a facilitator of advanced clearing and transfer systems. It also implies that the necessary banking services, as, for example, deposit facilities and loan facilities, are made available. Included here is also the availability of certain specialised institutions, which could be represented, for example, by an industrial development bank and /or an agricultural development bank and micro-finance institutions, and the facilitation of a money market, a capital market, and a foreign exchange market.
| THE ORGANISATION STRUCTURE |
Up to the end of 1993, the organisation structure of the Bank of Tanzania was a reflection of multiple-policy targets and control functions, which were a consequence of the role that the state had assumed in the economy.
For example, one objective was to achieve rapid growth in the agricultural sector, resulting in the establishment of a Directorate of Rural Finance. Commensurate with Tanzania's transition to a more market-oriented economy, the Bank moved away from multiple-policy targets to a single-policy target, i.e., Price Stability, leading to a drastic change in the Bank's organisation structure, with effect from January 1994.
Organisation units, which were carrying out developmental functions (e.g., the directorate of Rural Finance) and control functions (e.g., the Directorates of Exchange Management and Import Licensing), were dissolved.
The present organisation structure is built around the primary and the subsidiary functions of the Bank.
In accordance with this new framework, there are eight Directorates:
Banking
Bank Supervision
Economics and Statistics
Finance
Financial Markets
Internal audit
Personnel and Administration
Secretary to the Bank
One independent Department, i.e., Management Information Systems.
The Bank of Tanzania has its headquarters in Dar es Salaam, with Branches in Arusha, Mbeya, Mwanza, and Zanzibar, while the Bank of Tanzania Training Institute is located in Mwanza.
As mentioned already, the highest decision making body of the Bank is the Board of Directors, which consists of the Governor, the Deputy Governor, the Principal Secretary to the Union Treasury, the Principal Secretary to the Zanzibar Treasury, and six other Directors. The Board is responsible for determining the policy of the Bank, for the approval of its budget, and for any other functions that are conferred on it by the Act or any other law. The Board meets on a regular basis, but not less frequently than once every two months.
Top Management consists of the Governor and the Deputy Governor who are responsible for overseeing the implementation of the Board's decisions and the management of the Bank of Tanzania's operations.
On the basis of the overall Monetary Policy Framework charter out in the Monetary Policy Statements, and approved by the Board of Directors, the Monetary Policy Committee (Governor, Deputy Governor, Principal Secretaries to the Treasuries of the Governments, respective BOT Directors, Deputy Directors, and Staff members), which meets monthly.
The Monetary Policy Subcommittee (respective BOT Directors, Deputy Directors, and staff members) which meets weekly, are responsible for formulating and implementing Monetary Policy within a monthly and weekly time horizon.
In that context, the Monetary Policy Subcommittee works within framework provided by the Monetary Policy Committee. This particular decision making structure for Monetary Policy formulation and implementation has proven to be most useful.
| PUBLIC FINANCE |
| The 1999/2000 budget frame |
The 1999/2000 budget frame aim at achieving the following policy objectives:
To attain a GDP growth rate of 4.9 percent.
To bring the inflation rate down to 5 percent by the end of June 2000.
To increase domestic revenue collections to 13 percent of GDP.
To reduce the deficit on the current account of the balance of payments to 6.0 percent (overall) by encouraging more exports.
To continue with the privatisation programme so as to reduce the burden of the government budget.
To provide sufficient budgetary allocations to the social sectors so as to improve social welfare.
To continue improving control of public expenditure.
To improve management of external and domestic debt.
To increase and maintain adequate foreign exchange reserves.
Maintain a policy of no bank borrowing and make a repayment of TZS 24.0 billion to the Banking system.
Percentage contribution of sub-indices to year to yearheadline. Inflation in Feb 2000
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To achieve the above objectives the government will implement the following measures:
Review of different tax rates with a view to streamlining the tax regime and improving compliance and the efficiency of the tax system.
Rationalising of the tax structure and various fees in order to improve compliance, make taxes more transparent and increase revenue.
Strengthening Tanzania Revenue Authority (TRA) so as to enhance its capacity in revenue collection. Its capacity will get a boost from the Tax Administration Project (TAP) financed by the World Bank (IDA). TRA will also be mandated to institute Minimum Dutiable Value (MDV) for all imported goods that have shown a high incidence of underdeclaration of value with the aim of evading tax.
Introduction of the Performance Budgeting system. Under this system, allocation of funds to Ministries and Departments will be related to targets and expected output.
The cash budget system will continue alongside the performance budget. The cash budget system will be improved to allow Accounting Officers to be able to make quarterly indicative expenditure plans.
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