About the Bank
Primary Objective and Function of the Bank
Due to increasing evidence of the negative effects of inflation in recent years, there has emerged a growing consensus throughout the world 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.
This international consensus is also reflected in the Bank of Tanzania Act, 2006 and its predecessor 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-policy objective, i.e., Price Stability.
According to the Act "The primary objective of the Bank shall be to formulate, define and implement monetary policy, directed to the economic objective of maintaining domestic price stability, conducive to a balanced and sustainable growth of the national economy of Tanzania".
In other words, it is the primary responsibility of the Bank to establish monetary conditions conducive 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 Monetary 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 undue 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
- 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.
- The Importance of Price Stability
Price Stability implies that the Rate of Inflation, which is measured by the
rate of increase of the National Consumer Price Index, has to be kept as low as
possible, optimally within a longer-term average range of 0-5% (percentage
change on the previous year).
With a high rate of inflation, increases in wages and salaries cannot keep
pace with the resulting erosion of purchasing power, and, hence, there will be
decreases in real incomes for a large part of the population, which may result
in corruption, an expansion of the informal sector, social friction, increased
crime, and as a consequence of these factors, a decrease in economic efficiency.
Furthermore, a high rate of inflation is an incentive for currency substitution
and capital flight, it leads to an unplanned redistribution of income and
wealth, mostly in favour of the rich, and, in general, it adversely affects
decisions on consumption, saving, borrowing, and investment in productive
capacity, by increasing uncertainty about future prices. Excessive inflation is
also an impediment for achieving interest and exchange rate stability, which is
very important for facilitating smooth economic development. Therefore, a
combination of these factors could seriously impede the timely achievement of
the Financial and Economic Restructuring Program.
In this connection, it has to be stressed again that Price Stability is the
decisive cornerstone of a successful economic policy geared towards sustainable
medium- and longer-term economic growth. In other words, economic growth in the
Country will be severely curtailed in the medium and longer term, if inflation
continues to prevail at a high rate.
- Prerequisites and Limits of an Effective Monetary Policy
To achieve this objective, the Bank formulates and implements Monetary
Policy, by using instruments, such as Refinancing Policy, Minimum Reserve
Policy, Open Market Policy, Foreign Exchange Interventions, and other
The Ultimate Objective of Price Stability, however, can only be realised over
time, if there are well-coordinated Monetary, Fiscal, and General Economic
Policies, i.e., there has to be a concerted national effort. Monetary Policy, by
itself, cannot achieve Price Stability, no matter how strict a Monetary Policy
Stance the BOT is pursuing, it can only dampen inflation to some degree,
depending on the inflationary pressures emanating from Fiscal and General
Furthermore, the attainment of the Monetary Policy Objectives has to be
facilitated by a continued application of market-oriented policies in the
financial sector (the creation and maintenance of an efficient payments system
is included here), the public sector, the industrial sector, the agricultural
sector, and the external payments area.
Subsidiary Functions of the Bank of Tanzania
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,
- 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 interbank transactions.
- 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
- 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. Guarding international reserves
may imply the determination of buying and selling rates of gold and foreign
exchange in 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
- 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
- licensing of banks and financial institutions
- facilitation and monitoring of a Deposit Insurance Fund, the
purpose of which is the protection of small depositors, and
- 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 Current Institutional Framework of the Bank of Tanzania
Relations with the Governments
It has been generally accepted by now that there is quite a valid case for
Central Bank independence, since price stability is an important public good,
like peace and civil rights, and politicians in a multi-party system, who have
to work within the constraints of an electoral timetable, will always be tempted
to engineer pre-electoral booms (vote-maximising behaviour), regardless of the
longer-run inflationary consequences. Politicians tend to prefer monetary
expansion to monetary contraction, since the following short-term trade-off
exists between inflation and production and employment:
- monetary expansion first results in a stimulation of production and
increased employment, and only later there is an increase in the rate of
- monetary contraction first results in reduced production and
less employment, and only after some time there is a reduction in
the rate of inflation
Within the framework outlined above, there is also a tendency among
politicians to avoid expenditure cuts and tax increases by borrowing from the
Central Bank, which is the most inflationary method of financing government
deficits. It is, therefore, very important to separate the powers of spending
from those creating money.
Experiences the world over in the past decades unambiguously suggest that
countries, in which Central Banks enjoyed considerable autonomy in monetary
policy, recorded low inflation, while the opposite was the case in countries
where Central Banks were under government influence.
However, it has also been generally recognised that the Central Bank has to
be accountable. Accountability relates to the responsibility of the Central
Bankers to explain to the Public (Government, Parliament, and the General
Public) what they are doing and why, i.e., there should be a genuine two-way
communication (close consultations) between the Public and the Central Bank.
This also implies educating the public on economic principles, i.e., the harmful
effects of inflation have to be explained, in order to maintain public support.
Concerning day-to-day monetary policy operations, the Bank of Tanzania is
autonomous. However, commensurate with the accountability postulate, regular
consultations shall be held between the Governor and the Governments on monetary
policy. Furthermore, twice a year, prior to the commencement of the new fiscal
year, and not more than six months, thereafter, the Governor has to present to
the Union Minister of Finance the Monetary Policy Statement, for submission to
the National Assembly, giving an indication of monetary and economic
developments at present and the recent past, and expected economic developments
and the monetary policy stance during the next 12 months.
In the case of irreconcilable differences between the Governor and the Union
Minister of Finance, the Governor can be directed to formulate and implement
Monetary Policy for a period not exceeding 12 months, as specified by the
Minister. The directive shall be published in the Gazette.
The Board of Directors, the Bank's top decision making body, consists of the
Governor and the Deputy Governor, who are appointed by the President for a
period of five years (they shall not hold office for more than two terms), one
representative each for the Governments (Principal Secretaries to the respective
Ministries of Finance), and six other Directors. The latter are appointed by the
Union Minister of Finance for a term of three years; they shall not hold office
for more than three terms.
In order to keep Government borrowing from the Central Bank within reasonable
limits, borrowing benchmarks have been established for the Governments on the
basis of revenue collected. As indicated already, the Bank of Tanzania is the
advisor to the Governments on matters relating to finance.