In this Section, a brief account will be presented on the monetary arrangements in Tanzania prior to the establishment of the Bank of Tanzania. For that purpose, two periods will be distinguished: a) the period before the establishment in December 1919 of the East African Currency Board (EACB) and b) the period until the opening of the Bank of Tanzania in June 1966.

Monetary arrangements in Tanzania prior to l919 were different on the Mainland from those for Zanzibar, since the former was under German rule, while the latter had its own government. The currency on the Mainland was the German Rupee, made of silver, while the subsidiary coin was the Heller, which was 1/100 of the Rupee. In Zanzibar, the Indian Silver Rupee and its subsidiary coins were in circulation. In addition, shells and cattle used to serve as a store of value, and, to a certain extent, even as a medium of exchange. Commercial banking was introduced in the country in 1905, when the Deutsch-Ostafrikanische Bank opened its office in Dar es Salaam. This bank had a concession from the German Government to issue its own notes and coins, which helped the bank to meet the demand for coins in exchange for its notes. A temporary mint was set up in Tabora. In 1911, another German bank, namely the Handelsbank fuer Ostafrika, opened a branch in Tanga. There also was an official savings bank.

After World War I, the Mainland became a mandate territory of the United Kingdom (UK) and its monetary system was aligned to that of Kenya and Uganda, mainly in two aspects:

a) through the establishment of the EACB in December 1919 and b) by auctioning off the assets of the German banks and permitting British banks to open their offices. The regulations defining the Constitution, Duties, and Powers of the EACB stated that it had been constituted to provide for, and to control the supply of, currency in the East African Protectorate, the Uganda Protectorate, and any other dependencies in East Africa, which might be added by the Secretary of State, to ensure that the currency was maintained in satisfactory condition, and generally to watch over the interest of the dependencies as far as currency was concerned. Originally, the EACB operated in Tanzania Mainland, Kenya, and Uganda. Zanzibar adopted its currency in 1936. Other occupied countries joined the Board later, but withdrew from it again after some time. The Board itself stopped functioning in 1966, when Central Banks came into existence in Tanzania, Kenya, and Uganda.

The Board was authorized to issue its own currency notes and mint coins according to the designs approved by the Secretary of State for circulation in its area of operations. The rate of exchange between the Board's currency and the pound sterling was fixed by the Secretary of State. Board currency was essentially issued in exchange for pound sterling, indicating that the EACB's currency was backed predominantly by pound sterling.

2. The Establishment of the Bank of Tanzania

Following the decision to dissolve the EACB 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 the first President of Tanzania Mwalimu Julius 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 the 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 villagisation 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 amended 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:

a) the Rural Finance Fund;

b) the Industrial Finance Fund;

c) the Export Credit Guarantee Fund; and

d) 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.

II. The Primary Objective and Function of the Bank of Tanzania
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, 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 and implement monetary policy, directed to the economic objective of maintaining 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) a steady and acceptable rate of increase in the Money Supply;
b) 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;
c) realistic interest rates that must at least be above the level of the rate of inflation;
d) 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;
e) a relatively stable exchange rate for the national currency;
f) the protection and development of sound and well-managed banking institutions; and
g) 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 realizing the seriousness of the inflationary situation in the Country, the Bank is puling all its efforts towards achieving Price Stability and has declared Inflation the Nation's Economic Enemy Number One.