Financial Markets in Tanzania
I. The Money Market
Apart from the exchange of central bank balances, where credit
institutions make their excess central bank balances available to other banks, the money
market in the broader sense usually comprises dealings in money market paper, e.g., open
market operations under repurchase agreements.
Dealings in money market paper take place between the Central Bank
and credit institutions, and credit institutions among themselves. Nonbank institutions
can also be involved. A typical money market paper is a treasury bill. Open market
operations under repurchase agreements (REPOS) refer to the sale of specified bills and
securities with a commitment by the seller to buy the security back at a specified price
and designated future date.
At present, dealings in the money market by the Bank of Tanzania
comprise only treasury bills and repurchase agreement (repos) . Open market operations, so
far, have been taking place exclusively with 91-day treasury bills (Liquidity Papers), the
proceeds of which are sterilised in a blocked BOT account., while 182-day and 364-day
treasury bills (Financing Papers) have been used for financing the Governments' deficits.
Open market operations under REPOS are not currently in place. However, preparations for
REPOS are well in progress, with the guidelines and the legal framework for the REPO
market already having been written.
The money market in Tanzania is yet to be fully developed. Treasury
bills are sold in the primary market through auctions, which started in August 1993, to
commercial banks, other financial institutions, official entities, businesses, and
individuals. However, the secondary market is still at an early stage of development, with
little activity, and is, therefore, not yet fully effective. Treasury bills can be
discounted at the Bank of Tanzania at the discount rate in force, at the discretion of the
II. The Capital Market
Capital markets are facilities, which channel money (investible
funds), at a market price, into productive activities. Capital relates to money, which is
locked up in a business enterprise. The markets are the facilities and mechanisms through
which money moves from idle holders to productive users, or between productive users
themselves, depending on the benefits or advantages to be derived from each particular
There are a number of reasons why governments have found it
necessary to develop capital markets in their countries. With regard to Tanzania, the
underlying reason for the development of capital markets is the transition of the
country's economy from a "planned" economy, dominated by parastatal enterprises,
towards a "market" economy, where the private sector is expected to play an
increasingly important role.
Within the market economy, capital markets have the following main
a) mobilisation of savings from idle agents and transfer to
b) provision of finance to companies;
c) encouragement of broader ownership of productive assets; and
d) provision of facilities for competitive transfer (pricing) of
The current status of capital markets in Tanzania can be described
as an "emerging market". Bank financing and government subsidies have for a long
time been the source of finance for public corporations and companies. There is a
noticeable absence of public companies (i.e., companies allowed to invite subscriptions
from the public). Many companies are private, whose right to transfer shares is severely
restricted. The number of securities is rather limited, with government debt instruments
being the only securities in the market (i.e., stocks and treasury bills). A secondary
market for government securities is in the process of being established. Pension and
provident funds are the only major collective investment schemes, while there are no unit
trusts. A stock exchange has already started operating in Tanzania.
The government is considering capital markets development an
important component of the Economic Recovery Programme. Consequently, the Capital Markets
and Securities Act was prepared. The Act, which became effective on October 1,1994,
provides for the establishment of the Capital Markets and Securities Authority (CMSA),
which already started operations, and which will be responsible for developing the
necessary institutional and regulatory framework for capital markets.
III. The Foreign Exchange Market
Generally, banks and bureaux de change play a major role as both
dealers and intermediaries in a country's foreign exchange market. Usually, the foreign
exchange market is understood to mean dealing, mostly by telephone, in foreign currency
balances. The relationship between supply and demand in the foreign exchange market
determines the exchange rate for foreign currencies, which is expressed in terms of local
currency units for one (a hundred or a thousand) unit(s) of the foreign currency.
Depending on the contractually agreed point of time at which a foreign exchange deal is to
be settled, a distinction is drawn between spot and forward transactions. Spot
transactions are those which have to be performed immediately, i.e., within a period of
two days, while transactions to be performed later are forward transactions. The rates at
which spot and forward transactions are concluded are spot and forward rates,
The Bank of Tanzania gradually eased foreign exchange controls after
the enactment of the Foreign Exchange Act of 1991, by allowing the establishment of
foreign exchange bureaux in April 1992,
introducing foreign exchange auctions in July 1993, and creating the Interbank Foreign
Exchange Market (IFEM) in June 1994.
The foreign exchange market in Tanzania is composed of the wholesale
and retail markets. The IFEM is the wholesale market, which plays an important role in the
determination of the country's official exchange rate and the provision of funds for the
accumulation of international reserves. The main objectives of the IFEM are:
a) to allow banks and other authorised dealers to play an active
role in developing markets and instruments to serve their customers;
b) to increase the efficiency in the allocation of foreign exchange
reserves, thereby facilitating market-determined exchange rates;
c) to create a favourable environment for foreign investment, which
would, ultimately, pave the way to full liberalisation of the capital account; and
d) to improve the conduct of monetary policy
Initially, the IFEM was conducted on an open outcry basis, whereby
authorised dealers assembled in the BOT auditorium. The BOT supervised the daily sessions
by inviting offers and bids, and awarding deals at the highest bid. Telephone dealing was
introduced in May 1996 and authorised dealers are considering to introduce electronic
dealing in the foreseeable future.
The retail market, in which individuals and businesses satisfy their
foreign exchange requirements, is catered for by bureaux de change and banks.
Tanzania's trade and exchange system is now completely free of
restrictions on making payments and transfers for current account transactions. The
Government has already accepted the obligations of Article VIII of the IMF's Articles of
Agreement, in order to boost the country's attractiveness for foreign investors.
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