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Financial Markets

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 Bank.

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 transaction .

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 functions:

a) mobilisation of savings from idle agents and transfer to productive agents;

b) provision of finance to companies;

c) encouragement of broader ownership of productive assets; and

d) provision of facilities for competitive transfer (pricing) of capital resources.

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, respectively.

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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