BANK OF TANZANIA PRESS STATEMENT

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1 BANK OF TANZANIA PRESS STATEMENT RECENT GLOBAL FINANCIAL CRISIS AND IMPLICATIONS TO THE TANZANIAN ECONOMY The recent turmoil in global financial markets has generated growing fear, anxiety and lack of confidence among financial institutions. This has severely curtailed credit in global markets. The source of the crisis was sub-prime mortgages offered by banks and financial institutions in the housing sector in the United States of America (USA). The effects of the sub-prime loans have quickly spread across the world. Up to now, most African countries have to a large extent not been directly affected by the ongoing crisis. This is explained by the fact that despite growing globalization, most African countries have no strong linkages to global financial markets. Recent liberalization of financial markets in African countries, including Tanzania has

2 attracted a significant number of foreign banks into these countries. However, these banks have been required to operate under the laws and regulations prevailing in the respective countries, while their financial relationships with parent institutions in foreign countries has to be approved by the respective countries in which they currently operate. In Tanzania, despite the ongoing global financial crisis, the banking sector continues to be safe, stable and sound. The sector is adequately capitalized and profitable. On the basis of financial indicators, the sector is considered resilient to the current shocks emanating from the global financial crisis. Liquidity is high thus leaving no concern on the ability of banks to meet maturing obligations. Furthermore, credit to the private sector has continued to grow rapidly, reaching a staggering growth rate of 48% in September The banks continue to lend to each other at a reasonable rate of about 5% in the daily interbank cash market, in contrast to freezing of credit in the developed countries. On the other hand foreign borrowing by Tanzanian banks and holding of foreign securities affected by the crisis is very low, thus, limiting the exposure of our banks to this crisis. The foreign exchange reserves of the Bank of Tanzania remain at a comfortable level of around USD 2.7 billion, a position which has been maintained over the last 18 months. This level of foreign reserves is equivalent to 5 months of imports, which is higher than 2

3 that of most of the neighboring countries. Tanzanian residents likewise have almost USD 1.6 billion of foreign currency deposits in our banks. The commercial banks themselves have another $600 million in net foreign assets. The robustness of foreign reserves is important for the stability of the Tanzanian Shilling and confidence in the economy. Over the recent past, the shilling has enjoyed considerable stability, following the strengthening of the Bank of Tanzania s monetary policy strategy. In addition, the Bank of Tanzania monitors exchange rate movements. The Bank intervenes in the market to contain short term excessive volatility in the exchange rate, which are inconsistent with economic fundamentals. Such volatility puts both importers as well as exporters in a precarious situation. By so doing, the Bank s promotes an orderly market. In the last few days there has been speculative demand for foreign exchange in the country; partly driven by those anxious about foreign exchange availability in light of the ongoing global crisis. Some are trying to buy and hoard for the future. I wish to assure the public that our banking system backed by our reserves will have enough foreign exchange to meet normal business needs. There is no need to panic or speculate. 3

4 In the longer term, as His Excellency President Jakaya Kikwete indicated, Tanzania will have to face the indirect effects from this crisis through the following channels: The declines in incomes in developed countries will lead to a decline in demand for our exports to these countries. Increased expenditure by governments in developed countries to bail out banks may imply reduced assistance to poor countries. Decline in foreign loans or increased borrowing costs of foreign loans will deter foreign direct investment Decline in incomes in developed countries will reduce the number and level of spending by tourist coming to our country. In the meantime, international efforts are being taken to contain and mitigate these effects. Going Forward The current overall stability that Tanzania is enjoying needs to be safeguarded. This calls for continued vigilance not to erode our hardearned macroeconomic stability. On its part, the Bank of Tanzania will continue to take measures to preserve the stability the financial sector is enjoying.. The Bank will also continue to maintain strict surveillance over banks on a daily basis and employ early warning systems, to ensure that all financial indicators remain strong and the resilience of our financial sector is upheld. This will include ensuring the maintenance of optimal levels of liquidity by banks, which is key towards maintaining their ability to meet maturing obligations. The 4

5 intraday and overnight refinancing windows at the Bank of Tanzania will continue to remain open for banks in need of liquidity to square their positions. Moreover, the Bank will stand ready to support any bank that needs additional liquidity. The Bank will maintain its foreign exchange policy, including its presence in the foreign exchange market. This is aimed at not only complementing the other market instruments used in liquidity management operations, but also ensuring orderly developments in the market. In this connection, the Bank will continue with its measures aimed at strengthening its oversight role in this market. It will face head-on, any disruptive speculative behavior in the market, including ensuring that the code of conduct of the Interbank Foreign Exchange Market is strictly adhered to by all participants. Measures will also be taken to ensure the maintenance of an orderly payments system, so as to protect the market from possible contagion effect that could be transmitted to the country through a weakly regulated national payments system. Finally, the Bank of Tanzania would like to reassure the public and the market that the situation in the domestic financial markets remains sound and stable. I would therefore urge all market players and the public to continue to do business with the banking system normally. The Bank of Tanzania is in position of dealing with any situation that may arise. 5

6 Benno Ndulu GOVERNOR October 22,