Dar issues new policy to enhance effectiveness of the Interbank Foreign Exchange Market

The Bank of Tanzania (BoT) has issued a Foreign Exchange Intervention Policy that seeks to enhance integrity, transparency and effectiveness of the Interbank Foreign Exchange Market (IFEM) in line with global standards.

The Bank of Tanzania (BoT) Governor Emmanuel Tutuba in statement said the Bank of Tanzania Act of 2006 mandates the Bank to maintain price stability, promote economic growth, and ensure stability of the financial system.

“Therefore, the Bank intervenes in the foreign exchange market to achieve various economic objectives, including accumulation of foreign exchange reserves, and monetary policy purposes,” he said.

Tutuba noted that the Central Bank’s intervention the foreign exchange market seeks to achieve various objectives that include smoothening short-term excess volatility in the exchange rate of the Tanzanian Shilling against foreign currencies, accumulating foreign exchange reserves and maintain a sound buffer to deal with unexpected shocks, facilitating attainment of monetary policy objectives; and creating an avenue for providing liquidity in the foreign exchange market.

He however noted the foreign exchange intervention will not be used to support an exchange rate that is misaligned with economic fundamentals.

Criteria for intervention

Intervention in the foreign exchange market for monetary policy purposes will use the following criteria:

• The exchange rate should be characterized by excessive volatility.
• The exchange rate should be unjustified by economic fundamentals.
• Intervention should be consistent with the Bank’s monetary policy objectives.
• Market conditions should be opportune and allow intervention to have a reasonable chance of success.

Mechanisms of foreign exchange intervention

The Bank may intervene in the foreign exchange market using the following approaches:

• Purchase or sale of foreign currency at the best interbank foreign exchange market (IFEM) quotes with spot settlement.
• Purchase or sale of foreign currency through competitive variable rate auctions.
• Intervene in derivative markets, when needed to restore the functioning of the derivatives market.

Foreign exchange intervention disclosure

The Bank will publish pre and post intervention information through the official means to ensure transparency of foreign exchange market operations. The information will include:

1. Intervention details and modality.
2. The intention to conduct any type of foreign exchange intervention to the market.
3. The outcome of foreign exchange market operations.
4. Any vital information relevant to foreign exchange market.

Since the introduction of a floating exchange rate system in 1993, the Tanzania economy has experienced large fluctuations in the exchange rates.

“The economy is prone to large external shocks that can affect the exchange rate and pose significant risks to the Bank objectives,” the statement added.