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2017/18 the Mid-Year Review

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2017/18 the Mid-Year Review The Mid-Year Review 2017/18 February 2018 a b ISSN 0856-6976 MONETARY POLICY STATEMENT The Mid-Year Review 2017/18 GOVERNOR BANK OF TANZANIA February 2018 c d th 6 February 2018 Hon. Dr. Philip I. Mpango (MP), Minister for Finance and Planning, Treasury Square Building, 40468 Dodoma, TANZANIA. Honourable Minister, LETTER OF TRANSMITTAL In accordance with Section 21 (5) of the Bank of Tanzania Act 2006, I hereby submit the Mid-Year Review of the Monetary Policy Statement of the Bank of Tanzania for the financial year 2017/18 for subsequent submission to the National Assembly. The Statement reviews the implementation of monetary policy during the first half of 2017/18. It then describes the monetary policy stance and measures that the Bank of Tanzania intends to pursue in the second half of 2017/18 to meet its policy objectives. Yours Sincerely, Prof. Florens D. A. M. Luoga GOVERNOR BANK OF TANZANIA i ii TABLE OF CONTENTS LETTER OF TRANSMITTAL .................................................... i EXECUTIVE SUMMARY ........................................................... v Introduction ..................................................................................... v Global and Regional Economic Developments ................................ v Economic Developments in Tanzania ............................................. vi Implementation of Monetary Policy in 2017/18 .............................. x Conclusion ...................................................................................... xv PART I ......................................................................................... 1 1.0 INTRODUCTION .............................................................. 1 1.1 MANDATE AND MODALITIES FOR MONETARY POLICY IMPLEMENTATION ........................................ 1 1.1.1 The Mandate of the Bank of Tanzania ................................. 1 1.1.2 Modalities for Monetary Policy Implementation ............... 2 PART II .......................................................................................... 4 2.0 MACROECONOMIC POLICY FRAMEWORK FOR 2017/18 .................................................................... 4 2.1 Macroeconomic Policy Objectives ..................................... 4 2.2 Monetary Policy Objectives ............................................... 4 PART III ........................................................................................ 6 3.0 MACROECONOMIC DEVELOPMENTS .................. 6 3.1 Overview of Global and Regional Economic Developments 6 3.2 Domestic Economic Developments ................................... 9 iii PART IV ......................................................................................... 26 4.0 MONETARY POLICY IMPLEMENTATION DURING THE FIRST HALF OF 2017/18 ...................................... 26 4.1 Liquidity Management and Interest Rates Developments ... 26 4.2 Financial Sector Stability .................................................... 30 4.3 National Payment Systems Developments ......................... 32 PART V ......................................................................................... 34 5.0 MACROECONOMIC OUTLOOK ................................ 34 5.1 GDP Growth ...................................................................... 34 5.2 Inflation ............................................................................... 34 5.3 External Sector ................................................................... 34 5.4 Banking Sector and National Payment Systems ................ 35 PART VI ......................................................................................... 36 6.0 MONETARY POLICY STANCE FOR THE SECOND HALF OF 2017/18 ............................................................ 36 6.1 Liquidity Management ........................................................ 36 6.2 Interest Rate Policy ............................................................. 37 6.3 Exchange Rate Policy ........................................................ 37 PART VII ........................................................................................ 38 7.0 CONCLUSION ................................................................ 38 APPENDICES .................................................................. 40 GLOSSARY ...................................................................... 59 iv EXECUTIVE SUMMARY Introduction This mid-year review of the Monetary Policy Statement examines the progress made in the implementation of monetary policy in the first half of 2017/18. It describes the current macroeconomic environment and outlook and specifies the direction of monetary policy for the remainder of 2017/18. Global and Regional Economic Developments According to the IMF’s World Economic Outlook (WEO) update of January 2018, global real GDP is estimated to have grown by 3.7 percent in 2017, compared with 3.2 percent in 2016. This is mainly due to stronger domestic and global demand benefiting from accommodative monetary and expansionary fiscal policies. Much of the increase came from emerging market, euro area and developing economies. During the first half of 2017/18, inflation rates in the selected advanced and emerging market economies accelerated, mainly on account of higher costs of energy. In the EAC and SADC regions, average inflation rate recorded persistent decline, mainly associated with decrease in food prices as most countries in the region experienced improved food supply following favourable weather conditions. According to the IMF’s World Economic Outlook update of January 2018, inflation rate in the advanced economies is projected to pick up slightly to 1.9 percent in 2018 from 1.7 percent in 2017, which is driven by the increase in oil prices. Inflation rate in emerging markets and developing economies is projected to increase to 4.5 percent in 2018, mainly due to expected increase in food prices. v Economic Developments in Tanzania Tanzania Mainland The economy sustained strong real GDP growth at 6.8 percent in the first three quarters of 2017. The fastest growth rates were recorded in mining and quarrying (24.3 percent), information and communication (13.1 percent), transport and storage (11.9 percent), water (10.0 percent), manufacturing (9.8 percent) and construction (9.5 percent). Inflation rate continued to ease off, supported by improved food supply, stability in the value of Tanzanian shilling against the major currencies, improvement in domestic power supply and sustained prudence in monetary and fiscal policies. Headline inflation declined to 4.0 percent in December 2017 from 5.4 percent recorded in June 2017, while core inflation (which excludes food and energy) decreased to 1.3 percent from 1.9 percent. During the first half of 2017/18, revenue deposited at the Bank of Tanzania was TZS 8,438.7 billion, 4.6 percent higher than the amount deposited during the similar period in 2016/17. This outturn was on account of enhanced tax collection efforts by the Tanzania Revenue Authority. Total expenditure on cash basis amounted to TZS 8,727.1 billion, out of which development spending was TZS 1,952.2 billion. During the first half of 2017/18, the current account registered a deficit of USD 551.2 million compared with a deficit of USD 683.1 million recorded in the corresponding period in 2016/17. This outturn was driven largely by decline in imports coupled with increase in travel and transport receipts. Overall balance of payments recorded a surplus of USD 943.8 million, supported by increase in project grants and external borrowing, coupled with narrowing current account deficit. Consequently, gross official foreign reserves amounted to USD 5,906.2 million at the end of December 2017 vi compared with USD 5,000.4 million at the end of June 2017 and USD 4,325.6 million at the end of December 2016, sufficient to cover about 6.0 months of projected import of goods and services, excluding those financed through foreign direct investment. The stock of public sector debt of the United Republic of Tanzania increased by USD 1,054.6 million to USD 21,012.2 million at the end of December 2017, from USD 19,957.6 million registered at the end of June 2017. The increase was due to new disbursements and exchange rate fluctuations. During the first half of 2017/18, external disbursements amounted to USD 556.0 million, against external debt payments of USD 453.7 million. External debt stock, including private sector debt, increased by 3.4 percent to USD 19,180.2 million at the end of December 2017, when compared with the end June 2017 position, while government domestic debt increased by 8.6 percent to TZS 12,810.3 billion. The banking sector has maintained on average capital and liquidity levels above the regulatory requirements. The ratio of core capital to total risk weighted assets was 18.9 percent in December 2017, well above the minimum regulatory requirement of 10 percent, while the ratio of liquid assets to demand liabilities was 40.3 percent, above the minimum regulatory requirement of 20 percent. Nevertheless, the quality of assets as measured by the ratio of non-performing loans (NPLs) to gross loans deteriorated to 11.7 percent in December 2017 from 10.6 percent in June 2017. The Bank of Tanzania directed banks with high NPLs ratio to formulate and implement strategies to reduce the ratio to maximum of 5 percent, and introduced mandatory requirement for all banks and financial institutions to make use of credit reports of credit applicants during appraisals. The aim is to
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