Why Tanzania central bank stepped back from forex market

Dar es Salaam. Bank of Tanzania (BoT) data shows that there has been reduced participation of the central bank in the Interbank Foreign Exchange Market (IFEM) as foreign exchange liquidity improves among commercial banks.

BoT actively participated in the market between January 2023 and October 2023, selling substantial sums of dollars to address growing pressure on foreign exchange caused by high global commodity prices.

BoT participates in the IFEM for liquidity management purposes and intervenes occasionally to address short-term volatility in the exchange rate.

However, the central bank made no interventions from November 2023 to January 2024 after commercial banks’ forex businesses improved markedly.

Commercial bank transactions totalled $13.1 million in November 2023 from none in the preceding three months and the sum rose to $17 million in December 2023.

“IFEM improved, aligning with seasonal receipts from tourism and agricultural exports. Receipt of foreign loans and grants, as well as moderation in commodity prices also contributed to the improvement in the foreign exchange liquidity,” the BoT said in its monthly review report.

The IFEM continued to recover in January 2024, with commercial banks being the only participants in the market, albeit at a lesser magnitude after recording $3.8 million in total sales.

BoT governor Emmanuel Tutuba told The Citizen that there has been steady recovery in the IFEM, with the market situation fluctuating due to demand.

“The forex market is not consistent as it depends on day-to-day or seasonal needs. In December, demand usually increases significantly because it’s the end of the year and there is a surge in imports and trade generally, but once the season passes, demand declines,” he said, adding that there is a similar situation during Lent and Ramadhan.

Mr Tutuba said the central bank has continued to support the market and closely monitors it, intervening only when it is imperative to do so.

Data shows that while total transactions in January 2023 were $48.5 million, the central bank participated in the market by selling $21 million.

In February 2023 about $48.3 million was traded, with the BoT selling $20 million.

The IFEM market increased to $91.5 million in March 2023 and the central bank sold $46 million.

The turnover in April was $63.3 million and the BoT was responsible for $34 million.

In May 2023, the total market turnover was $79.5 million and the BoT remained active on the selling side.

In June, when the market remained vibrant and recorded a turnover of $65.9 million, the BoT sold a total of $42 million.

The IFEM was $52.1 million in July 2023, of which about 90 percent was sold by the central bank, while in August the BoT sold $73.5 million.

The IFEM faced increased demand pressures attributed to global events in September 2023, prompting the BoT to sell $150.5 million, more than double the amount sold in the preceding month.

However, backed by seasonal receipts from tourism and agricultural produce, the market gradually improved, leading to a reduction in central bank intervention in October when it sold $82.9 million.

There are also promising prospects in retail markets, according to Mr Tutuba.

“We continue to emphasise that people use the local currency for domestic purchases to reduce unnecessary pressure on the market,” he said.

The BoT last year issued the FX Code 2024 designed to promote a robust, fair, liquid, open and transparent market, where diverse participants can confidently transact at competitive prices in line with global standards.

The code draws significantly from the FX Global Code 2017, which consists of 55 principles organised into six major pillars.

These pillars include ethics, governance, execution and information sharing, risk management and compliance and confirmation and settlement processes.

“The pillars outline expectations for market participants to ensure ethical behaviour, effective governance, robust execution and risk management, accurate information sharing and efficient confirmation and settlement processes,” Mr Tutuba in a statement in January this year.