Jan. 3, 2018

 Bhaswar Mukhopadhyay


Bhaswar Mukhopadhyay

Resident Representative , IMF

TBY talks to Bhaswar Mukhopadhyay, Resident Representative of the IMF, on reversing the slowdown in growth, the need to update monetary policy framework, and the availability of credit in the country.


Bhaswar Mukhopadhyay is the IMF’s Resident Representative in Tanzania. Prior to taking up his post in September 2016, he was the IMF’s mission chief for Gambia and a co-author of the IMF’s semi-annual publication on sub-Saharan Africa’s Regional Economic Outlook. He has worked extensively on African countries, including a stint in Tanzania early in his career. Mukhopadhyay has also worked on the IMF’s modes of engagement in fragile states and on debt issues, including the IMF-World Bank Low-income Country Debt Sustainability Framework. He received his PhD in economics from New York University.

What role would you like to see the Central Bank playing in Tanzania to mitigate the drop in growth?

By lowering the statutory minimum reserve requirement, the Central Bank has clearly loosened the monetary policy stance, responding to the growth of monetary aggregates that have been below the Central Bank's targets. One of the factors that used to drive the growth of monetary policy aggregates in Tanzania was the inflow of foreign assistance, borrowing on capital markets, and syndicated loans, all of which generated funds that were then intermediated into the economy. This inflow of foreign exchange has slowed down significantly in the last couple of years. It is interesting that this has not only happened in Tanzania; there is a similar pattern with many other countries in East Africa. In Tanzania, there was a need to to reverse the slowdown in the growth of monetary aggregates. Reducing the statutory minimum reserve requirements is one way to do this. The central bank has also reduced some of the interest rates under its control.

What is the motivation behind the IMF's calls for the Bank of Tanzania to modernize its monetary policy framework?

A modern monetary policy framework will allow for more efficient monetary policy implementation, and I should note this is the Tanzanian monetary authority's objective. We merely provide advice to allow a smooth transition, although we do consider this to be an appropriate objective for a country like Tanzania. A modern monetary policy framework entails the use of price-based indicators, namely the interest rate, to achieve an inflation target, the ultimate monetary policy objective, rather than by trying to control the quantity of monetary aggregates. The reason for this is that the relation between the growth of monetary aggregates and inflation is quite volatile and working directly with an inflation target and interest rates to achieve that is more efficient. Under this framework the central bank announces its medium-term target level of inflation and then uses changes in the policy rate and a public communications strategy to guide the public about the central bank's views on the stance of monetary policy. It then demonstrates clearly what it stands ready to do through the policy rate it sets and the open market operations it conducts to ensure that rate guides all other interest rates in the economy.

What is your view of Tanzania's credit situation?

Some of the project finance loans that have been finalized will start flowing into the country now. The government has been working on a syndicated loan for some time and there are strong indications that this money will come in towards the end of the 2016/2017 financial year. The IMF also advocates that the government get a Eurobond credit rating as this would broaden its opportunities to borrow. The IMF's 2016 assessment of Tanzania's debt situation is that it is at low risk of debt distress. It has opportunities to borrow, and use this money to build up infrastructure. On the other side, credit to the private sector has been declining significantly. Part of that may be due to liquidity in the economy; however, with the economy entering a soft patch, banks have fewer good opportunities to lend to businesses. There is perhaps a little more banks can do to actively source new lending opportunities given the many businesses that have huge needs for capital. As the economy emerges from the soft patch it will create greater opportunities for banks to lend as well. Meanwhile, the reduction in the statutory minimum reserve requirements has eased some of the pressures on liquidity. The government has been borrowing much less and that too should have freed up liquidity for the banks to lend. I do believe that banks' excess reserves indicate that they do have resources available to lend.