IFEM records US$2.2 billion transactions in 2015

The biggest transactions were recorded in September, June and December at US$225.6 million, US$203 million and US$202.5 million respectively. The value of transactions during the three months in 2014 was US$171.6 million, US$198 million and US$178.8 million respectively.

In the entire 2014, banks bought and sold the greenback worth US$1.89 billion.

“The foreign exchange market is the backbone of international trade and global investing. It is critical to support imports and exports, which are necessary to gain access to resources and to create additional demand for goods and services. Without the ability to trade in different currencies, companies’ prospects would be limited and global economic growth would suffer,” UK’s Financial Times notes in one of its finance briefings.

In 2015, the Bank of Tanzania (BoT) was actively involved in the IFEM trading for mainly liquidity management but also to help stabilise the local currency that was mostly battered in the first half of the year.

It spent nearly US$730 million most of which was sold and boughtat only US$3.3 million from the market. BoT made the biggest sale of US dollars in June when the limited supply of the greenback greatly affected the exchange rate.

“BoT was an active participant in the IFEM’s supply side but we also bought hard currencies for mostly liquidity management and to help the shilling,” Governor Benno Ndulu told The Banker last week.

The IFEM is one of the market-based monetary policy instruments BoT uses to maintain liquidity in the economy within desired levels. Prof Ndulu said the others are the use of Open Market Operations (OMO) in the market for government securities as well as repurchase agreements (repos) and reverse repo to manage short-term liquidity fluctuations in the economy.

The liquidity management effort is further complemented by periodic adjustments in the pricing of standby facilities namely: the discount window and the Lombard facility; while the Intraday Loan Facility (ILF) is provided to smooth out payment and settlement operations among banks.

According to the February Monetary Policy Statement (MPS), liquidity condition in the bankingsystem was generally adequate with occasional periods of liquiditytightnessduring the first half of the current financial year.

“Liquidity was relatively tight at the beginning of the yearfollowing moderate net fiscal outlays and after-effects of tight monetarypolicy measures pursued by the Bank of Tanzania in the last quarterof 2014/15 to contain inflation expectations and excessive volatilityof the shilling exchange rate against the US dollar,” the MPS reads.

“The tight liquiditysituation was reflected in the rise of the rate at which commercialbanks lend cash to each other overnight (the interbank cash marketrate) to an average of about 29.98 percent in July 2015 from 17.99 percent in June 2015,” it adds.

BoT says that the liquidity situation started to improve in August 2015, largely dueto government outlays, and interbank rate declined before rising inOctober 2015 following increased demand for currency in circulation mostly related to General Election activities.

The chairman of Tanzania Bankers Association, Dr Charles Kimei, said the IFEM was an important aspect of the national economy because it was where the shilling exchange rate was determined. He said the price of the shilling mostly hinges on the supply and demand of the local unit against other foreign currencies.

“The use of foreign exchange intervention should be limited toliquidity management and smoothing volatility in the foreign exchange market, with higherreliance on domestic-currency instruments to address excess liquidity,” the IMF notes in its latest review of the economy.

According to it, the shilling experienced high volatility and depreciation in the first half of 2015, but stabilized starting last July with weakening against the US dollar reaching 25 per cent in 2014/15.

While the depreciation largely reflected the global strength of the dollar, domestic factors also contributed to the volatility, such as the loosening of monetary policy in late 2014, seasonal patterns in foreign exchange (FX) inflows, delays in mobilizing external financing, and perhaps uncertainty in the run up to the elections, the Bretton Woods institution adds.

“BoT took steps to address the situation by: (i) further restricting the use of currency swaps between banks in February; (ii) reducing the ceiling on banks’ FX net open position (NOP) to 5.5 per cent of core capital in April; (iii) reversing in May the lowering of reserve requirements introduced in December 2014; and (iv) increasing sales of FX,” IMF says in the February country report.

“BoT also intensified scrutiny of transactions of a potentially “speculative” nature.

The situation in the FX market returned to normal in July and has remained orderly since, with much lower volatility and the spread between the various quoted exchange rates returning close to zero; FX sales, remained higher than programmed ahead of the elections but decreased significantly after.”

On Thursday last week, money dealers said the shilling was likely to be steady next week, helped by a slowdown in dollar demand by importers. While the official mean exchange rate was 2,179 per dollar, commercial banks quoted the shilling at 2,182/2,192, unchanged from a week ago.

"The shilling has been trading flat for almost a month, I don't see it moving anywhere unless we get some solid inflows of dollars," said William Francis, a dealer at Commercial Bank of Africa Tanzania.