IMF report on financial stability reflected in current policy shifts

10Dec 2018
The Guardian
IMF report on financial stability reflected in current policy shifts

WORRIES may have been raised by a new report by the International Monetary Fund (IMF), the 2018 Financial System Stability Assessment (FSSA) for Tanzania, where one essential observation made was that the country still faces an economic momentum slowdown.

The report asserts that Tanzania has been experiencing difficulties with fiscal management leading to a build-up of expenditure arrears, which contributed to a higher level of non-performing loans. This was a point that wasn’t easy to grasp, as non-performing loans of individuals arose not from expenditure arrears (for instance paying private firms for services rendered to the government, as that often takes years) but the collapse of business returns owing to vast changes in public expenditure habits from December 2015.  Could the IMF have actually failed to notice or deliberately overlooked the difference?

The report cites a 2010 Financial Sector Assessment Programme (FSAP), where the monetary authorities have strengthened financial prudential regulations, “put in place elements of a framework for monitoring systemic risks and macro-prudential policy responses, and initiated a transition of the monetary framework toward an interest-rate based operating target.” This was an interesting observation as it actually sounded familiar, but with a catch. What is the difference between inflation-targeting monetary policy and an interest rate operating target?

Observations that bank asset quality had deteriorated in recent years and provisioning needs have increased was also largely in the past tense, as the Bank of Tanzania has been rectifying these drawbacks more or less systematically.

“Credit growth has decelerated, while dollarisation of bank balance-sheets could create liquidity pressures under adverse shock scenarios,” said the report in part. That worry was only partially founded as dollarisation enhances confidence, creates a veneer of stability, and there is no actual impact on reserves so long as new hard currency flows in from various sources.

Some observers may have worried that the report over emphasized vulnerabilities that could amplify the impact of external and domestic shocks, “including from tighter global financial conditions, lower trading partner growth, prolongation of domestic economic uncertainties, and delays in addressing difficulties related to fiscal management.” Global financing is tighter to an extent but is also increasingly competitive, and that is how Tanzania managed to obtain financing for the standard gauge railway, though getting cash for the liquefied natural gas plant has proved far more challenging.

With those fundamental concerns properly addressed, other observations relate to areas of prudential supervision and monitoring functions that the Bank of Tanzania conducts in tandem with its own priorities, some of which were not the subject of the IMF monetary policy and financial stability overview. These include the fight against money laundering, and how this aspect balances out with investment policy in general, as most important banks around the world have a finger in the pie in that regard.

In 1992 when the government allowed private individuals to apply for licences to operate banks it only gave minimum deposits and extensive certification to check fraud, but the issue of keeping out dirty money was left largely to investigative organs while the central bank was more concerned with bank stability. Is that not how it should be?