Tanzania: Nation Wins Credit On Capital Controls

TANZANIA is one of the countries in Sub-Saharan Africa with tight capital controls that discourage speculative inflows.


According to the International Monetary Fund (IMF) Regional Economic Outlook report Sub-Saharan Africa, released on Tuesday indicates that the move was aimed at coping with external shocks and especially after the world financial crisis experience.
The report says that high levels of foreign inflows into relatively small economies had posed challenges for policy in several countries.
"The high levels of capital flow into emerging economies before the crisis posed several challenges but again when investors pulled out, it led to increased exchange rate instability," the report says.
It says some countries may consider temporary controls on capital inflows to try to mitigate a recurrence of such instability. "The long-term trend has been toward more open capital accounts," the report says.
Commenting on the report, Dr Honest Ngowi, a senior lecturer with Mzumbe University Dar es Salaam Campus says that cautious measures should be adopted before liberalizing capital account.
"Generally it is risky and should not be left to be controlled by market forces. But if done with diligence, the country might reap enormous benefits from investment flows," he says.
He says the central bank should consider all possible effects and implications of liberalizing its capital account to the national economy.
The IMF report reveals further that private capital inflows had not yet returned to pre-crisis levels in all areas. "Private investors, possibly still smarting from the global financial losses of recent years, seem to be distinguishing between markets," the report says.
However, the economic growth in sub-Saharan Africa has largely returned to pre-financial crisis levels despite its monetary tightening failing to keep pace, with rising fuel and food prices a growing threat.
The IMF reiterated its forecast of 5.5 per cent Gross Domestic Product (GDP) growth for the region this year and 5.9 per cent in 2012, with low-income countries that make up the bulk of the continent recovering the fastest.
But the report warns over the rising food and fuel prices which tested the region's resilience of the past few years once again.
"These price shocks, coupled with the recovery, are likely to lead to higher inflation in most countries and to deteriorating current account deficits in a number of fuel importers," it says, adding:
"Monetary policy remains looser than desirable in many countries at the region ... Interest rates have failed to keep pace with the cyclical recovery and policy now needs to move ahead of the curve," it said.