IMF Executive Board Concludes the United Republic of Tanzania’s 2018 Financial System Stability Assessment

December 6, 2018

On November 19, 2018, the Executive Board of the International Monetary Fund (IMF) discussed the Financial System Stability Assessment (FSSA) of the United Republic of Tanzania. [1]

Economic growth in Tanzania has been relatively strong in the past decade. Prudent macroeconomic policies and consecutive Fund programs contributed to low inflation and contained public sector debt. More recently, a slowdown in economic momentum has emerged. Difficulties with fiscal management have led to a build-up of expenditure arrears, which contributed to a higher level of nonperforming loans.

Since the 2010 Financial Sector Assessment Program (FSAP), the authorities have strengthened financial prudential regulations, put in place elements of a framework for monitoring systemic risks and macroprudential policy responses, and initiated a transition of the monetary framework toward an interest-rate based operating target.

Notwithstanding such progress, financial stability challenges could be significant. Bank asset quality has deteriorated in recent years and provisioning needs have increased. Credit growth has decelerated, while dollarization of bank balance-sheets could create liquidity pressures under adverse shock scenarios. Vulnerabilities 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.

Key near term FSAP priorities include measures to reduce nonperforming loans and increase provisioning and buffers to manage liquidity, credit, and concentration risks. These measures should be complemented by strengthening banking supervision and problem bank oversight. Measures to deepen financial markets and modernize the monetary policy framework should be combined with new prudential tools to enhance systemic liquidity management.

Executive Board Assessment [2]

Executive Directors concurred with the findings and recommendations of the 2018 Financial System Stability Assessment (FSSA). They welcomed the important progress made by Tanzania since the 2010 Financial Sector Assessment Program, particularly in strengthening financial prudential regulations, putting in place some key elements of a framework for monitoring systemic risks and macroprudential policy responses, and initiating a transition of the monetary framework toward an interest‑rate based operating target. To build on this progress and ensure that the Tanzanian financial system is stable, efficient and inclusive, Directors called for policy action to lower risks and raise the resilience of the banking system. In this context, they encouraged the authorities to implement the recommendations of the FSSA.

Directors noted that despite favorable macroeconomic conditions, financial stability challenges are significant with deteriorating asset quality, falling credit growth and liquidity pressures. Directors noted that continued macroeconomic stability, an improved business environment, better execution of fiscal policy and resolution of government payment arrears would help address financial sector vulnerabilities and risks.

Directors stressed the need to improve asset quality, address non‑performing loans and increase capital buffers in the banking system. In this context, they cautioned against potential excessive use by banks of the regulatory relief provided by the Bank of Tanzania’s circular for loan classification and restructuring. They encouraged the authorities to issue further guidance aimed at preventing banks from overstating capital ratios and earnings.

Directors emphasized the need to enhance surveillance and monitoring of liquidity risks in foreign exchange, and introduce regulations aimed at limiting them. These regulations, buttressed by macroprudential requirements, would complement measures to promote proactive foreign exchange risk management by banks and corporates. Completing operational guidance for emergency liquidity assistance, including in foreign exchange, also remains a priority.

Directors encouraged further efforts to align the prudential framework with international standards and best practices. They welcomed the authorities’ plans for Basel II/III implementation in line with EAC harmonization commitments and encouraged the authorities to advance the framework for identification of domestic systemically important banks. Directors also noted the need to strengthen enforcement of prompt corrective action regulations within an adequate legal framework. Remaining shortcomings in the AML/CFT framework also need to be addressed and risk‑based AML/CFT supervision needs to be further developed. Directors underscored the importance of ensuring that adequate staff and resources are available for bank supervision.

Directors underlined the need to deepen financial markets, increase access to formal financial services and address financial infrastructure gaps. Policy actions in these areas would help to enhance financial inclusion and contribute to improved growth prospects.

[1] The Financial Sector Assessment Program (FSAP), established in 1999, is a comprehensive and in-depth assessment of a country’s financial sector. FSAPs provide input for Article IV consultations and thus enhance Fund surveillance. FSAPs are mandatory for the 29 jurisdictions with systemically important financial sectors and otherwise conducted upon request from member countries. The key findings of an FSAP are summarized in a Financial System Stability Assessment (FSSA), which is discussed by the IMF Executive Board. In cases where the FSSA is discussed separately from the Article IV consultation, at the conclusion of the discussion, the Chairperson of the Board summarizes the views of Executive Directors and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in a summing up can be found here:

[2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings-up can be found here:

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