Money supply process in Tanzania: policy implications.

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University of Dar es Salaam
In Tanzania financial planning has been unsuccessful, in that most of the targeted rates of money supply have been overshot. High money supply growth rate compared to target rates has been experienced since early the 1970's to the 1990's. The question of interest is what are the causes of excessively high rate of monetary expansion, and hence deviations between planned and actual growth rate of money supply. The objective of this study was to investigate the factors which determine money supply in Tanzania for the period 1967 -1998. The study used multiplier models to establish the factors that explain changes in narrow money supply (M1), broad money supply (M2) and extended broad money supply (M3). For narrow money supply (M1), and broad money supply (M2) annual data have been used from 1967 - 1998, and for extended broad money supply (M3) quarterly data have been used from 1992IV - 1998IV. This is because the Bank of Tanzania (BoT) started to target extended broad money supply (M3) in December 1992. Regression analysis employed Ordinary Least Square method (OLS) and Single Equation Error Correction Model (SEECM). The econometric results for the annual data have indicated that, changes in money supply arise from mainly changes in high-powered money (H) and currency-to-deposit ratio (cr). The interest rate (R) and reserve requirement ratio (k) were found to be insignificant in the process. For the extended broad money supply (M3) in addition to high-powered money and currency-to-deposit ratio, interest rate were found to be significant in determining money supply. These findings lead to a major conclusion that the money supply process in Tanzania is largely determined by the monetary base. The major source of growth was mainly influenced by changes in net foreign assets and expansion of domestic credit mainly through financing of government deficit. Therefore policy measures should be directed at a monetary base components especially domestic credit that can be controlled.
Available in print form, East Africana Collection, Dr. Wilbert Chagula Library, Class mark (THS EAF HG226.3.T34K5)
Money supply, Tanzania
Kida, T. M. (1999). Money supply process in Tanzania: policy implications. Master dissertation, University of Dar es Salaam.