In January 2008 Bank of Tanzania governor Daudi Ballali stepped down in disgrace. For months beforehand allegations of corruption had battered the credibility of the central bank and monetary policymaking in the country.
It was against this backdrop that Benno Ndulu, a former economics professor, took over as central bank governor.
He had an immediate remit to show the probity and transparency of the central bank. Later that year he had to deal with the global financial crisis and, in particular, the tricky problem for a country with limited financial resources, of bringing down interest rates at a time of fiscal expansion.
On both counts Ndulu has succeeded.
From May this year, Ndulu has allowed interest rates to fall by reducing the supply and frequency of 91-day Treasury bills. The yield on the benchmark government paper has fallen from 12% in early March to 4.7% – a rate not seen since the turn of the century.
“The basic approach we took was the diversification of instruments for liquidity management purposes,” says Ndulu in an interview with Emerging Markets.
Ndulu, who had worked for the Macroeconomic Division of the World Bank for Eastern Africa, sought to sterilize domestic liquidity through regular sales of foreign exchange rather than relying on net increases in liquid paper.
“We decided we should not overload the use of T-bills for the purposes of mopping up liquidity in response to the big increase in government expenditure. So we decided to increase foreign exchange sales and have a better use of repos [repurchase agreements with banks].”
These moves have reduced the high cost of liquidity management to the central bank and the government. The operation prevented Ndulu asking the government for emergency financing which, he says, “would have jeopardized our independence”.
The problem that dogs central banks in sub-Saharan Africa is the difficultly in influencing interest rates due to the structural constraints of regional economies, such as poor legal structures and an underdeveloped financial system.
However, overnight inter-bank lending rates now stand at 0.7% – a historic first. “This has increased the money being made available for private sector credit,” he says.
Another potentially epoch-making feature of Ndulu’s tenure is the stability of the exchange rate. Until quite recently the shilling has traditionally been allowed to devalue to ensure competitiveness.
However, the shilling has appreciated in trade-weighted terms since 2007. Ndulu says: “We’ve generally left the market to play its role and occasionally work with a currency band to make sure the exchange rate does not get too unstable. However, importantly I wanted to change the market view that the currency could only go in one direction: down.”
Ndulu has also cleaned up the central bank’s image. He has sought to subject the central bank’s accounts to independent oversight, improve the governance structure and regularly communicate with primary dealers, chief executives at banks and the media.
“In a hugely difficult period, Ndulu’s arrival has helped to improve Bank of Tanzania’s communication with markets and his liberal approach to the managed float has worked well,” says David Cowan, Africa economist at Citi.