Central Bank Responses to IMF-Supported Programme Conditionality and Macroeconomic Volatility in Tanzania

This paper investigated how, in the course of achieving the IMF-supported programme quantitative conditionality, monetary aggregates, in particular, might cause volatility in macroeconomic variables in Tanzania. Specifically, the paper ascertained the extent to which achieving the IMF-supported programme quarterly targets amplified macroeconomic volatility. The results from an Error Correction Model indicated that although the IMF aims at helping member countries to stabilize their economies, paradoxically, findings revealed that in the course of fulfilling the IMF-supported programme conditionality, the process amplified macroeconomic volatility in Tanzania. Also the behavior of fiscal aggregates, such as government expenditure and deficit were noted to contribute to macroeconomic volatility in Tanzania. The paper suggests that the IMF needs to design appropriate performance criteria, which are manageable by a recipient country within a specified period. Also recipient countries need to implement their economic policies on a steady basis in order to be able to fulfill the agreed IMF-supported programme conditionality feasibly. It may be desirable for the Bank of Tanzania to move from a fixed to a flexible monetary targeting framework, which takes allowance of shocks in real and financial sectors, in order to reduce volatility in the economy. A flexible monetary policy framework would take into account base money changes as well as developments in other macroeconomic indicators. Keywords: Central Bank Responses; Macroeconomic Volatility; and IMF Conditionality