In a significant monetary policy development, the Monetary Policy Committee (MPC) of the Bank of Tanzania convened its 228th Meeting on October 27th, 2023, to assess the nation's economic landscape and chart the course forward. During the session, the MPC acknowledged the effectiveness of the less accommodative monetary policy implemented over the months of August, September, and October 2023.
This strategic policy approach, when combined with supportive fiscal and structural measures, played a vital role in maintaining liquidity at appropriate levels within the Tanzanian economy. Notably, these efforts successfully contained inflationary pressures, facilitated economic activities, and ensured the stability of the financial sector, all amid challenging global economic conditions. Furthermore, the policy stance alleviated pressure on foreign currency demand, contributing to a more stable economic environment.
On the global front, the MPC observed a persistently weak growth trajectory despite surpassing projections in the first half of 2023. This subdued global growth was attributed to multiple factors, including the tightening cycle of monetary policies, geopolitical tensions, and elevated oil prices. While inflation eased in numerous countries compared to the previous year, it remained higher than desired levels, prompting central banks worldwide to maintain tight monetary policies in a concerted effort to restore inflation to the targeted low levels.
Turning the focus to the domestic economic scenario, the MPC highlighted several key indicators. Tanzania experienced robust growth, with the first and second quarters of 2023 showcasing a 5.4 percent and 5.2 percent expansion, respectively. Zanzibar's economy also demonstrated impressive growth, expanding by 6.2 percent in the first quarter and aiming to achieve an annual target of 7.1 percent growth in 2023.
In the realm of inflation, the trend displayed a downward trajectory since June 2023, reaching 3.3 percent in September 2023. This decline was primarily attributed to decreasing food prices, contributing significantly to the overall stability of the economy. However, in Zanzibar, inflation saw a slight uptick, rising to 7.5 percent from 6.5 percent in June 2023, driven primarily by food prices. Despite recent increases in oil prices, inflation was projected to remain within acceptable limits.
The MPC also noted a significant growth in money supply (M3), registering a robust 17.7 percent growth in the first quarter of 2023/24, surpassing the target of 10.1 percent set for end-December 2023. This growth was propelled by strong private sector credit expansion, which reached approximately 22 percent in July and August, subsequently moderating to 19.5 percent in September 2023. This expansion in credit was influenced by an improved business environment, reinforced by the less accommodative monetary policy. Agricultural activities particularly benefited from this credit growth.
Additionally, the government's budgetary operations performed satisfactorily, with revenue reaching an impressive 96.2 percent during the first quarter of 2023/24. In Zanzibar, the resource envelope exceeded the target by 1.7 percent, while expenditures continued to align with the available resources, showcasing prudent fiscal management.
The current account deficit demonstrated a narrowing trend, albeit remaining high due to the rise in commodity prices in the global market. The deficit decreased to USD 3,652.6 million year-on-year in September 2023 from USD 4,728.2 million in September 2022, primarily due to increased earnings from tourism. This positive trend was expected to continue, driven by earnings from tourism, gold, and traditional export crops. In Zanzibar, however, the current account deficit widened to USD 417.1 million in the year ending September 2023, compared to a deficit of USD 344.8 million, mainly due to increased imports of goods and services.
Furthermore, foreign exchange reserves remained robust, surpassing USD 5 billion in July-October 2023, providing import cover well above the country's and East African Community (EAC) benchmarks of at least 4 and 4.5 months, respectively. The banking sector continued to exhibit stability, being adequately capitalized, liquid, and profitable. Notably, the sector's assets showed improvement, as indicated by a decline in the non-performing loans ratio, dropping to 5.2 percent in September 2023 from 7.3 percent in September 2022. This decline was expected to encourage banks to enhance lending to the private sector, further stimulating economic growth.
Addressing the recent challenges related to foreign currency shortages, the MPC highlighted gradual improvements attributed to earnings from tourism, minerals, manufacturing, and cash crops. Active participation by the Bank of Tanzania in the interbank foreign exchange market, involving the sale of foreign exchange to mitigate the accumulation of foreign currency-denominated loans extended to importers, significantly contributed to this improvement. The MPC expressed confidence in the continuous enhancement of the foreign currency situation, driven by inflows from tourism, export crops, minerals, and measures implemented by the Bank and the Government to address the issue.
Given this comprehensive evaluation of the economic landscape, the MPC made a strategic decision to maintain the current less accommodative monetary policy stance. This decision was underpinned by the successful outcomes observed during the reviewed period and the ongoing collaborative efforts with fiscal and structural policies. The MPC emphasized that monetary policy measures would be diligently implemented to achieve the targets outlined in the Extended Credit Facility Program for the quarter ending December 2023, ensuring continued stability and sustainable growth for Tanzania's economy.