The Act empowered the Bank of Tanzania to perform all the traditional central banking functions. However, within eight months of the inauguration of the Bank, in February 1967, the Arusha Declaration was proclaimed, and, with it, the Bank had to reorient its policies. Most of the traditional instruments of indirect monetary policy stipulated in the Act became inoperative, as there was no longer an environment of the type which exists in a competitive system, where indirect instruments are effective.
The Annual Finance and Credit Plan (AFCP), supported by a system of administered interest rates, was devised as the main instrument of monetary policy from 1971/72. Similarly, the Foreign Exchange Plan (FEP) was devised to control the use of foreign exchange in accordance with national priorities. The plans were formulated in the Ministry of Development Planning, in consultation with the Bank. However, the Bank and the banking system were responsible for their implementation. A system of direct controls was used for this purpose, as stipulated in the Exchange Control Ordinance and the Import Control Ordinance.
During the same period, several other developments occurred, e.g., a radical transformation of the rural economy, as a result of the villagisation programme, industrialisation, and persistent weaknesses in the Balance of Payments. In order to enable the Bank to better address these developments, the Bank of Tanzania Act was amended in 1978, with the result that additional developmental functions were vested in the Bank. As stipulated in this amendment, the Bank established four special Funds:
- the Rural Finance Fund;
- the Industrial Finance Fund;
- the Export Credit Guarantee Fund; and
- the Capital and Interest Subsidy Fund.
These funds were formed to provide refinance and to offer guarantee facilities to banks and other financial institutions against their loans and advances to specified sectors of the economy.
The amendment of the Act also incorporated the following changes:
The responsibility of financial planning was shifted from the Ministry responsible for Planning to the Bank, with the effect that the Bank became responsible for the preparation and implementation of the AFCP and the FEP. It empowered the Bank to inspect and/or supervise banks and other financial institutions, which had not been the case previously.