The purpose of this paper is to review the current exchange rate system in Tanzania in light of other macro-economic developments. Sustained trade liberalization must ultimately rest on market clearing exchange rate regime. Considering the importance changes in the nominal exchange rate for the overall stability of the Tanzanian economy, the authorities should at all times be capable of intervening the market, varying their foreign assets positions. This action of course, would lead to change in broad money supply. To be able to deal with the unwanted consequences of these changes the authorities must have access to effective instruments of monetary policy. The authorities should also be able to more effectively, and efficiency, influence the private demand for foreign exchange, essentially by using interest rate policy and open market operations to affect both the intensity of monetary flows through the balance of payment and the level of domestic aggregate demand. In short Tanzania must implement both a more sustained liberal trade regime and more effective instruments of monetary policy