The central bank’s interventions to stimulate lending and investment have included reduction of the discount rate twice in a space of six months this year.
According to two reports released this week, borrowers are still finding it difficult to obtain loans as lenders remain cautious in extending credit as part of the strategy to contain the escalation of bad debts.
The easing of monetary policy has also not helped in containing the cost of borrowing in the country, which is among the most expensive in the region largely due to structural challenges that banks face when lending to the private sector.
Additionally, the failure of the central bank’s measures to improve the weak credit conditions has negatively affected the supply and availability of liquid funds.
“Monetary policy easing has not yet translated into better credit conditions,” the World Bank notes in the Tanzania Economic Update (TEU) that was released on Monday.
The report also has it that the easing of monetary policy has not translated into lower interest rates on loans noting that “the slow growth of credit and the lack of significant movement in the net foreign assets (NFA) of the banking system have resulted in limited growth in money supply (M3)”.
Also technically referred to as extended broad money, M3 is all the money in the economy that includes currency in circulation as well as all short and long term deposit balances in commercial banks.
In the latest review of the economy, BoT says that during the year ending August 2017, extended broad money supply (M3) increased by 998.4bn/- to almost 23.5trn/-, representing an annual growth of 4.4 per cent. According to it, this growth rate was lower than 5.8 per cent in the preceding month and 5.1 per cent in the year ending August 2016.
“Slow growth of domestic credit was the main driver for the subdued expansion in money supply,” the central bank notes in the September Monthly Economic Review (MER), which was released on Tuesday.
“The low growth of credit to the private sector is associated with cautious stance taken by banks in extending credit following weakening of the quality of banks’ asset and slowdown in uptake of credit by firms,” it adds.
Already the low liquidity in the economy and the persistence of the credit crunch have started to take toll on the economy. In the new TEU, the World Bank cautions that growth prospects could be weakened if there is no recovery to the growth of credit to the private sector.
The global lender also warns that further uncertainty regarding future policy changes could compound the impact of low liquidity and weak credit conditions, deterring businesses from making investments.
“To stimulate lending and investment, the Bank of Tanzania has reduced the discount rate twice in the space of six months. However, the impact of this easing has yet to be realized,” the Bretton Woods institution notes in the report.
The discount rate is the interest rate at which central bank lends to commercial banks. The first reduction of the borrowing cost was made in March by cutting the interest rate from 16 per cent to 12 per cent.
The last time BoT had reduced the discount rate was in 2013. After the first reduction failed to help boost the supply of credit to the private sector, the central bank again reduced the rate in August lowering it to nine per cent.
“Despite these measures, the growth of credit to the private sector has remained low, at a rate of 1.0 per cent in July 2017. This is significantly lower than the figure of 15.2 per cent recorded in July 2016,” the World Bank notes in the report, which also says that the growth of credit to the Government has also remained negative.
In the MER, BoT says that commercial banks net claims on the central government increased to about 4.81trn/- in August 2017 from about 3.35trn/- a year earlier reflecting the banks preference for less risky government securities. Bank of Tanzania net claims on the government on the other hand declined to 1.5trn/- at the end of August 2017 from around 1.31trn/- a year earlier.
The central bank’s report also has it that during the year ending August 2017, credit to private sector increased by 26.6bn/-, which translates to a growth rate of 0.2 per cent, compared with a growth of 13.8 per cent in the year to August 2016.
Relative to the year ending August 2016, lowest credit growth manifested mostly in transport andcommunication, and trade activities. Building and construction, manufacturing and hotels andrestaurants activities recorded relatively strong credit growth.
In terms of shares to total outstanding credit, personal and trade activities remained dominant, accounting for 19.7 per cent and 18.9 per cent of total credit to the private sector, respectively.
“As regard to the credit to the government from the banking system, net credit to the government decreased by 29.2 per cent in the year ending August 2017 compared to an increase of 5.9 per cent recorded in the year to August 2016, attributed to a decrease in the Bank of Tanzania net claims on thegovernment,” the September MER reads.
“Bank of Tanzania net claims on the government declined by 213.8 per cent in the year ending August 2017, from a decline of 8.7 percent a year earlier on account of strong build-up of government deposits at the Bank of Tanzania by the government following improvement in domestic revenue collection,streamlined expenditure and cumulative effect of the external non-concessional loan received in June 2017,” it adds.
“However, net lending by commercial banks to the Government rose by 43.3 per cent compared with 12.9 per cent in the year to August 2016 reflecting banks preference for government securities.”
On extended broad money, the World Bank report says that by July 2017, M3 grew by 5.8 per cent, slightly lower than the figure of 6.9 per cent recorded in July 2016.
“Despite the Bank of Tanzania pursuing an expansionist monetary policy, liquidity conditions have remained tight, partly due to the tight fiscal policy stance. This, together with the deterioration in business