Tanzania: Bot’s 1tri / – Will it Boost the Private Sector, Solve the High Interest Dilemma?

TODAY’s analysis examines the so-called high interest charged by banks in Tanzania amid initiatives by the BoT to pump 1 tril / – to increase private sector investment in what the BoT governor , Professor Florens Luoga, described it as an effort to mitigate the macroeconomic impacts of the covid-19 pandemic in Tanzania.

Across banks, bank loan interest rates remain high, at around 17%, despite monetary expansion and other measures adopted by our central bank. With the injection of 1 tril / -to be capped at no more than 10% interest rate, questions emerge not only about the segment with this money, but also about the collateral in place this time around that the banks would allocate to keep lending rates low.

Interest rate issues may surprise many, but critically it is misunderstood when reading the news about how the major Tanzanian banks are preparing their shareholders for big profits in Q2 2021 are still showing profits. higher compared to the same period last year.

Analysis of previously published audited bank reports shows that the Big Seven Lenders recorded a total of Sh. 430.052 billion net profit in the 2nd quarter of 2021, an improvement of around 46% from shared net profit of Sh. 98.075 billion that banks received during the same period in 2020.

While I am not suggesting and being careful that the big banks are raking in profits for their shareholders at the expense of borrowers with high rates, I do think that means cutting interest if really work spurs much more. economic activity in Tanzania and therefore generates more returns to shareholders.

But it does happen, BOT is once again challenged especially when its own circular issued in January 2021 that requires commercial banks and financial institutions to effectively manage non-performing loans and other operating expenses leaves more room for desire when they are linked to realism on the ground with regard to loans and risks. is a concern.

While it is conceivable that the BOT measure will solve the cost problems within banks, consisting in reducing borrowing costs and maintaining NPLs at a level not exceeding 5% of total gross loans and the cost / income ratio to be kept at a cap of 55%, in my opinion, BOT needs to work more on these issues, as its impact on the overall economy is huge. For example, why 1tril / -to stimulate the private sector and not 2tril / – or 3tril / – etc. ?

Was the work done before announcing this thoughtful amount? My aim is not to criticize our august central bank and the way it is deploying efforts on the ground to mitigate the macroeconomic effects caused by internal and external factors, but an attempt to examine the effects of high interest rates. and their impact on an economy.

As an economist and privileged person to learn about economic issues with an open mind based on economic modeling research and analysis, it is clear in my assessment that high interest rates have not only kept the cost of credit down. unnecessarily high, but have also discouraged many otherwise viable projects. to be implemented in Tanzania.

I am open to being challenged, but the misbehavior of high interest rates in Tanzania is due to the following reasons which include on the one hand, structural flaws and inefficient banking system which prevent rapid transmission of lower interest rates to borrower clients and others, the perceived risks of loans, including macroeconomic instability, lack of security and lack of credible credit data on borrowers.

In my view, the importance of macroeconomic stability must be underpinned by fiscal discipline. In my opinion, the need for increased competition, improved competence and reduced operational costs in the banking industry, while also addressing borrower risks, needs to be carefully considered, in addition such measures as the imposition of a cap on the spread of deposit rates for bank loans.

Tanzania’s high level of interest rates continued to be a source of alarm in the country, ranging from politicians on all sides to those in high positions in Tanzania.

Although some macroeconomic stability has been achieved in the past and recently (see for example the daily news of July 28, 2021), interest rates have generally remained stubbornly high.

The importance of the topic to politicians, the business community and others and the need to fill an obvious lack of public information have inspired my thoughts expressed here today as I continue to follow the measures instituted by the bank. Central Tanzania with the objective of sharing some little or not all of the economic costs of high interest rates and its opportunity costs.

Despite the fact that bank loan rates may have been the center of attention and fury; for the sake of knowledge and without going into details, it is necessary to distinguish that there are many interest rates which are determined in several segments of the financial structure. In the middle of these are the policy rate, interbank rate (s), government bond rates, and bank borrowing and deposit rates.

All of these issues and the way they are distributed can have huge consequences for overall lending rates. In Tanzania, unfortunately, in my opinion, based on my own assessment, the reflection of the policy rate which is supposed to play the benchmark role used to signal the cost of funds especially bank lending rates has been extremely late.

In principle, the rates charged by banks are that the interest rates in the various segments of the financial structure tend to be related somewhat, sparking the cost of funds. In this process, the relationship also flows from the opinion of the arbitrage which says that money will flow, within cost margins, from markets where they receive lower returns to others where they receive higher returns. students.

In principle, a certain level of interest rate equilibrium will be achieved in each section of the loanable funds market, sparking the point where the supply of available funds equals demand. That said, there are several layers of influence and actors in the markets that affect the flow of funds that determine interest rate levels.

Amid the supply and demand for funds, the healthy effects of high interest rates hurt the economy more than many realize. Undoubtedly, no one has a better recognition of the effects of high interest rates than the businessmen who are at the forefront of production.

Not even the bankers who take care of the project evaluation and eligibility criteria by checking the detailed questions on the timesheet to help get a loan.

It’s not surprising; therefore, that there was an outcry and a voice among borrowers to denounce the high level of interest rates. As a longtime business advisor for manufacturing companies inside and outside Tanzania, I can clearly say that high interest rates decrease the incentive to invest and thus not only slow down industrial growth. but also economic growth.

Indeed, Tanzania’s somewhat high interest rates and the high cost of credit make Tanzania less competitive in attracting investment, especially from local industrialists, which in my opinion hinders its growth.

If interest rates and the cost of credit were drastically reduced, I am confident that Tanzania would be able to attract higher levels of investment, which would add several notches to its growth rate, such as envisages the 6th government headed by President Samia Suluhu Hassan.

In the long run, by inflating the cost of credit and production, high interest rates further translate into high prices for the goods and services that customers have to afford.

It is known that monetary powers may have a tendency to raise interest rates to try to inhibit demand pressures in the fight against inflation, because in my opinion, the irony of such action is that it can also cause more inflation if manufacturing costs increase significantly due to the high cost of credit.

The key point to note is that high interest rates can as well; both hamper economic growth and cause inflation. The Tanzanian economy has probably been caught in this unfavorable scenario for a long time.

While growth rates averaged 6.7% from 2010 to 2019, and inflation fell to 3.8% in 2019 (see daily front page news from July 28, 2021), results in the past seemed to us very much appreciated, in my opinion, for achieving the Millennium Development Goals. The targets would need much higher growth rates, probably 7-9%.

However, this is unthinkable when real interest rates, at least on bank loans, are so high. Lowering interest rates should therefore be a national priority.

The corrective practical measures and how BOT should be implemented in order to manage this high interest dilemma in a way that produces a win-win situation would be my next article on this column published by the Daily News.

About Alexander Estrada

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