Political Uncertainty Dilutes Bank of Tanzania Discount Rate Value

Central Bank of Tanzania in Background, with Tanzania Shilings in foreground

 

By TZ Business News Staff.

 

The Bank of Tanzania (BoT) has repeatedly cut down its discount rate during  the past couple of months hoping to  encourage  banks to reduce their lending rates with the possibility bank customers would rush to borrow.

The monetary policy gimmick is not working as it should, though, according to some entrepreneurs who talked to TZ Business News, because of political uncertainty.

BoT  reduced  its discount rate from 9% down to 7% in August, 2018, a third cut within 2017 and 2018.  The central bank reduced this rate from 16%  down to 9% in 2017, a drop effected first from 16% to 12%, then down to 9% within a few  weeks during the first quarter of 2017.

It was on Monday, March 6, 2017 when the Bank of Tanzania issued a circular to commercial banks informing them it had reduced the discount rate from 16% down to 12% to help spur lending and boost economic growth.  The circular marked the first time the lender of last resort had lowered borrowing costs since 2013. Everyone hoped liquidity would improve as businesses rush to borrow from commercial banks. The situation on the ground is telling  a different story.

The Dar es Salaam-based medium scale wholesale and retail entrepreneur Samo Munanka says businessmen have not rushed to borrow from commercial banks because of political uncertainty.

The current unpredictability of political decisions against  business has increased the risk on capital, Samo says.  It is not wise for any business to borrow from a bank if business can be destroyed by some unpredictable political decision, he explains.

The Bank of Tanzania informed commercial banks in late August, 2018 it had reduced the discount rate again, announcing that “this [new] review reflects the continued need to promote credit growth for supporting economic activities and financial policies,” adding that  the discount rate cut had  also taken into account the prevailing monetary policy stance and recent developments in the 91 and 182 days Treasury bills yields.

But the demand side  on bank borrowing is  week. A micro enterprise operator in Dar es Salaam, Fadhili Ally who runs his father’s  tiny restaurant told TZ Business News he has no interest in loans from any lender SACCOS because people’s purchasing power is subdued.  “There are days I cook food and I have to throw it away because  buyers did not show up,” he says. “How do you make profit to repay your loan under this kind of environment? The best stance is keeping away from loans.”

A senior research economist at the Bank of Tanzania, Dr. Suleiman Misango agrees businesses in Tanzania currently face some challenges but adds what the Bank of Tanzania has done is among measures  to promote business growth by ensuring  adequate liquidity in the economy, although it is true this central bank measure alone cannot eliminate lending  and business challenges .

“We anticipate [commercial bank] lending rates to come down if other factors do not offset measures the central bank has taken,” Dr. Misango says, adding that it is also important to note that other authorities in the country are taking measures to help improve the business environment; he cited one  example of a ministry of industries and trade move which aims to improve the business environment.  (see our earlier analysis here).