The central bank today faces a fundamental change in the way it conducts policy as well as new challenges whose management is crucial future growth. In the short term, there […]
The central bank today faces a fundamental change in the way it conducts policy as well as new challenges whose management is crucial future growth. In the short term, there is a liquidity squeeze among the financial institutions of East African nations that is inhibiting the ability of banks to lend. In Tanzania, the squeeze was caused by a government directive to transfer funds from government agencies, ministries, local governments, and government companies from private banks and hold them in the central bank instead. The knock-on effects threaten businesses, from importers to industry.
This move is part of the federal government’s wider objective to improve tax collection and crack down on corruption. Notwithstanding the success of those efforts in achieving their objectives, the move has shaken the confidence of decision makers across the economy as they wait to judge the effects of the changes. In August 2016, a one-year government treasury bill was undersubscribed following a tax payment period, a reflection of the tight liquidity situation.
This largely policy-induced squeeze may be short-term, and overshadowed soon by the BoT adding interest rates to its basket of policy tools, which today consist primarily of foreign exchange interventions, open market operations for government securities, and minimum reserve rules. The new tool may add flexibility and power to the bank’s policymaking, which in the long term include lowering high interest rates for consumers and businesses. The BoT is said to be in the final stages of adoption and is expected to set its first rates in 2017. The move has broad support from the private sector. In an interview with TBY, Ineke Bussemaker, the CEO of NMB, one the country’s top three largest lenders, said, “The move to a bank rate improves transparency in how interest rate policy is made… The net impact of this may be a more stable interest rate environment, which would be more conducive to savings and investment.“ The governor has also allayed fears that Tanzania would adopt an interest-rate cap similar to its neighbor Kenya, a move that has dealt a blow to banks across the border.
A third important development on the horizon involves the fast-growing mobile money sector. East Africa is unique in the scale of its mobile money market, but longstanding regulatory issues have slowed its growth. In September, the central bank announced that it would require telecoms to unbundle their mobile money services, causing them to function as a separate business that provides services to the entire market instead of only their subscribers.
While there is debate over the impacts on telecoms, the move may create competition that results in wider implementation. Crucially, it will also make Tanzania the first country to achieve “wallet to wallet“ interoperability, allowing customers to transfer mobile money between operators and thereby transforming the payments system into something closer to a bank account or a debit card. The new licenses are not restricted to mobile companies, as banks and other institutions will reportedly receive them as well.
Tanzania has also signaled its interest in a Eurobond sometime in the near future and is reportedly consulting with a number of international credit ratings agencies for its first rating. The money raised from such an exercise would be essential to achieving the infrastructural improvements needed to drive growth in the next decade. A presence on international markets would also force transparency and predictability to remain at the top of the government’s agenda. The BoT’s prudent and acclaimed monetary policy under its governor Ndulu will be a significant help in achieving the country’s goals as well as a stable credit rating.
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