Central bank slashes rates again to boost credit for private sector

Dar es Salaam. The Bank of Tanzania (BoT) has once again cut its discount rate by three percentage points in a deliberate attempt to improve liquidity in commercial banks and spur growth of credit to the private sector.

The BoT said in a circular to commercial banks on Thursday – a copy that The Citizen has – that it was revising its discount rates downwards to 9 per cent from 12 per cent with effect from today.

“Please be informed that the bank has revised the discount rate. It will go down to nine per cent from 12 per cent with effect from August 7 (today). The revised discount rates takes into account the prevailing monetary policy stance,” reads the statement, which was signed by the BoT deputy governor for administration and internal controls, Mr Julian Raphael.

The discount rate is applicable to commercial banks borrowing from the BoT, which is a lender of last resort.

When a commercial bank faces liquidity challenges, it can get funds through the interbank market (loans from a bank to a bank) or it can even do so through growing its own deposits among others.

Borrowing from the BoT – an exercise that is applied through discount rates – is the last resort to a commercial bank that is in liquidity challenges.

This is the second time in four months that the BoT is slashing the rate it charges the commercial banks, which borrow from it.

In March, the discount rate was reduced to 12 per cent from 16 per cent.

It is also the third attempt by the BoT in four months to ease monetary policy by reducing the cost of borrowing and stimulating economic growth.

In March, the central bank also reduced the amount of cash that the banks must hold as reserves – the statutory minimum reserve (SMR) requirement.

The SMR was lowered to eight per cent from 10 per cent from April 20 as the BoT sought to leave part of the money that the commercial banks would be required to deposit so they can use it in issuing loans to the productive sector.

Experts believe that the measures seek to help unlock funding for key business sectors at a time when figures paint a gloomy picture of commercial banks’ credit to the private sector.

“This is nothing new. It only means since weighted average yields for 91-day and 182-day Treasury Bills have gone down, the discount rates must also follow,” said the Dhow Financial Ltd chief executive officer, Prof Mohammed Warsame.

However, he noted that that in as far as unlocking funds for commercial banks to loan the private sector is concerned, the SMR reduction was the most important step to have been undertaken during the period.

Reduced lending

The BoT’s measures come against the backdrop of falling commercial banks’ lending to the productive sector as financial institutions concentrate on internal controls while battling rising levels of Non-Performing Loans (NPLs).

Last year, the economy was said to have grown by seven per cent, slightly less than the target of 7.2 per cent.

Lending to the private sector grew by 2.5 per cent in 2016 after expanding by 26.8 per cent a year earlier, BoT data shows.