A glimpse at TZ’s quest for containing liquidity stress

Dar es Salaam. Tanzania has registered impressive economic growth over the last two decades, but 2017 was one of the most challenging years due to liquidity woes, analysts have observed.

According to them, the removal of government deposits from commercial banks, cut of government expenditures, dramatic fall of lending to private sector and tight monetary policies have had an impact to the country’s liquidity.

Public spending cuts were seen as exacerbating the liquidity squeeze in the economy, which has in turn reduced consumer spending and money in circulation.

Businesses also found themselves in a tight corder as they had to ensure they comply with tax laws, including clearing accumulated arrears in tax, all this taking a toll at their liquidity levels.

Commercial banks, which depend on customer savings as assets by 80 per cent were also affected, as deposits in most institutions shrunk due to market liquidity stress.

Reports by the Bank of Tanzania (BoT) showed the dramatic fall of lending growth to the contraction of eight per cent this year from the growth 24 per cent recorded last year.

Major sectors including agriculture and manufacturing, both accounting for large share of the economy and employment--formal and informal--were the main victims of falling banking lending.

The BoT Monetary Policy Statement for last June indicated that during the first four months of this year, liquidity condition in the banking system were relatively tight.

It was largely attributed to cumulative impact of substantial decline in net foreign budgetary inflows and transfer of public institutions’ deposits to the central bank.

“Tight liquidity situation was reflected in the sustained slowdown in the growth of monetary aggregates, notably the broad money supply and credit to the private sector,” BoT said.

Growth of broad money supply (M3) slowed down to 3.8 per cent in the year ending April, 2017 from 12.9 per cent in the year ending April 2016, while growth of credit to the private sector decelerated to 3.4 per cent from 19.3 per cent.

Growth rates of M3 and credit to the private sector were significantly lower than the targeted limits of 12.3 per cent and 12.5 per cent respectively for end June 2017.

The impact of the slow growth in monetary aggregates was partly dampened by gradual rise in velocity of money circulation and money multiplier on the back of financial innovations especially the enhanced use of mobile financial services.

During 2017/18, the central bank said it will continue to focus at ensuring that liquidity is kept within a range consistent with GDP growth and inflation objectives.

The monetary policy actions taken by the aank are expected to continue broadening the lending base of banks and lowering the cost of funds to support various economic activities.

Following tight liquidity condition among banks, the BoT tried to stir up liquidity in the economy using a mix of instruments including the reverse repo operations, purchase of foreign exchange from the domestic market, inward foreign exchange swaps and provision of short-term loans to banks.

“The standby facilities at the Bank of Tanzania were also available for any bank in need of liquidity,” says the central bank.

Bank of Tanzania lowered minimum reserve requirements, its discount rate and stepped up liquidity injection operations.

In March 2017 the discount rate was reduced to 12.0 per cent from 16.0 per cent to ease access to liquidity and in April 2017 the statutory minimum reserve (SMR) requirement on private sector deposits was reduced to 8.0 per cent from 10.0 per cent to broaden the lending base of commercial banks.

The same month, BoT also reduced the Statutory Money Reserve (SMR) were also reduced to eight per cent from ten per cent, which gave banks excess liquidity to increase their portfolios, mainly lending.

In August this year, the central bank also reduced its discount rate by three per cent to 9 per cent deliberately to increase liquidity in banking system and spur growth of credit to private sector.

It was the second time the central bank reduced the discount rates, as the first time was in March where it reduced it from 16 per cent to 12 per cent.

This has also helped to ease interbank money market, the rates which banks use to lend each other to the current less than four per cent from double digit recorded in January this year.

However, this has not eased lending rates to private sector while banks have started to increase vetting procedures for existing and prospective borrowers to avoid rising non-performing loans in banking sector.

But generally, the problem of liquidity shortages in Tanzania has also affected the consumptions, mainly individuals and businesses, which has reduced abilities for producers of goods and services to expand their supplies.

Speaking during the opening of CRDB branch in Dodoma last month, President John Magufuli said his government was taking several monetary policy measures to improve lending to the private sector, and this had already started to ease pressure on shilling liquidity.