Although interventions to curb the spread of the coronavirus disease 2019 (COVID-19) such as physical distancing, self-quarantine, and closure of universities and other educational institutions are crucially important, they are disrupting the wider economy.
Speaking in Parliament last month, Finance Minister Dr. Philip Mpango said that many economic sectors in Tanzania are affected, with education, aviation, maritime, hospitality, construction, and tourism being the worst-affected sectors. The impact of COVID-19 is enormous, but nevertheless ‘hopefully’ temporary.
Central banks in neighbouring Uganda and Kenya as well as in Egypt, Namibia, Mauritius, South Africa, and Ghana have joined the global trend of unveiling big policy responses in consonance with their respective economies’ GDP to limit the human and economic impact of the pandemic.
There is a surge in the flow of money from investments seen as riskier to the safety of cash, triggered by business distress and closures and the uncertainty surrounding a COVID-19-clouded future. This abrupt development is the main driver behind the evaporation of liquidity and, if uncontrolled, the spectre of credit contraction lurks over the Tanzanian economy.
Tanzania’s central bank, the Bank of Tanzania (‘the Bank’), needs to consider cushioning businesses and individuals by ensuring that credit is affordable and accessible during this unprecedented time. If not, credit starvation would greatly impact the economy and, consequently, recovery and productive capacity would be staggered and eclipsed, respectively.
Inflation—caused by excessive creation of money—is the number one economic enemy of Tanzania, according to the Bank’s website. In fulfilling the monetary policy objective stipulated under section 7(1) of the Bank of Tanzania Act, 2006, the Bank must first stabilise the economy and employment so as to keep the rate of inflation as low as possible.
Ideally, the optimal level of inflation within the target range can be achieved by setting a realistic and appropriate level and structure of interest rates. The situation is different however during an era of disruption to lives, the economy and society.
In the face of COVID-19 disruptions, the Bank needs to take comprehensive, swift and decisive action to support the economy by ensuring the stability of the Tanzanian financial system and an adequate supply of credit during this incredibly difficult and stressful time.
From a monetary policy perspective, the Bank can support the economy by revising the discount rate and steering actual inflation towards its target. These tools would make it more profitable for commercial banks to lend by lowering their interest rates on loans and thus encourage businesses and individuals to borrow.
This is by no means an exhaustive list of the monetary policy tools that can be deployed to further support the Tanzanian economy and achieve the inflation target but it gives an indication of the many tools that can be used.
Tanzania’s financial markets are fairly still at a nascent stage. All the same, intervention by the Bank is crucial to ensure that these markets continue to function properly.
In this period of COVID-19, financial institutions might be disinclined to invest in government securities (Treasury bonds and Treasury bills) and other financial assets. Substantial fluctuation in the prices of these securities would discourage banks and financial institutions from trading in securities, which operate as a benchmark for other interest rates, thereby leading to illiquidity and, ultimately, a more inefficient market.
As the outbreak of the virus is straining financial markets, the Bank could expand its balance sheet by acquiring financial assets and acting as a lender-of-last resort to banks and financial institutions so as to ensure the smooth functioning of the financial system, seen as a critical factor to recovery.
The complexity and uncertainty emanating from the coronavirus may weaken the ability of financial institutions to obtain funds for lending to customers as well as force these institutions to cut back on lending for fear of insolvencies or default. In this case, the Bank’s role in making liquidity available to financial intermediaries to support financial market functioning and the flow of credit is critical if businesses and individuals are to navigate the COVID-19 crisis.
Ultimately, addressing the human and economic impact of coronavirus is not an all alone affair for the Bank; fiscal policy—the use of government spending and taxation to influence the economy—is similarly crucial in, inter alia, providing the financial muscle needed for the Bank’s interventions, including supplying official liquidity.
Paul Kibuuka (email@example.com), a tax and corporate lawyer and tax policy analyst, is the CEO of Isidora & Company and the Executive Director of the Taxation and Development Research Bureau.