Perspectives on BoT’s 2021 policy response to Covid-19

Covid-19 has had - and still is having - many negative economic implications across the globe. It has made economies to bleed, slowdown, move towards and even into and beyond red territories. It has led to reduced sales volumes, reduced sales revenues, reduced profits and dividends as well as reduced growth prospects.

Although there have been some signs of economic recovery from the pandemic in some countries, there are threats of this recovery being derailed by new waves of Covid-19. The need for various responses including policy ones to address the pandemic and eventually deliver recovery cannot be overemphasized. This piece gives some perspectives on the July 27, 2021 policy response from the Bank of Tanzania (BoT) that aim at delivering recovery from Covid-19.

Economic recovery

Economic recovery in the context of this article is the process through which all the negative business and economic aspects are changed for the better.

It is all about turning around things and pumping new life into struggling businesses and economies at all levels. It is about businesses bouncing back to pre-Covid-19 growth paths and beyond. It revolves around the axis of moving from red to green territories by way of kissing goodbye losses and making profits. It is all about stopping economies from bleeding and slowing down. It is going back to improved sales volumes, sales revenues, profits and dividends as well as growth prospects and trajectories.

Recovery is not a linear function but a non-linear one punctuated with ups and downs. Various policy measures can trigger and sustain recovery. These include those announced by BoT on July 27 as partly outlined in what follows.

Reduction of reserves

This policy measure is on reduction of statutory minimum reserve (SMR) requirement for banks that will extend credit at interest rate not exceeding ten percent annually to agriculture.

Such banks will be eligible to a reduction in SMR amount, equivalent to the loan extended. This is likely to make banks more liquid and increase lending to agriculture sector. If the broad definition of agriculture including crops, livestock and fishing and their many, long and highly intertwined value chains and nodes is taken, then a very wide ecosystem stand to benefit from this measure thereby delivering recovery.

Relaxation of agent banking

This measure has removed the regulatory requirement of business experience of at least 18 months for applicants of agent banking business. New entrants in this space will be required to have just National ID Card or National ID Number. This policy measure is expected to increase in loanable funds to banks through deposit mobilization. The measure also intends to lower lending rates.

This can deliver recovery through increased employment in agency banking and related activities and by extension through more financial inclusion. However, the highly disputed high mobile phone transactions levy saga has to be solved for this measure to be effective.

Introduction of special loan

BoT shall provide a special loan amounting to one trillion Shillings to financial institutions at three percent per annum for pre-financing or re-financing of new loans to the private sector. This implies reduced cost of borrowing to private sector.

Such funds will attract interest rate of not more than ten percent on part of private sector.

This measure intends to increase liquidity to banks and reduce lending rates. At such times as these of economic challenges posed by Covid-19, increased liquidity and low interest rates are among the prerequisites for recovery.

Reduction of risk weight on loans

Lending is risky and depends on risk appetite of lenders. BoT shall reduce risk weight on different categories of loans. This implies increased risk appetite and risk loving as opposed to being risk averse.

This measure will provide opportunity for banks to extend more credit to the private sector than before due to increased allowable risk appetite. More credit is good economics for recovery.

Ways forward

The expansionary monetary policy instruments applied by BoT are highly welcome as potentially good for recovery from Covid-19. They need to be monitored and evaluated along with the ones issued in May 2020.

Monetary policy responses alone will not deliver the recovery we want. Expansionary fiscal policies, too, are needed for a faster, sustainable and more meaningful recovery from Covid-19.

The author is Associate Professor of Economics at Mzumbe University and Acting Principal of Mzumbe University Dar es Salaam Campus