In its seventh review of Tanzania’s performance under its current Policy Support Instrument (PSI), the International Monetary Fund (IMF) noted, among other things, a sharp increase in the number of non-performing loans up by 12% by September this year.
One of the reasons for the sharp increase may have been the audit of public employment and the subsequent sacking of underqualified and unqualified staff. But this impact will level off in the coming months. Meanwhile, President John Magufuli — known for his interventionist approach across all sectors of the economy — will no doubt give his backing to resolving unviable smaller banks.
However, a challenge specific to Tanzania is also the fact that the new Bank of Tanzania Governor Florens Luoga is not a banker or even a financial sector expert, but a tax specialist who had been part of the team structuring the deal with Barrick Gold. This is likely to affect the degree of competence with which the authorities will address their banking sector challenges. And it appears that Bank of Tanzania — on Magufuli’s order — will follow Kenya in the ill-advised policy decision around interest rate capping.
Bank of Tanzania Deputy Governor Bernard Kibese revealed that Tanzania was planning to implement and release an interest rate cap in early March next year. This would, according to Kibese, foster the banking sector. Some development economists argue this can be beneficial: where insufficient credit is provided in some sectors of strategic importance to the country’s economy, or, to incubate an underdeveloped economy from global — and in this case regional — market forces. Magufuli’s government is clearly concerned by the impact of increased competitiveness among its regional partners (Kenya, Uganda, and to a growing extent Rwanda) and the impact on Tanzania’s goods and services in global markets while, simultaneously, attempting to develop its industrial sector.
However, interest rate caps are ultimately an insufficient method of managing these market failures and reaching the ultimate goal of lower long term interest rates. This is, fundamentally, because such caps address the short term affects from these market failures — high rates for credit — but not the causes in terms of developing a deeper level of financial sector reform, supporting inter-bank competitiveness, and providing market information.
To take an example in neighbouring Kenya, President Uhuru Kenyatta’s government passed legislation to cap credit. The result caused banks — under pressure to cut costs — to focus on automatic processes and terminated employment, but also to cut lending to individuals and, more importantly, to small and medium-sized enterprises. Exacerbated by some other factors, Kenya’s private sector credit growth fell to 1.6%, the lowest in a decade, and a marked decline from 25% in mid-2014.
This segment is taken from the Tanzania section of our East Africa Politics & Security publication. If you wish learn more about this topic, the country or discuss the paper with us, contact Tom Gray.
