7 February 2006

Tanzania: Lending to Private Sector Rises Sharply

Nairobi — Robust private-sector credit demand in Tanzania spurred a significant increase in lending to various economic activities in November last year.

With deposits growing faster than credit to the private sector during the month, the share of private-sector credit to banks' deposits declined marginally, to 43 per cent from 44 per cent in October.

According to the Monthly Economic Review for December 2005 by the Bank of Tanzania released in Dar es Salaam last week, the trend implies that banks have been investing mostly in government securities, whose share of total deposits rose from 30 per cent to 33 per cent.

On an annual basis, private-sector credit grew by 33 per cent in November. The outstanding stock of private-sector credit increased to $1,411 million, up from $1,373.7 million in October 2005, whereas net claims on the government by the banking system narrowed to $206.8 million - from $258.5 million - providing more space for lending to the private sector.

The report says monetary policy implementation in the first five months of 2005/06 continued to provide for a robust increase in private-sector credit.

In the year ending November, extended broad money supply grew by about 37 per cent - the highest in 10 years - exceeding by far the growth rate of 19.4 per cent in November 2004 and 32.3 per cent in October 2005.

The central bank's report says the substantial growth in money supply was mainly due to sustained expansion in domestic credit, along with the consolidation of economic activities. In particular, credit to the private sector has been growing above 30 per cent for the past four years now.

Meanwhile, broad money supply grew by 34.2 per cent, which was also higher than the growth of 19 per cent recorded in the previous year. Broad money supply is currency in circulation outside banks, and total deposits held by commercial banks, excluding foreign currency deposits.

On a monthly basis, the extended broad money supply (including foreign currency deposits) increased by $134.9 million to $3,914.2 million between October and November 2005, mainly due to a sharp increase in commercial bank deposits - particularly foreign currency deposits, which went up by about $126 million.

According to the report, the driving factors behind the sharp increase in foreign-currency deposits are additional deposits from big corporate customers and conversion of local currency into foreign-currency deposits for speculation against higher gains in future transactions.

Except for local currency demand deposits, which declined by $34.6 million, savings and fixed-time deposits increased sizeably, following banks' continued initiatives in deposit mobilisation and product innovations. Overall, deposits with commercial banks increased by $169.8 million during the month, from $3,126.8 million in October 2005 to $3,296.5 million.

Interest rates in commercial banks moved in tandem with rates in the Treasury-bill market. In November 2005, the weighted average lending rate stabilised at 15.3 per cent as in the preceding month, while the weighted average Treasury-bill rate remained unchanged at 13.6 per cent for two consecutive months.

Similarly, deposit rates were also maintained at almost the same level between October and November 2005. Weighted average savings and term deposit rates remained unchanged at 2.6 per cent and 5.2 per cent respectively, while negotiated deposit and lending rates were put at around 8.7 per cent and 11.5 per cent, respectively.

During the month under review, the report says, high liquidity in the banking sector exerted pressure on interest rates. Inter-bank rates dropped from an average of 5 per cent in October 2005 to around 4 per cent in November 2005, on overnight lending.

Government securities remained attractive as the Bank of Tanzania increased measures to keep liquidity within target. The overall weighted average yield remained high at around 13.6 per cent for Treasury-bills and about 17 per cent for Treasury-bonds. By the end of November 2005, about 33 per cent of banks' deposits liabilities were invested in government securities.

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