The Citizen (Dar es Salaam)
Costantine Sebastian
16 November 2009
The current high cost of borrowing in Tanzania is making it difficult for the country to recover swiftly from the global economic downturn, experts have said.
The chief operating officer of a travel and tour firm said the Government had made a "grave mistake" by not addressing the problem of high interest rates in its Sh1.7 trillion stimulus plan.
The official, who asked not to be named, called for the Government's immediate intervention to help stir domestic demand, which, he said, was of vital importance as far as quick recovery from the slump was concerned.
Researcher and consultant Honest Ngowi said the decision by banks to cut back on lending and toughen borrowing conditions had made the path to recovery rougher.
Without mentioning names, Dr Ngowi said he was aware of at least two banks that had drastically reduced lending and stepped up efforts to recover loans.
"In such times as these of the global financial crisis, a borrowing rate (cost of capital) to the tune of up to 20 per cent and above will be a constraint on the road to recovery from the crisis," he said, noting that the bailout package addressed the supply side of the economy while the real issue was to create demand.
"These are the times that one would expect an expansionary monetary policy and its attendant instruments one of them being low borrowing interest rate in order to stimulate demand," the Mzumbe University lecturer added.
The chairman of the Agricultural Council of Tanzania (ACT), Mr Salum Shamte, concurs with Dr Ngowi, saying that low interest rates were a necessity for accelerated economic development even without a recession.
He said the approach has been used in the whole of Asia and South America.
"I can safely say that one of the biggest impediments to faster economic growth in Tanzania is the high interest rates and lack of long term financing.
If we do not solve this problem we will never see high economic growth because it has never happened anywhere in the history of mankind," noted Mr Shamte, who is also the managing director of sisal firm Katani Ltd.
Similar sentiments were echoed by several other bankers, who accused the Government of not doing enough to address risks that made banks charge high interests on loans.
Also speaking on condition of anonymity, they cited the legal system as being one of the factors that makes lending difficult in Tanzania because courts take so long to make decisions.
"High interest rates are obviously choking efforts to put the economy back on its efforts and the Government is to blame for bottlenecks such as lack of personal identification and physical addresses.
"Elsewhere in the world, in Japan for example, borrowing rates have been squeezed down to almost zero per cent as part of monetary policy response to the crisis," one of them noted.
The director of economic research and policy at the Bank of Tanzania (BoT), Dr Joe Masawe, said the Government's rescue plan seeks, among other things, to ensure that the flow of credit in the economy was maintained.
He said the plan was designed to particularly ensure banks continue lending to export oriented activities, which were mostly hit by the global slump.
He said the Government would increase domestic borrowing but leave enough room to ensure that credit to the private sector will grow by 30 per cent this financial year.
Noting that the credit grew by 33.2 per cent last fiscal year, he said the targeted level is a comfortable rate even by international standards.
"Already interest rates on government securities have fallen substantially, which is expected to crowd in the private sector," he told The Citizen in an exclusive interview.
According to BoT latest monthly economic review (MER), the overall Treasury bills rate fell by nearly 54 per cent between January and July this year from 12.53 per cent to 5.81 per cent.
The savings deposits rate during the two months was 2.64 per cent and 2.68 per cent respectively while the overall lending rate was 14.93 per cent and 15.14 per cent respectively.
The August 2009 MER further shows that the overall time deposit rate was 6.41 per cent in January and 6.63 per cent in July.
Dr Ngowi said the gap between deposit and borrowing interest rates is still unreasonably big with borrowing interest rates at about 20 per cent for business borrowers and about 19 per cent for individual borrowers.
He said that due to the crisis banks in the country will obviously tighten and impose more stringent conditions on lending and concentrate more on recovering loans.
"With the global financial crisis, we are likely to see some banks reducing their lending portfolio and increase the loan recovery activity. Indeed at least two banks are already doing this," he said on Thursday.
"Before they can recover a substantial amount of their loans, they cannot keep on extending loans especially to risky borrowers. It is unfortunate that due to the crisis, we are likely to see tighter and more stringent conditions to access loans."
He said the bailout package favour mostly banks and cotton buyers and would be unsustainable if the crisis continues for considerable time.
While noting that the plan was a mere short-term strategy, he says that the problem was not the ability to produce, but the ability to sell due to all-times low aggregate demand caused by all-times low consumers and investors sentiments.
According to him, the most serious problem with the package was the sources of the funds for the package.
He faults the domestic borrowing approach saying that it will among other things increase the national debt, which increased by 1.2 per cent between June and July to about $8.84 billion (about Sh114 trillion).
"Firstly, one questions on whether the market is liquid enough to be able to extend the loans to the Government. If available, there is a danger of the Government's borrowing to squeeze and crowd out the private sector from the money market.
"The needed private sector investments to revive growth and place the country on the road to recovery stand to be a distant dream should the private sector lack access to capital," Dr Ngowi warned.
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