10 November 2012

Tanzania: Country's Borrowing Worries Economists

DAR ES SALAAM, Tanzania government's increasing borrowing from commercial banks to foot various expenditures is crowding out investments, which in turn has a negative impact on economic growth.

Analysts say the trend might derail the country's economic growth desire because of the slowed-down credit to the private sector which in return reduces producers output.

The Bank of Tanzania (BoT) recently announced a sharp year-to-year decline of lending to private sector to 16.8% in August this year from 27.5% of the same month last year.

In the month the credit slowed down by almost 3.0 percentage points to 16.8% in comparison between July and August, this year.

Economists have it that the slowing down of credit to private sector, which is an engine for growth, is bad for economic growth and may retard the projected GDP growth.

"A number of economic activities recorded slow growth rates in credit in the year ending August 2012, except for transport and communication, agriculture, manufacturing, and personal activities," BoT indicates in September's month economic review.

The University of Dar es Salaam Senior Lecturer (Economics) Dr Jehovanness Aikael said the slowing down would affect the ability of financial sector to facilitate production growth and hinder GDP growth.

"The trend is not health especially if we believe that private sector is the engine of growth," Dr Aikael said, adding that the sector needs capital [via borrowing] to facilitate production growth."

Dr Aikael said should the private sector lending decrease while credit to government increase, it means there is a crowding out of investment, a phenomenal that contracts GDP growth.

"As the economy grows, financial sector facilitation to output also increase," Dr Aikael said, adding that the current trend shows "lessening in lending activities that means reduction of financial sector facilitation to production process."

According to BoT, during the period under review, external debt stock stood at $10.42bn, compared with $10.35bn recorded at the end of July 2012.

"The profile of external debt by creditor category indicates that the stock of multilateral and commercial debts increased by 0.9% each," BoT said.

The domestic debt at the end of August 2012 increased to Tsh4.57trn (about $2.85bn) from Tsh4.5trn (about $2.8bn) registered at the end of July 2012.

Two sectors namely transport and communications and, manufacturing registered high credit growth from negative to 15.8% and 23.8% respectively. While others construction, agriculture, hospitality, trade and personal loans decreased substantially in year-to-year comparison.

While the credit to private sector dwindles, lending interest rates increased slightly ranging between 15.55% and 16.23% in August compared to 14.46% to 15.88% recorded in the preceding month.

"Overall lending rate recorded an increase of 15 basis points to 15.83% in August [2012], while short-term lending rate, up to one year, increased by 9 basis points to 14.55%," BoT said in the review.

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