Tanzania Daily News (Dar es Salaam)

12 November 2012

Tanzania: Private Sector Credit Falls, Production Drops

THE government's strategy of financing its budget deficit by borrowing from the private sector has had its share of criticism, especially since it caused economic growth contraction.

The Bank of Tanzania (BoT) statistics show that since 2005 the government's domestic debt increased by over 200 per cent from 1.5tr/- in August 2005 to 4.6tr/- at the end of August, this year. The increase is almost 30 per cent per year. The critics have it that the government has good lending record with almost nil defaulter rate compared to some private businesses.

Hence commercial banks tend to lend the government because the area is risk-free. That in return means funds directed to the private businesses are driven away to choke the private sector growth, as it ends up with insufficient capital for increasing output and expansion. The increase, according to BoT, was mainly on account of issuance of new Treasury bonds that outweighed maturing obligations.

"The increase was a result of issuance of new Treasury bonds compared to maturing obligations," BoT said in its September's Monthly Economic Review. BoT data shows the government borrowing at the end of August stands at 7.95 billion US dollars, while on the other hand the private sector lending was 1.92 billion US dollars. This, because the government borrows such large amounts of capital, its activities can increase interest rates to discourage individuals and businesses from borrowing money, which reduces their spending and investment activities.

A University of Dar es Salaam Senior Lecturer (Economics), Dr Jehovanness Aikael, said government increase in borrowing from banks reduces the funds supposed to be lent to private sector. "The trend is not healthy especially if we believe that private sector is the engine of growth," Dr Aikael told the 'Daily News' adding, "the sector needs capital (through lending) to facilitate output growth."

The economist said should the private sector lending decrease while credit to government increases, this means "there is a crowding out of investment, a phenomenon that contracted GDP growth." In economics, crowding out is a phenomenon occurring when expansionary fiscal policy causes interest rates to rise, thereby reducing investment spending. BoT said in the review, "overall lending rate recorded an increase of 15 basis points to 15.83per cent in August (2012), while short-term lending rate, up to one year, increased by 9 basis points to 14.55 per cent".

"That means increase in government spending crowds out investment spending," a critic said. However, economics literatures show that monetary authorities can accommodate a fiscal expansion by increasing the money supply, thus dampening any rise in interest rates. Annual growth of extended broad money supply (M3) decelerated to 9.0 per cent in August from 12.8 per cent in July and 21.4 per cent recorded in the corresponding period of 2011.

"This development was driven by the slowdown in the growth rate of Net Foreign Assets (NFA) and Net Domestic Assets (NDA) of the banking system," the central bank says in the review. However, the country has yet to neither reach nor accommodate "monetizing the deficit" where the central bank prints money to buy bonds issued by the government to pay for its expansionary deficit. The debt increment worries economists as most loaned money is directed to recurrent expenditure - salaries and wages and allowances - more than invested in development budget.

They said borrowing is not a bad hing but what matters most is how the monies are used, because every shilling contracted as a loan today should be spent wisely to bring the desired development goals. Mzumbe University's Dar es Salaam Business School Senior Economist, Dr Honest Ngowi, told the 'Daily News' whether the debt was serviced or not, it puts the country in a tight situation as it reduced the ability to provide other public services.

"The money set aside to service the debt today could be disbursed to higher learning institutions to calm the students' demonstrations," Dr Ngowi said over a telephone interview. As at the end of August, external debt stock stood at 10.42 billion US dollars compared to 10.35 billion US dollars recorded at the end of July. Going by BoT figures, out of the external debt stock, 85.6 per cent was disbursed outstanding debt and the remaining was interest arrears.

The nearest problem, the economist is seeing, is for national debt stock to balloon out of proportion to exceed the country's GDP: "This will be like living well above your income." On annual basis, domestic debt stock increased by 15.5 per cent or 711bn/- to 4.57tr/- as at the end of August from 3.86tr/- recorded in the corresponding period last year. On month-to-month basis, at the end of August, this year the total stock of domestic debt increased to 4.57tr/- from 4.50tr/- registered at the end of July.

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