MPs demand firm BoT strategies to lower interest rates

MEMBERS of Parliament have advised the Bank of Tanzania (BoT) to conduct a thorough analysis of the criteria used by financial institutions in setting interest rates and identify short, medium and long term strategies for reducing the charges.

According to the lawmakers, the move will help to make loans available at affordable rates for investment and business. The bank has also been advised to review the interest rates on loans for public servants and those in formal and contractual employment and reduce them to single digits.

They said this is because loans for public servants are paid directly from salaries by employers, and therefore the likelihood of default is low.

Tabling a report on activities undertaken by the Parliamentary Budget Committee in 2023 here yesterday, Chairman Daniel Sillo said that interest rates have continued to remain high at an average of 16.04 per cent despite all the measures taken by the BoT to reduce the reserve requirement for commercial banks, provide a 1tri/- loan through a special window, and reduce the interest rate on short and long-term government bonds.

“Since the banking sector in the country has been seen to be making huge profits from interest, fees and various charges, experience shows that the interest rate is not expected to exceed twice the inflation rate,” said Sillo, who is Babati Rural MP (CCM).

He said in a period between July and November last year lending rate was 15.54 per cent while inflation rate was 3.6 per cent. On interest rates for public servants, the chairman said that as of June 2023, lending rate was 16.04 percent, which is 3.5 times the inflation rate (4.6 per cent).

“The committee’s analysis has found that these interest rates, together with high fees and charges on transactions, are the source of huge profits for banks, thus it recommends that loan interest rates for public servants, should be reduced to single digits,” he said.

Early last month, BoT officially transitioned to an interest rate-based policy. The decision reflects BoT’s commitment to refining its approach to monetary policy in order to influence the primary monetary variable in the economy.

The newly adopted framework is expected to bolster the efficacy of monetary policy by fostering low and stable inflation while facilitating robust economic activities.

BoT emphasised that the strategic shift aligns with Tanzania’s dedication to harmonising its monetary policy framework within the East African Community and other regional economic communities where the country holds membership.

Under the revamped framework, BoT will now determine the policy rate, referred to as the Central Bank Rate (CBR, the Bank of Tanzania would set the policy rate known as the Central Bank Rate (CBR), consistent with low and stable inflation conducive to economic growth.

“A change in the CBR will signal the direction of monetary policy, indicating either a tightening or expansionary monetary policy stance,” the BoT said in the statement.

The statement further said that the CBR would also serve as a guide for determination of interest rates by financial institutions.

According to BoT interest ratebased monetary policy framework has proven to be more efficient and transparent in delivering the desired monetary policy outcomes in the countries that have been using it.

The policy interest rate normally influences monetary variables such as consumer prices, exchange rate, or credit expansion, among others in the economy