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Gauging effect of declining private sector credit on economic growth

Gauging effect of declining private sector credit on economic growth

INVESTMENT large or small is remarkably vital for economic growth.

Principally investment by the private sector creates an important part of total investment in many of the market economies. The supply of credit to the private sector therefore is one of the basic features of an investment, without which it is mostly challenging for the businesses or other related economic agents to grasp it.

Therefore, it is important to ask what affects private sector credit positively and what affects in the opposite way. The Daily newspaper dated 12/March/2021 pg16 on its business and finance section carried a caption discussing credit extended to private sector being down.

This discussion prompted my mind on things that could be the main cause of this low credit extension and whether causes are external or internal. Inspired by the need to avoid possible factor bias concomitant with causes that could have contributed to low contribution reminded me the working of famous Schumpeter, who promoted the concept of finance-led growth.

Because of his views, the debate on the role of finance in economic expansion has been an ongoing one, especially in developing countries, where the role played by private sector is key to development of the economy. The business intermediation starring role in an economy is largely executed by the financial sector, which channels savings into productive investment.

Within this equivalence, deposit taking institutions in specific are well acknowledged for carrying out the crucial role of sourcing finance to support private sector consumption and investment in Tanzania.

In order to bring discussion at same level of understanding, and in the context of picture mapped on credit extension to private sector down as referred in the paper, credit to private sector in my view refers to financial resources delivered to the private sector, such as loans and advances, purchases of non-equity securities, trade credits and other accounts receivable, which establish a claim for refund.

In this respect, credit can be regarded from two perspectives; namely: trade or commercial credit and banking system credit. To my non-economist, trade credit refers to transactions which comprise the supplier handing over goods or performing a service without receiving immediate payment.

But to be specific and to the point views expressed here will focus on banking structure credit to private sector, which involves the direct provisioning of loans and overdrafts to the private sector by institutions, such as deposit money banks, non-interest banks and commercial banks in an attempt to explain what happen to the economy in long-term when credit extension is small to the ground or is high to the sky.

In my judgment, in any set economy, economic growth is the never-ending upgrading in the capacity to satisfy the demand for goods and services, resulting from amplified production scale, and improve productivity meaning advances in products and processes which is usually measured over a certain period of time.

In other words, it is the extent of annual percentage rise in real GDP over a certain period of time. There are diverse notions of economic growth and techniques of gauging it, but the primary description is in terms of growth in the long-run productive capacity of the economy, typically measured by real growth in Gross Domestic Product.

GDP Growth can be measured in terms of demand or supply. Long-term growth is driven primarily by productivity. As productivity is concern, an economist by name Paul Krugman once said productivity isn’t everything, but in the long-run it is almost everything.

Implying, over the longer-term, economic growth will be determined primarily by the factors which determine productivity whose champion is private sector. Thus why, when credit to private sector falls, is much great of concern, that in my opinion, has to go beyond reflected spillover effects on the businesses linked relatively to covid-19.

The drivers of economic growth such as access to credit facilities, labour, level of technology, etc. are factors which either improves the quality of outputs, or the efficiency with which inputs are transformed into outputs.

Numerous realistic studies have established that the effective extension of credit has a positive and substantial effect on output and occupation opportunities while a low level of financial development and its linked ineffective private sector credit system changes economic growth.

A strong and inclusive financial system to support the private sector and micro small and medium enterprises in particular and accessibility of investable capitals play vivacious roles in financing economic project and activities that would promote economic growth and development.

This is because access to credit enhances the productive capacity of businesses and enhances their prospective to grow. In view of credit supplier’s importance in motivating the real sector, monetary authorities need to ensure that their financial structure is sound and vibrant. A vibrant, dynamic, and well-functioning financial sector leads to a host of improved economic outcomes.

I am yet to came across pleasingly an assessment and inquiry of what has led to credit extension to fall as untaken in the caption in the daily news, dated 12th/3/2021 pg. 16, but additional interpretations point out that in recent years, private sector credit and economic growth connexion has been a major issue in economic discourse all around the world and theoretical collected works has been questionable on this issue.

Conferring to Bank of Tanzania monthly economic report for February 2021, credit longdrawn- out to private sector rose by 513.8bn/- turning into an annual growth of 2.6 per cent equated to 3.1 per cent recorded December 2020. And, credit to the central government, which was through a bank purchase of government securities, rose by 24.6 per cent.

The summary of the private sector credit by economic activities shows growth in loaning to personal undertakings essentially micro, small and medium enterprises, transport, communications, hotels and restaurants. In terms of personal segment activities continued dominant followed by trade and manufacturing activities accounting for 34.8 per cent, 15.3 per cent and 9.7 per cent of total outstanding credit, respectively.

In opinion of these ratios, it could be a right time now to conduct a study and to calculate the effect of private sector credit on the country’s output. From such study and analysis, it will be easier to ascertain whether funding is the major constraint or enabler to economic growth and development of a country.

By means of four times a year time series data that I consider are accessible at BOT or NBS, we could scrutinise the short- and long-run connexion between output and private sector credit that could help to support significant structural break desirable to revitalise private sector credit growth, prime lending rate, gross fixed capital formation i.e. a proxy for investment, government expenditure and the nominal exchange rate.

My understandings isn’t enough to state credit to private or public sector has expanded or has contracted however, what does that mean to the general economy and to individual economy for small business? It is well known that the provision of private sector credit to major sectors of the economy holds great potential for stimulating economic growth.

In the middle of this potential, the banking sector, which is the main source of credit to the private sector, is an important channel of financial intermediation through which financial resources can be mobilized for productive investment.

If banks miss the mark to appreciate credit extension and instead invest in less risk areas such as T-bills and T-bonds, private sectors accessing reasonable credit will remain to be a tall order and this might not be health to the growth of private sector and the economy.

Hence, there is a need to keep interest rates at levels that are contributing to for the growth objectives of the nation by investing on trustworthy private sector to do what best are at.

If you want extravagance, foot the bill

TANZANIA is a very interesting country, and ...

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Author: DR HILDERBRAND SHAYO

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