THE Bank of Tanzania (BoT) issued the first reverse repurchase agreement after nine months to align with banks’ liquidity needs. The first reverse repo was issued last December after the central bank halted issuing them last February to control the liquidity level in the economy to fend off inflationary pressure.
Reverse repos are financial instruments used by the central bank to inject liquidity into the banking sector, different from repurchase agreements (repos) which are used to mop up liquidity from the banking sector. Alpha Capital Head of Head, Research and Financial Analytics, Imani Muhingo, said on Monday that BoT halted the issuance of reverse repos in last February after the adaptation of a mild contractionary policy to curb inflation.
“The reverse repo issuance in December last year is a sign of resuming accommodative measures,” Mr Muhingo said. Also, the central bank began issuing repos last August, the first time since July 2018—after four years.
Monetary Policy Committee (MPC) met last week and advised the central bank to maintain an ‘implementing less accommodative monetary policy stance’ for the first two months of this year, aimed at controlling inflationary pressure while safeguarding the growth of economic activities.
One of the most important things noted in the MPC statement was the improved quality of credit in the economy as the non-performing loans ratio of the overall banking sector dropped to 5.8 per cent at the end of last year compared to 8.5 per cent during a similar period in 2021 and further down from 13 per cent in 2017.
This comes amid the credit growth to the private sector is 22.5 per cent last December compared to 10 per cent for a similar period in 2021 and 1.7 per cent in December 2017.
“Expansion in the loan portfolio is reflected in banks’ performance as they release annual financial results for the year 2022 and most having reported a significant growth in income and profits,” Mr Muhingo said.
The MPC statement noted the ease of inflationary pressures globally, as similarly in Tanzania inflation was already marginally dropping since November.
Dr Hildebrand Shayo, an economist- cum-investment banker, told Business Standard that for the country policymakers and BoT the inflation news is encouraging and maintained during the period under review. “…but the battle is far from won,” Dr Shayo said, “It is time to readjust to fit in and protect our growth achievement for the better future of Tanzania growth.”
The less accommodative monetary policy stance was further evident by the consistent rise of Treasury yields in the auctions.
For instance, last week the central bank issued a 10 years Treasury bond worth 133bn/-, of which only 47.6 per cent was subscribed, and as a result, the weighted average coupon yield went up 20bps to 10.5847 per cent.
“The weighted average coupon yield has been rising in all the auctions conducted by the central bank since the beginning of the year, similar to the trend during last year beginning June,” Mr Muhingo said. Debt market experts have it that while the shift in monetary policy may cause some uncertainty in the short term, a rise in yields is a reflection of a strong and stable economy.
Zan Securities Chief Executive Officer, Raphael Masumbuko, said the less accommodative monetary policy stance is expected to result in a trend of upward movement in Treasury yields. “This, in turn,” Mr Masumbuko said, “is likely to have a slight negative short-term impact on current bondholders”.
Though the bond yields and prices move in opposite directions, as yields increase, prices will decrease, providing current bondholders with capital losses.
Additionally, Zan CEO said, a rise in yields could attract new investors to the bond market looking to capitalise by acquiring bonds on the cheap.
The MPC’s decision to maintain a less accommodative monetary policy stance is a sign of confidence in the economy and its ability to withstand inflationary pressures.
“This bodes well for long-term economic growth and stability,” Mr Masumbuko said. Furthermore, credit growth to the private sector has slightly dropped for a second consecutive month, to 22.5 per cent last December, from the highest point in the last six years.
Last October the credit level was 23.7 per cent. Credit growth to the mining sector was hit the most, by more than half, from 48.6 per cent last November to 21.5 per cent last December.
Annual growth of credit to agriculture also fell from 54.1 per cent in November to 46.1 per cent in December 2022. Credit growth to agriculture was the highest in October 2022 at 57.7 per cent.
