Why private sector credit grows at decreasing rate

TANZANIA: THE private sector credit growth has been growing at a decreasing rate since quarter four last year, but still remained in the Bank of Tanzania (BoT) targets.

The latest monthly economic report of the Bank of Tanzania (BoT) shows that credit growth to the private sector slowed to 16.6 per cent in the year ending April compared to 22.9 per cent posted in the corresponding period last year.

According to the central bank report, private sector credit growth started a downward trend in September last year (21 per cent) to April this year (16.6 per cent).

The Head, Research & Financial Analytics at Alpha Capital said yesterday that the private sector credit growth is still growing, rather at a decreasing rate, averaging 17 per cent in quarter one this year from 23 per cent in quarter three last year, as per the Monetary Policy Report by the BoT.

The slowdown in private sector credit growth has been in line with monetary policy implementation, gauging the growth towards a set target of 16.4 per cent, according to the Monetary Policy Statement published in February 2024.

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Private sector credit growth and aggregate money supply growth have remained above target for the last two years, prompting the central bank to adopt the less accommodative policy in 2022.

The policy was finally abandoned in the end of 2023 as growth of money supply approached within the central bank’s target, albeit remained slightly afloat.

Vertex International Securities Research and Analytics Manager Beatus Mlingi said the BoT’s economic reviews from January to April 2024, highlight a concerning trend of declining credit to the private sector.

Several factors contribute to this decline, each with significant implications to the Tanzania’s economy.

One primary reason for the reduction in credit is the tightening of monetary policy by the BoT.

To control inflation, the central bank decided to increase the Central Bank Rate from 5 per cent in the first quarter of this year to 6 per cent in the second quarter.

This increase in interest rates makes borrowing more expensive, thereby reducing the demand for credit among private sector businesses.

As a result, companies find it more challenging to secure the funds needed for expansion and operations.

Another contributing factor is the increased risk aversion among banks, particularly tier 2 and lower-tier banks.

Rising non-performing loans (NPLs) have led these banks to adopt stricter lending criteria.

When banks perceive lending to the private sector as riskier, especially in uncertain economic conditions, they become more cautious, further restricting credit availability.

Additionally, new regulatory measures aimed at improving the banking sector’s stability might inadvertently tighten credit conditions.

The BoT’s risk assessment parameters for banks can constrain their ability to lend, as they must adhere to stricter regulatory requirements to maintain stability.

The implications of this decline in credit availability for Tanzania’s economy are significant.

Reduced credit hampers business expansion and investment, leading to slower economic growth. The private sector, which is a crucial driver of economic activity, relies heavily on credit for capital expenditures and operational funding.

Without adequate credit, businesses may cut back on hiring or even lay off employees to manage costs, leading to higher unemployment rates and reduced household incomes.

Furthermore, financial constraints on businesses can lead to a decline in consumer confidence, resulting in lower consumer spending.

This reduction in spending can further slowdown economic activity, creating a negative feedback loop that exacerbates economic challenges.

Long-term investments in infrastructure, technology and other productive assets may also be postponed or canceled, reducing the economy’s productive capacity and growth potential.

An economist-cum-investment banker, Dr Hildebrand Shayo said yesterday that some commercial lenders have funded mega and long term projects which take long time to start operations.

“Some commercial lenders have been financing mega projects which take a long time to commence production thus causing delays in loan payment,” he noted.

Dr Shayo said that some private sector players implementing government projects have been experiencing payment delays thus destabilising liquidity stance of the lenders.

He said also the considerable part of the non-performing loans that most commercial lenders are experiencing is from the private sector players.

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