In light of the recent COVID-19 pandemic, the Bank of Tanzania (the BoT) has taken steps to introduce policy measures to safeguard the stability of the financial sector. In this article, we outline the policy measures which the Monetary Policy Committee of the BoT have recently approved to maintain stability in the financial sector and to ensure there is guidance in relation to increased non-cash transactions.
The policy measures that have been approved by the Governor of the the BoT are set out below:
Statutory Minimum Reserves (SMR)
The BoT intends to lower the SMR requirement from 7% to 6%. Pursuant to the BoT Act 2006, the BoT may require banks or financial institutions to maintain minimum cash balances with the BoT as reserves against the deposit and other liabilities of the banks and financial institutions and may, in that respect, prescribe the currency or the currencies in which such balances shall be held. According to the Press Statement, this policy measure will come into effect on 8 June 2020 and is expected to provide additional liquidity to banks. This policy measure has often been taken by the BoT in the past given prevailing economic conditions and has proven effective to spur economic growth in the market.
In anticipation that banks may require additional funding from the BoT in light of COVID-19 the BoT has reduced the discount rate from 7% to 5%. The discount rate is the rate at which the BoT lends to banks. According to the Press Statement, this policy measure came into effect on 12 May 2020 and will enable banks to borrow additional funds from the BoT at a lower discount rate to then lend to their customers at a lower rate.
Haircuts on Government Securities
In relation to government securities, the BoT has reduced haircuts on treasury bills from 10 percent to 5 percent and on treasury bonds from 40% to 20% marking a significant change which has been made in the expectation that it would increase the ability of commercial banks to borrow from the BoT with less collateral than before. Haircuts are the difference between the current market value of an asset and the amount that can be used as collateral for a loan. A higher haircut means that if there is a drop in the market value of the collateral, the lender is still able to recover the amount that has been maintained as collateral. According to the Press Statement this policy measure came into effect on 12 May 2020.
Regulatory Flexibility on Restructuring of Loans
While additional lending is expected, for existing loans the BoT is permitting regulatory flexibility in order for banks and financial institutions to discuss restructuring of loans with borrowers who are facing financial difficulty due to the pandemic. According to the Press Statement, the restructuring of loans which will include loan repayment moratoriums and the granting of loan rescheduling will be determined on a case by case basis and done in a transparent and impartial manner.
Mobile Money Operators
The BoT has increased daily transaction limits for mobile money customers from Tanzanian Shillings 3,000,000 to Tanzanian Shillings 5,000,000 as well as increasing daily balance amounts from Tanzanian Shillings 5,000,000 to Tanzanian Shillings 10,000,000 for all mobile money platforms. By sellers promoting non-cash payments and the increase in transaction limits and permitted balances, the BoT envisages that this would further ameliorate the current concern with congestion in public places such as banks during this pandemic.
The Press Statement has also provided some general comfort as it confirms that Tanzania has adequate foreign exchange reserves for importation of goods and services, but has reiterated the position that in-country transactions between residents should be made in Tanzanian Shillings.
The policy measures set out in the Press Statement are long-awaited steps in the right direction to ensure financial stability during this pandemic. Through the Press Statement the BoT is assuring the public that it will continue to monitor the situation and take appropriate policy measures to limit the impact of COVID-19, not only on the banking sector but on various other sectors of the Tanzanian economy.