Bank of Tanzania's monetary policy and non-performing loans in light of COVID-19

As countries across Africa deal with the impacts of COVID-19, the Bank of Tanzania (BoT) has recently introduced the June 2020 Monetary Policy Statement which addresses a number of key concerns in Tanzania, including the impact of COVID-19 on non-performing loans (NPLs).

In this article we consider the actions the BoT has been taking to bolster the economy and the effectiveness of these actions. We also consider similar actions that have been taken in Kenya.

Actions taken by the BoT

In our article of March 2018, found here, we discussed the measures taken by the Bank of Tanzania (BoT) to reduce the number of NPLs. Briefly, as a result of a slow-down in private sector growth and the increasing number of NPLs, the BoT recommended minimum strategies and granted reliefs to assist in tackling the growing number of NPLs through the BoT Circular No. FA.178/461/01/02, found here.

While the impact of the Circular was evident in that NPLs declined from 11.1 percent in April 2019 to 10.7 percent in June 2019 and 9.8 percent in December 2019¹, the Monetary Policy Statement identifies that the ratio of NPLs to gross loans has increased to 11 percent in April 2020 following the outbreak of COVID-19. Certain sectors have been hit harder than others but it is anticipated that the monetary and fiscal measures the BoT introduced earlier this year, as discussed in our article here, will cushion the economy from the impacts of COVID-19 and reduce the risk of deterioration of loan portfolios. The various policy measures introduced by the BoT include lowering the statutory minimum reserves requirement, lowering the discount rates as well as providing regulatory flexibility on restructuring of loans.

Actions taken by the Central Bank of Kenya

The Central Bank of Kenya introduced measures similar to the BoT including instructing banks to restructure loans to customers for a minimum period of one year and extending credit tenures, which reduced monthly repayments as part of the reserve banks relief package. The Kenyan Monetary Policy Committee took the following policy measures in March 2020, among others, in order to prevent COVID-19 from resulting in a severe economic and financial crisis:

• lowering the Central Bank Rate (CBR) from 8.25 percent to 7.25 percent; and
• reducing the Cash Reserve Ratio (CRR) from 5.25 percent to 4.25 percent².

The lowering of the CBR signalled commercial banks to lower their lending and deposit rates, while the reduction in the CRR resulted in releasing KES 35.2 billion as additional liquidity availed to banks to directly support borrowers that are distressed as a result of COVID-19.

In Tanzania, banks have remained profitable and have attributed this profitability to increasing loans, hence yielding more interest payment despite the disruption of some economic activities.

BoT Monetary Policy Statement

In spite of the above, economic recovery following COVID-19 will likely take some time. In view of this the Monetary Policy Statement provides some steps that the BoT intends to take for the 2020/2021 financial year to ensure that the economy recovers:

1. Liquidity Management
   The BoT intends to increase liquidity by easing monetary policies. This will ensure there is adequate liquidity in the market among banks and will also stabilise short-term interest rates. This will be done while maintaining low inflation with a target of 5 percent.
2. Interest Rate Policy
   The BoT has indicated that interest rates will continue to be market-determined.
3. Exchange Rate Policy
   Similar to the interest rate policy, the exchange rate will also continue to be market determined, with the BoT occasionally intervening only to smooth out short term volatility in the exchange rate. The BoT will also continue to participate in the interbank foreign exchange market for liquidity management purposes.

[1] Statistics from the Monetary Policy Statement and the Citizen - see here

[2] EABC brief on interventions by the central bank in light of the economic impact of COVID-19 - see here

We hope this information has been useful. Should you require further information, please do not hesitate to contact us.

This briefing is prepared for clients and contacts of Clyde & Co Tanzania. We aim to keep our clients abreast of developments in Tanzania as they happen and if you have any questions on the issues raised above please contact us directly.

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