Why credit to private sector growth slowed to 3-year low

Dar es Salaam. Growth of loans extended by banks to the private sector reached its lowest rate in over three months - even as the central bank is still maintaining a relaxed policy.

The annual growth of credit to the private sector dropped to 2.5 percent in the year to February 28, 2021, down from about 8.0 percent previously, according to the Bank of Tanzania’s Monthly Economic Review for March.

The central bank indicates that the credit to the private sector increased by Sh495.1 billion compared with an increase of Sh1.48 trillion previously.

The BoT attributes the slow growth to the impact of Covid-19, which has disrupted some economic activities around the world.

“The subdued growth of credit to the private sector was attributable to the adverse impact of Covid-19 to some economic activities, particularly those directly exposed to external shocks, such as tourism,” states the central bank in its latest report.

Tourism, which was once Tanzania’s leading foreign exchange earner, is one of the sectors hit the most by the pandemic after different countries imposed containment measures like lockdowns which restricted travelling.

The sector was overtaken by gold which turned a safe haven among investors after the global financial markets experienced volatility.

While gold exports increased from $2.25 billion to $2.98 billion in the year to February 28, 2021, tourism revenue dropped from $2.67 billion to $876.8 million.

That is due to the fall of the number of international visitors who dropped to 509,773 arrivals from 1,553,686 visitors previously.

Monetary policy

The slowdown of the provision of loans to economic activities comes as the central bank is implementing an accommodative monetary policy that seeks to expand the overall money supply to boost the economy.

The BoT said recently that it will maintain such stance through the second half of the fiscal year 2020/21 in support of growth of the economy.

“The policy stance considers low inflation expectations and the need to steer recovery of the economy through expansion of credit to the private sector. The accommodative monetary policy is expected to boost growth of money supply and private sector credit, while ensuring efficiency in financial services delivery and stability of money market interest rates, ultimately influencing lending rates,” the central bank said.

In implementing the policy stance, the Bank of Tanzania also said will use appropriate mix of monetary policy instruments, and monitor and manage the level of liquidity in the economy.

Winners and losers

As the credit growth is slowing, there were economic activities which benefited more than the others.

As usual, loans extended for personal activities, which include lending for micro and small enterprises, continued to dominate in terms of the market share, accounting for 35.5 percent of the outstanding credit to the private sector.

It was followed by trade at 15.2 percent and manufacturing at 9.7 percent. In terms of growth, the personal loans increased by 22.1 percent during the year: the highest rate of all economic activities.

It was followed by hotels and restaurants at 4.3 percent; transport and communication at 3.9 percent, and mining at one percent.

On the other hand, loans to four other economic activities decreased, namely: trade (-11.9 percent), agriculture (-7.2 percent), building and construction (-7 percent) and manufacturing (-4.9 percent).

Meanwhile, domestic credit - which comprises credit to the private sector and central government - grew at an annual rate of 6.9 percent in February 2021, higher than 6.2 percent in January 2021, and 5.8 percent in February 2020.

Credit extended by the banks to the central government - basically through the purchase of government securities - grew by 7.2 percent in line with the borrowing limit set in the FY-2020/21 government budget.