Tanzania's monetary policy in the fourth quarter of 2024 demonstrated a strategic approach to sustaining economic growth while maintaining price stability. The Bank of Tanzania (BoT) maintained a stable policy stance, supporting key sectors like agriculture, manufacturing, and construction through robust private sector credit growth. Effective liquidity management and moderate adjustments in interest rates highlighted the central bank’s commitment to fostering macroeconomic stability and inclusive economic activity.
Central Bank Rate (CBR) and Policy Stance
- CBR: The Bank of Tanzania (BoT) maintained the Central Bank Rate at 6%, demonstrating a stable monetary policy stance.
- 7-day Interbank Cash Market (IBCM) Rate: This rate was expected to fluctuate within ±200 basis points (bps) of the CBR, indicating the BoT's tolerance for short-term liquidity variations while ensuring stability.
Liquidity Conditions and Interbank Markets
1. Bank Liquidity
- Liquidity was tight in October 2024 due to increased demand for cash for seasonal crop purchases, especially cashew nuts.
- The 7-day IBCM rate averaged 8.48%, slightly exceeding the BoT's policy corridor, but declined from 8.58% in September 2024.
2. Monetary Injections
- To manage liquidity, the BoT scaled up injections through reverse repurchase agreements (reverse repos):
- October 2024: TZS 2,887.9 billion,
- September 2024: TZS 2,160 billion.
This significant increase in reverse repos reflects the BoT’s active role in maintaining liquidity.
Monetary Aggregates Growth
1. Extended Broad Money Supply (M3)
- Growth in M3 accelerated:
- October 2024: 14.6%,
- September 2024: 11.4%,
- October 2023: 12.4%.
This rise indicates expanding financial activity, supported by robust monetary policy transmission.
2. Private Sector Credit
- Credit growth to the private sector remained strong:
- October 2024: 17%,
- September 2024: 17.5%,
- October 2023: 17.9%.
While slightly lower, this consistent growth reflects ongoing support for economic sectors.
Sectoral Credit Distribution
- Agriculture:
- Recorded the highest growth in credit at 44.7%, reflecting strong support for rural and agricultural activities.
- Manufacturing:
- Credit growth reached 18.7%, aiding industrial expansion.
- Building and Construction:
- Growth at 18.6%, indicative of sustained infrastructure investment.
- Personal Loans:
- Comprising 38.2% of the total loan portfolio, largely benefiting SMEs.
- Trade:
- Represented 12.7% of the loan portfolio.
- Agriculture (overall share):
- Accounted for 12% of total loans, emphasizing its importance in Tanzania’s economy.
Interest Rate Developments
- Overall Lending Rate:
- Increased to 15.67% from 15.53%, signaling slight tightening.
- Negotiated Lending Rate:
- Remained stable at 12.93%, aiding business planning.
- Overall Deposit Rate:
- Increased to 8.25% from 8.20%, enhancing savings attractiveness.
- Negotiated Deposit Rate:
- Rose significantly to 10.27% from 9.12%, reflecting better returns for large depositors.
Key Observations
- Price Stability:
- Despite tighter liquidity in October, the monetary policy maintained overall price stability.
- Support for Growth:
- The growth in M3 and private sector credit illustrates that monetary policy supported economic activity effectively.
- Balanced Approach:
- The policy successfully managed liquidity and ensured sufficient credit flow, particularly to productive sectors like agriculture and manufacturing.
- Macroeconomic Stability:
- BoT’s monetary policy ensured stable inflation, sustainable economic growth, and reasonable interest rates.
This multi-dimensional approach highlights the effectiveness of Tanzania’s monetary policy in fostering both macroeconomic stability and sectoral growth.
Tanzania's monetary policy in the fourth quarter of 2024 with key insights about the country's economic environment and the effectiveness of its central bank actions.
1. Policy Stability and Support for Economic Growth
- The stable Central Bank Rate (CBR) at 6% indicates a commitment to fostering economic growth while maintaining inflation within a manageable range.
- Despite seasonal liquidity tightness, the monetary policy stance was accommodative, ensuring adequate support for economic sectors.
2. Effective Liquidity Management
- Tight liquidity in October was managed through increased monetary injections (reverse repos). This intervention highlights the Bank of Tanzania's flexibility in responding to short-term economic demands (e.g., seasonal crop purchases like cashew nuts).
- The slight decline in the 7-day interbank cash market (IBCM) rate signals gradual easing of liquidity pressures.
3. Strong Credit Growth
- Robust credit growth of 17% in the private sector reflects a healthy financial sector capable of supporting businesses and households.
- Sectors like agriculture (44.7%), manufacturing (18.7%), and construction (18.6%) benefited significantly, showcasing targeted resource allocation to productive and growth-enhancing areas.
4. Interest Rate Dynamics
- The rise in lending and deposit rates indicates moderate tightening of monetary conditions, potentially to control inflation or stabilize the currency. However, negotiated rates remain competitive, supporting business borrowing and savings.
- The increase in the negotiated deposit rate (10.27%) suggests banks are competing for large deposits, possibly due to higher demand for liquidity.
5. Expansion in Monetary Aggregates
- The strong growth in the money supply (M3) to 14.6% and private sector credit underscores:
- Economic confidence, with businesses and individuals accessing financing for growth.
- An effective monetary transmission mechanism, where policy changes successfully impact financial flows.
6. Focus on Key Sectors
- The priority for agriculture reflects Tanzania's reliance on this sector for economic stability and employment. The highest credit growth in agriculture indicates significant support for rural economies and food security.
- The dominance of personal loans (38.2%) highlights the importance of SMEs and individual businesses in Tanzania's economic framework.
7. Macroeconomic Balance
- The policy achieved a delicate balance between:
- Inflation control (via tight liquidity management and slightly higher rates),
- Credit expansion (to productive sectors),
- Economic growth support (through liquidity injections and targeted sectoral credit).
Conclusion
Tanzania's monetary policy in Q4 2024 reveals a proactive central bank addressing both short-term challenges (like seasonal liquidity tightness) and long-term goals (sectoral growth, price stability, and financial inclusion). It highlights an economy growing steadily, with sound monetary management ensuring stability and opportunity for diverse sectors.
Global growth faces multiple risks, including geopolitical tensions, which may disrupt trade and raise energy prices beyond $84 per barrel in 2024. Trade fragmentation could slow expected trade growth to below 2.5%, while persistent inflation, projected at 3.5% in 2024, might force central banks to maintain high interest rates of around 4% through 2026, dampening investment. Additionally, 40% of EMDEs are at risk of debt distress, with tightening global financing further constraining growth. Climate-related disasters and slower growth in key economies, like China, also pose significant threats to recovery. Conversely, faster disinflation and stronger U.S. growth offer potential upside.
1. Geopolitical Tensions
- Geopolitical risks remain a significant factor that could destabilize global growth. Escalating tensions, especially in areas like the Middle East and Eastern Europe, could lead to increased volatility in commodity prices, particularly energy.
- Disruptions in the supply of oil could push prices higher than the projected $84 per barrel in 2024, dampening global economic activity.
- Geopolitical conflicts can disrupt global trade networks and heighten uncertainty, which has already reached historically high levels in recent years due to trade restrictions and sanctions.
2. Trade Fragmentation
- Trade fragmentation and rising protectionism continue to threaten global trade. Trade policy uncertainty in major economies has reached its highest level since 2000, partly due to elections and new trade measures aimed at restraining cross-border flows.
- Trade growth is expected to recover moderately to 2.5% in 2024, but further trade barriers could reduce this significantly.
- A breakdown in global supply chains, especially in critical sectors such as semiconductors and energy, could cause delays and price increases that slow down production and economic recovery.
3. Inflationary Pressures
- Persistent inflationary pressures, especially in core areas like services, pose a risk to growth, as central banks may need to maintain tight monetary policies for longer.
- Global inflation is forecast at 3.5% in 2024, but if inflationary trends continue to be more stubborn than anticipated, central banks might delay easing interest rates.
- Higher-than-expected inflation could lead to continued high global interest rates (expected to remain around 4% through 2026, double the previous two decades' average), dampening investment and consumer spending.
4. Higher-for-Longer Interest Rates
- The risk of higher-for-longer interest rates could further slow down global activity. Monetary policy rates in advanced economies, especially in the United States and Europe, are expected to stay elevated as long as inflationary pressures persist.
- This is particularly problematic for emerging market and developing economies (EMDEs), as it increases borrowing costs and leads to capital outflows. EMDE borrowing costs remain high, with about 40% of EMDEs vulnerable to debt-related stress.
- If interest rates remain high, global growth could deviate downward by 0.3-0.5 percentage points over the next two years, and investments could suffer.
5. Debt Vulnerability and Fiscal Stress
- Many countries, particularly low-income countries (LICs) and EMDEs, are facing elevated levels of debt distress. The report highlights that around 40% of EMDEs are at high risk of debt-related stress.
- As global financing conditions tighten, servicing this debt will become more difficult, constraining governments’ ability to invest in growth-stimulating projects.
- Public investment could be significantly reduced as countries try to balance fiscal sustainability with their debt obligations.
6. Climate-Related Natural Disasters
- Increasing frequency of climate-related natural disasters could severely impact growth, especially in vulnerable regions like Sub-Saharan Africa and small island developing states.
- These disasters can disrupt agriculture, infrastructure, and production chains, leading to output losses and exacerbating food insecurity.
- Food prices could spike if global agricultural supply chains are hit by extreme weather events, with potentially significant implications for inflation in vulnerable economies.
- The report emphasizes that climate-related risks can stall or even reverse the progress made in disinflation efforts.
7. Slower Growth in Key Economies
- Weaker-than-anticipated growth in key economies, such as China, poses a significant downside risk to global growth.
- China’s growth is expected to slow to 4.8% in 2024, and any deeper or more prolonged downturn in China’s property market or overall economy could negatively impact commodity-exporting countries that depend on Chinese demand.
- A more severe slowdown in advanced economies, such as the Eurozone (projected to grow at only 0.7% in 2024), could drag down global trade and investment.
8. Upside Risk: Faster Disinflation and Stronger Growth in the U.S.
- On the upside, faster-than-expected disinflation could occur if global supply chains recover more quickly, or if there is more progress in technological adoption that improves productivity.
- In such a scenario, central banks could ease monetary policy faster, leading to a stronger growth outlook, particularly in advanced economies.
- U.S. growth could outperform expectations if labor force participation continues to rise and investment in technology-driven sectors remains strong.
Key Figures:
- Global inflation: Forecast at 3.5% in 2024, but inflation risks remain high due to ongoing supply chain disruptions and persistent service sector inflation.
- Interest rates: Expected to average 4% through 2026, but could stay higher if inflation remains stubborn.
- 40% of EMDEs are vulnerable to debt-related stress, which could slow down growth if financial conditions tighten
- Trade growth: Projected at 2.5% in 2024, but fragmentation and geopolitical tensions could reduce this further.
Summary of Risks to Global Growth:
- Geopolitical tensions and trade fragmentation are critical risks that could disrupt global supply chains and trade flows.
- Inflation remains a major concern, with the possibility of persistent inflation forcing central banks to maintain high interest rates, which could dampen investment and growth.
- Debt vulnerability in EMDEs and climate-related disasters pose significant challenges, while slower-than-expected growth in key economies like China could impact global demand for commodities.
- On the upside, faster disinflation and stronger growth in the U.S. could help mitigate some of the risks, improving the global growth outlook.
Source: Global Economic Prospects June 2024 report