FINANCE LAW UPDATE: COMMENTARY ON THE BANK OF TANZANIA’S POLICY MEASURES TO REMEDY AND CUSHION THE ECONOMIC IMPACTS OF COVID-19 IN TANZANIA
- Reduction of the Statutory Minimum Reserves (SMR) requirement to 6 percent
- Reduction of the discount rate to 5 percent
- Reduced haircuts on Government securities
- Regulatory flexibility ensured to Lenders who opt for loan payment rescheduling
- Increase of daily transaction and wallet size limits for mobile money limits
- Encouragement of Digital payment to curb the use of cash and bank branch visits.
- Continuous monitoring of the COVID-19 impact by the Bank of Tanzania
- Call for a complementary Fiscal Policy
On 12th March 2020 The Bank of Tanzania (“BOT”) issued a press statement explaining various policy measures approved to mitigate the adverse effects of COVID 19 on the economy. The statement follows the meeting of the Monetary Policy Committee of the BOT on 8th May 2020 which approved the policy measures. According to sections 12(5) and 12(6) of the Bank of Tanzania Act, 2006, the Monetary Policy Committee of BOT is expected and obliged to meet as often as necessary to determine the monetary policy of BOT regarding the major issues affecting the policy and provide its stand.
The measures are aimed at safeguarding financial sector stability and continue to facilitate the financial intermediation process.
Our Banking and Finance department at Breakthrough Attorneys has prepared this publication for purposes of informing the general public and interested stakeholders on the implications of each measure.
2.0 The sanctioned measures and their Implications
The BOT approved 6 policy measures demonstrated and explained herein below;
2.1 Reduction of the Statutory Minimum Reserves (SMR) requirement.
The bank has lowered the SMR from the pre-existing seven percent (7% to six percent (6%) effectively from 8th June, 2020. The BOT contemplates this measure to provide additional liquidity to banks. The SMR is a percentage of deposit liabilities of banks collected from the public.
Under section 44(1) of the Bank of Tanzania Act, 2006, banks and financial institutions are required to maintain minimum cash balances with the BOT as reserves against the deposit and other liabilities of banks and financial institutions.
This accommodative policy stance of BOT will contribute to a significant improvement in the growth of credit to the private sector amidst the COVD-19 pandemic.
2.2 Reduction of the discount rate.
The discount rate has been reduced from seven percent (7%) to five percent (5%). The discount is aimed at providing additional space for banks to borrow from BOT at a lower cost which will also allow banks to maintain reserve requirement.
In this context the discount rate refers to the interest rate charged to commercial banks and other financial institutions for the loans taken from BOT.
Section 41 of the Bank of Tanzania Act, 2006 provides that the Bank of Tanzania shall be the lender of last resort to banks that are solvent but illiquid. During this COVID-19 pandemic, Banks with reduced liquidity may borrow from the BOT at discount.
The BOT can influence the extent of money supply expansion by changing the discount rate. All else equal, if the discount rates are high, banks are inclined to borrow less. Thus, banks make fewer loans or reduce their investments so they can repay their loans from BOT, reduce the amount of reserves in the banking system and hence, the money supply.
In a current situation where the world’s financial sector is experiencing problems as one of the many effects of COVID-19 reduction of discount rates is a well-calculated move.
2.3 Reduction of haircuts on Government securities
Effectively from 12th May 2020 haircuts on government securities have been reduced from ten percent (10%) to five percent (5%) for Treasury bills and from forty percent (40%) to twenty percent (20%) for Treasury bonds. It is expected that the decrease will increase the ability of banks to borrow from BOT with less collateral than before.
The term haircut in this context refers to the percentage difference between an asset’s market value and the amount that can be used as collateral for a loan.
Section 40(1) (b) of the Bank of Tanzania Act, 2006 allows banks and financial institutions to acquire loans from BOT against the collateral of Treasury bills provided that the same matures within 180 days from the date of acquisition. Treasury bonds can also be used as collateral.
The decrease in haircut on government securities will ensure that banks, which hold treasury bills and Treasury bonds, use these securities as collateral as the value devaluation percentage is decreased.
2.4 Banks to thoroughly assess financial difficulties experienced by borrowers.
BOT has promised to provide regulatory flexibility to Banks and other financial institutions, which will carry out loan restructuring in a transparent and impartial manner.
In this BOT urges banks and financial institutions to consider the fact that borrowers may be facing financial difficulties which might lead to failure to honor their contractual obligation of repaying debts.
Therefore banks and other financial institutions are urged by the BOT to discuss the possibility of restructuring loans (moratorium) and grant payment rescheduling.
This approach can be used as an answer to the question of how the financial institutions and their clients in Tanzania can be able to protect their interests in loan agreements.
Some banks and financial institutions in the world are already offering loan payment rescheduling options to their borrowers. For example the Big Six lenders – Royal Bank of Canada, TD Bank, Scotiabank, Bank of Montreal, CIBC and National Bank of Canada – announced the coordinated effort on March 17th, 2020 to offer mortgage relief to customers suffering pay disruption as businesses grind to a halt.
2.5 Mobile money operators to increase daily transaction limit to customers.
The current daily transaction limit of TZS 3,000,000 to increase up to 5,000,000, and the daily balance limit of TZS 5,000,000 to increase to TZS 10,000,000.
This measure is aimed at encouraging the use of digital payment platforms thus reducing congestion at bank premises. Banks are also urged to encourage digital systems to conduct their transactions.
During this COVID-19 pandemic in which people are encouraged to stay home, the increase in daily balance and transactional thresholds, is expected to be of benefit to all members of the public and specifically to those with daily needs to make transactions of up to 5,000,000/= which was not possible to transact through mobile money. This also ensures money circulation in the economy.
2.6 The BOT to continuously monitor the impact of COVID-19
According to the Press statement, BOT has resolved to evaluate the impact of COVID- 19 to various areas of the economy and to take appropriate actions to limit such impacts. The BOT also instructs that all transactions in the country between Tanzanian residents to be in Tanzanian shillings.
A resident to complete their transactions in Tanzania shillings is used as a measure to avoid currency value fluctuations, which may be caused, by using foreign currency for transactions within the country.
3.0 Our Take and Call for Further Economic Strengthening
The implications of the fore-mentioned measures will mitigate the adverse impact of the COVID-19 to the Tanzania’s economy and more importantly to the financial sector. The policy measures will definitely boost liquidity in the market as well as support commercial banks with cashflow which in turn will be available for lending. Also, the BOT policy measure will give incentives to banks to avoid increasing loan interest. The implication is that money will flow from the BOT to individual banks leading to increased borrowing; hence there will be increased money circulation in the economy. Furthermore, BOT’s action to extend the limit on mobile money transactions and increasing wallet-size limits so as to encourage digital payments will immensely reduce the risk of spread of COVID-19.
Further, we are of the opinion that the Government should also devise a fiscal policy to complement the monetary policy on various sectors of the economy, which suffered the most. Some of these sectors include those in the hospitality industry such as tourism, aviation, hotels etc. The government may need to dish out more incentive in these areas such as tax cuts, tax deferments, extension of deadlines for tax filings and declarations, more provisions on tax exemptions, faster tax refunds, and so forth to align with the Hon. President’s speech on May 17th 2020 that “our economy comes first”.
Our take is that what Tanzania needs is a continuous business cash flow and such measures in fiscal policy may tilt the fortunes in the COVID-19 aftermath. They may also result in a higher rate of employment retention amidst the aftermath. The OECD reckons that as the world continues to contain COVID-19 and mitigate its aftereffects, adaptation to fast changing circumstances will be key in economic stability. Read more in their extensive article .
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