Bank of Tanzana's capping strategy works

BoT's Governor Prof Beno Ndullu
The Bank of Tanzania (BoT) seems to have succeeded in capping interest rates, a good step that will entice back money traders and bring the market into equilibrium.

Through capping, overnight trading rates have recently dropped to trade between one and 12 per cent levels while exchange rates have not gone beyond 1,610/- a dollar. “The BoT seems to be succeeding in keeping a cap on rates… liquidity has continued to improve,” Standard Chartered Bank said over the weekend on its Daily market report.

The bank added: “Overnight rates have come in lower trading at 1 per cent and 12 per cent levels. We expect auctions to be well received and demand to move towards the far end of the curve”.

The overnight, a window through which banks borrow from each other, reached a 10-year high rate following tight money measures to contain the falling value of the shilling and high inflation rates.

On average, the rate hit 35 per cent at the first week of January, which was the highest since the financial sector was liberalised over ten years ago when the rate was around 5 per cent. After recording an all-time low against the US dollar in October, the shilling jumped back lately, ending the week trading at between 1,590/- and 1,609/- against a greenback. Last October the shilling wobbled past a 1,800/- mark.

The strength of the shilling has been attributed to the central bank’s intervention and strategic pegging of the exchange range for oil importers, thus easing market speculations. The BoT move is to enable oil importers buy at an affordable exchange rate because the sector’s demand for dollars is huge, thus affecting the shilling movement.

Foreign exchange analysts argue that without the high demand of the oil sector on the interbank, needs in other sectors for the foreign currency match very well with the current supply. “The shilling continued trading relatively flat yesterday on the back of matched flows in the interbank and corporate markets,” Standard Chartered Bank said.

Mid last October, the central bank announced several measures to curb the shilling down-spiral trend and high inflation rate that was derailing some of macroeconomic fundamentals. The measure included the reduction of the core capital of foreign exchange dealers from 20 per cent to 10 per cent to facilitate the release of more foreign exchange into the market to strengthen the shilling.

The central bank also raised discount rate—commercial banks’ borrowing rate to BoT)—by 200 basis points to 9.58 per cent to mop up excess money from circulation, resulting in lower inflation and a stronger shilling. The bank increased cash reserve
requirements on government deposits from 20 per cent to 30 per cent.

This means that the BoT holds 30 per cent of all customer deposits at commercial banks to reduce money circulation in the market. As the results of tight liquidity measure, money in circulation dried up, pushing interest rates on overnight, government securities, and commercial loans up.

However, stock brokers said the high coupon rate for government securities are affecting the equity market dearly because on average dividend rates are around 10 per cent compared to over 15 per cent of debt instruments. “Investors will migrate to debt and fixed security incomes because of the high yields offered and on top of that are risk-free instruments”, Tanzania Securities Business Analyst Joel Nkya said.

To mobilize deposits, Mr Nkya said, banks have started to offer very competitive rates on fixed deposits.
Source: Business Standard,www.dailynews.co.tz, reported by Abduel Elinaza
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