BoT's Director of Economic Research and Policy, Dr Joe Masawe
However, some quarters think differently, saying the national economy will not be immune from the impact of the first increase in nearly a decade.
The IMF Resident Representative, Thomas Baunsgaard, said on Friday that the country was not going to be directly affected because the national economy was still not very integrated into global financial markets.
However, he admitted that shocks of the 25 basis point increased would be felt over the medium term and called on the government to prepare for the shock by managing its borrowing prudently. Baunsgaard said a gradual increase in global interest rates would likely imply higher external financing cost.
“A gradual tightening of monetary policy in the US could affect both advanced and emerging markets to varying degrees. Still, the immediate global impact of the modest and widely anticipated increase in the US Fed funds rate has been limited so far,” he told The Guardian on Friday.
“Moreover, Tanzania is not likely to be directly affected. Tanzania is still not very integrated into global financial markets and for the same reason short term capital inflows have been relatively modest, mainly into some more actively traded shares on the Dar es Salaam Stock Exchange,” he added.
The IMF’s outlook is shared by the Bank of Tanzania (BoT) whose Governor Benno Ndulu also said the country would not be badly impacted by the development in the US economy. However, he cautioned that there would be escalation of the national debt and local currency volatility as feared in some quarters if the government does not restrict commercial borrowing.
Some local experts and many international analysts believe that African economies are the most vulnerable to fiscal and monetary risks from the US Fed rate increase.
They said the raise of the interest on Wednesday did not augur well for the global economy hence many emerging markets and poor economies have good reason to be worried. According to them, many companies and governments in developing and poor countries borrowed heavily in dollars over the last decade because rates were low.
Servicing the debts under the new austere monetary atmosphere would cost more and future borrowing will be more expensive, they argue. The other major victim of the development will be local currencies already suffering from a strong US dollar and reeling from the on-going commodities crunch.
The US Federal Reserve raised the range of its benchmark interest rate by 25 basis points to between 0.25 and 0.50 per cent, the first hike in nine years.
“The cost of money will go up by the amount of the rate increase. Loans will be more expensive. This is not good news to borrowers, including Tanzania,” Prof Honest Ngowi of Mzumbe University told The Guardian on Saturday.
Prof Ndulu said the mitigation of the hike shocks will also see the central bank continue maintaining its tight monetary policy stance to ensure the shilling is not affected by the new changes as well as encouraging more exportation for foreign exchange generation.
To lure investors, who are expected to be attracted more by the impressive rates in the US, Prof Ndulu said Tanzania will continue improving its investment environment especially in the country’s abundant natural resources.“We used to borrow from capital markets since they had lower rates. Now since US has decided to raise its federal rates, we will reconsider accessing financial support from multilateral sources such as the African Development Bank, IMF and the World Bank,” he told The Guardian yesterday.
He said concessional borrowing, which attracts very small interest rates, was the only way to keep the economy stable under the unfolding circumstances in the global economy.
According to him, the national debt risk is addressed by the fact that 60 per cent of it was concessional loans. Tanzania’s other main debts are from bilateral lenders such as China whose interest rates are fixed.
Prof Ndulu said less than five per cent of the debt was obtained from commercial sources such as international capital markets. He recently said that the debt was sustainable based on the latest debt sustainability analysis, a view that is also shared by the IMF.
“The external debt held in US dollars accounts for 54 per cent of the total external debt, followed by EURO, which holds 22 per cent of the total external debt,” Treasury says in the Quarterly Pubic Debt Report of March 2015.
According to it, the exchange rate risk in the external debt portfolio is highly dependent upon US dollar and EURO currencies movement relative to the local currency. The report also has it that concessional multilateral loans have been the major source of external financing, accounting for 57 per cent of the debt.
Tanzania borrowed than never before during the 10 years of immediate former President Jakaya Kikwete leading to the public debt to hit 40.7trn/- by September.
The alarming appetite to borrow saw the national debt increase by 30.1/- of what it was in July 2005 with most of it being external debt. According to the latest monthly review of the national economy by the Bank of Tanzania (BoT), the external debt reached nearly US$19 billion in September.
On Thursday, BoT’s Director of Economic Research and Policy, Dr Joe Masawe, was quoted saying that Tanzania was prepared to meet the challenges of expected capital outflow and higher borrowing cost after the US Federal Reserve raised interest rates.
According to him, there was likelihood of capital outflows from emerging and poor economies as investors seek higher returns in the world biggest economy, which is expected to lure investors after the hike.
Dr Masawe said the net outflows of capital will stir up demand for US dollars, which will in return pile more pressure on the shilling that has been freefalling most of this year. He was however optimistic that the level of the outflows would be lower compared to Uganda and Kenya’s whose capital accounts are more liberal.
SOURCE: THE GUARDIAN