Transition to Interest Rate-Based Monetary Policy in Tanzania

As of January 2024, the Bank of Tanzania (BOT) has made a significant shift in its monetary policy framework, transitioning from a focus on the quantity of money (monetary aggregates) to an interest rate-based approach.

The newly adopted interest rate-based policy is designed to allow the BOT to influence economic conditions more precisely. By adjusting interest rates in response to changes in inflation, the central bank aims to achieve its primary objectives of price stability and sustained economic growth.

According to the Notice, under the new framework, the BOT will introduce a Central Bank Rate (CBR) consistent with low and stable inflation and conducive to the growth of the economy. The CBR will be used as a tool to influence the direction of monetary policy either a tightening or expansionary stance. The CBR will also be used as a guide or benchmark for determination of interest rates.

Pursuant to the Notice, the introduction of the CBR does not imply fixing of interest rates offered by banks and financial institutions. Commercial interest rates will continue to be influenced by market forces, reflecting the dynamic nature of the financial landscape.

Implications on Debt Finance Transactions

This shift in monetary policy, particularly the introduction of the CBR, carries significant implications on debt finance transactions, both locally and in the context of foreign loans. Here are key highlights to consider:

• Cost of Borrowing and Interest Rate Risk: The CBR will have a direct influence on the cost of borrowing in the country. If the BOT raises interest rates, borrowers with variable-rate loans could experience an increase in borrowing costs, impacting both existing and new debt transactions.
• Refinancing Considerations: Borrowers with existing debt may face legal challenges in the refinancing or rollover of their debt as interest rates fluctuate. Higher interest rates can result in increased debt servicing costs, potentially impacting the borrower's ability to meet financial obligations.
• Currency Risk (for Foreign Loans): In the case of foreign loans, changes in monetary policy can influence exchange rates. CBR differentials between countries can affect the attractiveness of a currency. Borrowers taking loans in foreign currency may face currency risk if the exchange rate moves unfavourably. This risk can impact the cost of servicing the debt in local currency.
• Credit Availability: Changes in monetary policy can impact the overall credit environment. Tightening monetary policy, often accompanied by higher interest rates, may lead to a more conservative lending environment. This could make it more challenging for borrowers to access credit, especially those with lower creditworthiness.
• Contractual Terms: Loan agreements often include provisions related to interest rates, and some loans may have floating or variable interest rates tied to benchmark rates. The adoption of CBR can trigger adjustments in the contractual terms of the loan agreements and some parties may opt to benchmark against the CBR going forward.

The shift to an interest rate-based monetary policy in Tanzania signifies a strategic move by the BOT to enhance its ability to steer economic conditions. Market participants, including borrowers, lenders, and investors, should closely monitor these changes and adapt their strategies to navigate the evolving financial landscape. As the BOT seeks to strike a balance between inflation control and economic growth, the implications for debt finance transactions underscore the importance of a proactive and informed approach in managing risks and opportunities.