by Dr Hildebrand Shayo

Should Tanzania be concerned about the UK and USA’s banks’ hike in interest rates?
When the Fed in the US or the Bank of England raises interest rates, what happens To Tanzania? Is Tanzania secure, bearing in mind the government’s commitments and government repayment to loans on the table, given like any other nation has borrowed from international financial institutions that use hard currency? If any further financial commitments and repayment are necessary, were these interest hikes anticipated in the nationally approved 2023/24 national budget? If not, how will this increase in interest rates affect Tanzania’s economy, which is already struggling to find enough dollars for imports of essential items like oil and other goods and services?

When the Fed or Bank of England raises interest rates, it is obvious that they intend to boost borrowing costs generally. The choice results in higher interest rates for everyone, raising the cost of loans for both businesses and consumers. Furthermore, this will result in a significant shortage of greenbacks, which will have an impact on many economies, including Tanzania, which depends on foreign exchange to facilitate trade.

Tanzania should be prepared to soon face the effects of US monetary policy, which will generally raise the cost of lending across the economy. Everyone ends up paying more in interest since higher interest rates make loans more expensive for both firms and consumers. Therefore, the crucial question is: Are we ready to withstand the sting of rising interest rates?

To ensure that everyone is on the same page, it is crucial to know for example that the US Federal Reserve on Wednesday 26th July 2023 increased its benchmark lending rate by 0.25% points to combat the US market’s prevalent above-target inflation. For the UK, the Bank of England envisaged hikes exceeding 200bps by year-end and a peak policy rate above 5% by early next year is something that cannot be overlooked in Tanzania. There are indications that the rate may be hiked higher to boost their economic prospects, according to the discussion that followed this US federal decision and the expected Bank of England decision rates scope.

Will this decision spare Tanzania, which like many other countries in the region is suffering from a shortage of the widely used trade currency, as evidenced by the recent shortage of the US dollar supply that prompted oil importers to voice their concerns to the government, even though this is likely to attract more investment into the US market?

Tanzania will have a difficult mountain to climb to manage the consequences of this rate increase. While it may seem like Tanzania should seriously consider increasing its domestic production by reviving its domestic industries that use local raw materials, or seriously consider switching over machines and engines that used imported oil to gas, or generally seriously consider achieving output that will mitigate this impact, this isn’t a one-day action.

As a nation, in my opinion, it is high time to face reality and accept that this shift would only strengthen the US dollar and damage other currencies, including the Tanzanian shilling. Changes in interest rates have an impact on how consumers and businesses access credit to make critical purchases and make financial plans. Even some life insurance policies are affected by it.

I do recognise that as a country we might be tempted to look to raise money through Euro bonds on the global market, but if this is going to be the only solution, we need to be ready because there will be significant charges with higher interest rates as the markets all over will react to the Federal Reserve decision.

In a way, our desire to create more jobs for young Tanzanians graduating from colleges and universities as well as those who want to start their businesses will be unable to obtain bank credit and likely be severely hampered by the gradual reduction in borrowing by businesses or the failure of new businesses to access credits at reasonable affordable rates.

When the Fed or Bank of England adjusts interest rates, it’s crucial to consider the effects on the economy, including lending and borrowing, consumer spending, and the stock market. My reflection aims to spark conversation about how we can assist the government in working with the central bank to find workable solutions because these changes will soon have an impact on how Tanzanian consumers will pay more for the capital needed to make purchases and when businesses will face higher costs associated with expanding their operations and funding payrolls.

The use of many strategies, in my opinion, including loans, swaps, exports of products and services, promotion of tourism, closer coordination of remittances, or attracting more FDIs, can help Tanzania overcome this difficult and challenging time in our development history.
While these actions may seem great, I believe there is one area that needs extra attention – specifically purchasing gold, that can be utilised as a hedge in this situation – but mistakes and lessons of the past when the government through the central bank was involved in purchasing gold must be considered.

It is more crucial for the government to set aside money to assist projects that promote exports and import alternatives. In this regard, policy banks like the TIB Development Bank or commercial banks can carry out the export guarantee plan, but caution must be exercised to prevent misuse by learning from lessons from the past where such government support was seriously mismanaged at the expense of Tanzanians.

Unquestionably, an increase in interest rates in the US or in the UK will induce or persuade investors to place their capital in equities and bonds and assets on the US market in search of big returns.

Changes in interest rates have a ripple effect on many aspects of the economy, comprising mortgage rates and consumer credit and consumption, and stock market movements. Nonetheless, due to the impact of interest rate changes on the global economy, most commodities traded on the international market, such as oil, will cause Tanzania to experience greater economic hardship if the proper strategies and actions are not taken on a timely and strategic basis.

My main concern is how interest rate instruments are being utilised while also thinking about what needs to be done to calm markets and prevent potential bank runs. I will go into more detail about this in the next issue and how strategically Tanzania can overcome this global challenge. But first and foremost, I worry that higher interest rates will increase pressure on Tanzanian banks, which will restrict lending. This will in turn undoubtedly damage small companies and businesses and other borrowers that seek sanctuary in this sector of the economy that is considered a major source of tax revenue for the government and importantly job creation for the army of young graduates from colleges and universities.