They were directed to immediately shift any deposits, by which is meant money that isn’t part of day to day departmental or corporate needs, for instance paying salaries or routine debts, to the Bank of Tanzania.
Treasury Registrar Lawrence Mafuru said the directive starts to apply right away, with just one account left by each entity in commercial banks for small transactions.
The measure has not come about hastily but has taken some time to be thought out and mapped out, for instance the fact that the president raised the matter in his early December meeting with top level ministerial executives, that is permanent secretaries and their deputies at the State House, well before he had even nominated the prime minister, or formed a cabinet of ministers.
Whether or not relevant departments and corporate entities have had time to prepare, or even need such time to prepare is a different matter. Indeed the queries coming up don’t relate to that side of things, but fate of the banks!
One interviewed expert working at the University of Dar es Salaam said that it wasn’t a very good idea to mop out government deposits from commercial banks, saying inter alia that placing large sums of money at the central bank where the executive has a free hand with it was dangerous.
This is a sort of normative issue, as to whether public funds are safer in commercial banks or at the central bank, and the jury shall still be out on that point. What the veteran economist also said was that the move could leave banks struggling to raise capital, in turn making commercial borrowing more costly for customers.
This latter observation is entirely valid but is easily met by the disclaimer, I am not my brother’s keeper, that it isn’t the work of the government to make it easy for commercial banks to operate, nor indeed for individuals to obtain loans from banks, by depositing money in lending institutions.
What is at stake is whether the government loses money in so doing, and indeed it does, for it borrows like any other individual, whereas by shifting deposits to the central bank, it eliminates the sort of liabilities that used to crop up more frequently and by wide payment margins. Deposits will boost government financing.
At least two other aspects or considerations can be cited, namely in the fact that the government is rapidly moving to recapitalize public productive institutions to the extent that it can, and doesn’t seem to be disposed towards rapid privatization of viable state owned commercial entities.
Using its own reserves as a new minimum from which the government can borrow without affecting currency value isn’t a bad idea, but as the Varsity economist says, this convenience has risks attached to it. When push comes to shove as they say, indicators that now run commercial financing starts losing value, blunted,
The government can certainly manage its deposits within the central bank without putting the currency in peril if it can exercise discipline that doesn’t have to be mediated by the fact that it borrows from commercial institutions.
It will still have to borrow from commercial banks at higher interest rates as banks are more selective, and is likely to squeeze the private sector even harder at that time, as the need to be sure that cash will be paid shall be even stronger now. Some pain is thus definitely in store.
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