Tanzania: Measuring the Effect of Declining Private Sector Credit on Economic Growth


INVESTMENT, big or small, is remarkably vital to economic growth.

Private sector investments mainly represent a large share of total investment in many market economies. The supply of credit to the private sector is therefore one of the basic characteristics of an investment, without which it is especially difficult for companies or other related economic agents to apprehend it.

Therefore, it is important to ask what positively affects private sector credit and what affects the other way around. The 12 / March / 2021 daily pg16 on its business and finance section published a caption discussing declining credit to the private sector.

This discussion prompted me to think about things that could be the root cause of this poor credit extension and whether the causes are external or internal. Inspired by the need to avoid possible factorial biases concomitant with causes that could have contributed to a low contribution, reminded me of the work of the famous Schumpeter, who promoted the concept of growth driven by finance.

Because of his views, the debate on the role of finance in economic expansion has been ongoing, especially in developing countries, where the role played by the private sector is essential to the development of the economy. The main role of commercial intermediation in an economy is largely performed by the financial sector, which channels savings into productive investment.

Within this equivalence, deposit-taking institutions in particular are well known to play the crucial role of fundraising to support private sector consumption and investment in Tanzania.

In order to bring the discussion to the same level of understanding, and in the context of the mapped picture on extending credit to the private sector as mentioned in the paper, credit to the private sector refers in my opinion to the financial resources provided. to the private sector, such as loans and advances, purchases of non-equity securities, trade credits and other accounts receivable, which establish a demand for repayment.

In this regard, credit can be viewed from two angles; namely: commercial or commercial credit and the credit of the banking system. To my non-economist, trade credit refers to transactions where the supplier delivers goods or performs a service without receiving immediate payment.

But to be precise and precise, the views expressed here will focus on the banking structure of credit to the private sector, which involves the direct provisioning of loans and overdrafts to the private sector by institutions, such as deposit banks, interest-free banks and commercial banks. to try to explain what happens to the long-term economy when the extension of credit is confined to the ground or is raised to the sky.

In my opinion, in any defined economy, economic growth is the endless improvement in the ability to meet the demand for goods and services, resulting from an amplified scale of production, and to improve productivity, which means progress in products and processes which are typically measured over a certain period of time.

In other words, it is the magnitude of the annual percentage increase in real GDP over a certain period of time. There are various notions of economic growth and techniques for measuring it, but the main description is in terms of the growth of the long-term productive capacity of the economy, usually measured by the real growth of the gross domestic product.

GDP growth can be measured in terms of demand or supply. Long-term growth is mainly driven by productivity. When it comes to productivity, an economist by the name of Paul Krugman once said that productivity isn’t everything, but in the long run it’s almost everything.

This implies, in the longer term, that economic growth will be determined mainly by the factors that determine productivity, championed by the private sector. So why, when credit to the private sector declines, is of great concern, which in my opinion must go beyond the spillover effects reflected on companies related to covid-19.

Drivers of economic growth such as access to credit facilities, labor force, level of technology, etc. are factors that improve either the quality of outputs or the efficiency with which inputs are transformed into outputs.

Numerous realistic studies have established that the effective extension of credit has a positive and substantial effect on production and employment opportunities, while a low level of financial development and its inefficient credit system linked to the private sector modifies the economic growth.

A strong and inclusive financial system to support the private sector and micro-small and medium-sized enterprises in particular and the accessibility of investable capital play a vital role in the financing of projects and economic activities that would promote economic growth and development .

Indeed, access to credit improves the production capacity of companies and improves their growth prospects. Given the importance of credit providers in motivating the real sector, monetary authorities must ensure that their financial structure is healthy and dynamic. A vibrant, vibrant and well-functioning financial sector leads to a multitude of improved economic outcomes.

I have yet to happily come across an assessment and investigation into what led to the decline in the credit extension as shown in the daily log caption, dated 12/3/2021 pg. 16, but additional interpretations point out that in recent years the link between private sector credit and economic growth has been a major problem in economic discourse around the world and the collected theoretical work has been called into question on this issue.

According to the Bank of Tanzania’s monthly economic report for February 2021, long-term credit to the private sector increased by 513.8 billion / – translating into an annual growth of 2.6%, equivalent to 3.1 % recorded in December 2020. And, credit to the central government, which was done through a bank purchase of government securities, increased by 24.6 percent.

The summary of credit to the private sector by economic activity shows a growth in credit to personal enterprises, mainly micro, small and medium enterprises, transport, communications, hotels and restaurants. In terms of the personal segment, activities continued to dominate, followed by commercial and manufacturing activities representing respectively 34.8 percent, 15.3 percent and 9.7 percent of total loans outstanding.

In view of these ratios, the time may have come to conduct a study and calculate the effect of private sector credit on the country’s output. From such studies and analyzes, it will be easier to determine whether finance is the main constraint or catalyst for a country’s economic growth and development.

Using time series data four times a year that I consider accessible to the BOT or NBS, we could examine the short- and long-term connection between production and credit to the private sector that could help support a major structural disruption. desirable to revitalize the private sector credit growth, prime rate, gross fixed capital formation, ie an approximation of investment, government expenditure and nominal exchange rate.

My understanding is not sufficient to state that credit to the private or public sector has grown or contracted, but what does this mean for the economy in general and for the individual economy for small businesses? ? It is well known that the provision of private sector credit to major sectors of the economy holds great potential for stimulating economic growth.

Amid this potential, the banking sector, which is the main source of credit to the private sector, is an important channel of financial intermediation through which financial resources can be mobilized for productive investments.

If banks miss the mark to appreciate extending credit and instead invest in less risky areas such as treasury bills and treasury bonds, the private sectors will gain access to reasonable credit will remain a significant challenge. may not be healthy for private sector growth and the economy.

Therefore, there is a need to keep interest rates at levels that contribute to the nation’s growth goals by investing in a trustworthy private sector to do the best.

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