Dar set for Fed rate hike shocks

TANZANIA is prepared to meet the challenges of expected capital outflow and higher borrowing cost after the US Federal Reserve raised interest rate on Wednesday.

The Bank of Tanzania’s Director of Economic Research and Policy, Dr Joe Masawe, told the ‘Daily News’ in Dar es Salaam that there was likelihood of capital outflow from emerging as well as developing economies as investors will seek higher returns in the US, which is expected to become a more attractive investment destination after the rate hike.

According to him, the net outflow of capital will stir up demand for US dollars which will in return pile more pressure to local currencies.

He, however, said Tanzania had low probability for net outflow of capital than their neighbouring Kenya and Uganda because it has not yet opened fully its capital account to foreign investors.

“Effects to Tanzania will be muted compared to Kenya and Uganda because there are still restrictions in the capital account,” he said in an interview. Tanzania has partially liberalised its capital account to allow East African Community (EAC) residents to participate in the Dar es Salaam Stock Exchange (DSE) securities and to a limited extent in government securities.The East Africa’s second largest economy expects to fully open the account by the end of the year to join neighbouring Kenya, Uganda and Rwanda who have opened their capital accounts fully.

Dr Massawe explained that despite the low probability of capital outflow in Tanzania, there were possibilities the effects of the problem in neighbouring countries may spill to Tanzania.

He said the developments in the US had led them come up with precautionary clause to protect the economy when the capital account is fully liberalised. One of them will be a clause that will limit foreigners from buying treasury bills whose maturity period is less than a year.

“There will be speed bumps to avoid excessive volatility of capital which destabilises microeconomic stability,” he said. He noted that the Fed interest rate rise may also lead to an increase in the cost of borrowing and as a result investors will become more wary of taking up risks.

“Accessing international capital will be more costly. Investors would seek higher premiums and hence the cost of borrowing will increase,” he said. Professor Humphrey Moshi of the University of Dar es Salaam told the ‘Daily News’ that the US rate rise would not pose big risk to Tanzania and African countries because US trade and investments in Africa was not that big.

“US footprint to Africa’s economy is not that big compared to China for instance, hence the risk remains small if the rate rise does not lead to strengthening of the dollar,” he said.

The US Federal Reserve has raised short-term interest rates for the first time in nearly a decade, calling an end to the near-zero borrowing costs that have prevailed since the US was struck by the worst financial crash in modern times.

In a landmark step, the US central bank announced a quarter-point increase in the target range for the federal funds rate to 0.25-0.5 per cent, lifting it from the historic lows it has occupied since December 2008, when the US was mired in an economic crisis that would ultimately drive unemployment to 10 per cent.

/Daily News.