Tanzania’s Central Bank prioritizes long-term bonds in restructured issuance plan

Tanzania’s Central Bank has made a strategic shift in its bond issuance calendar by prioritizing longer-term bonds, marking a departure from its previous focus on medium-term bonds. This change in strategy has already had an impact on Treasury yields in recent auctions, with a positive response seen in the market. To shed light on this significant development and its potential implications for the Tanzanian economy, CNBC Africa spoke with Imani Muhingo, Head of Research & Financial Analytics at Alpha Capital, live from Dar es Salaam. Muhingo explained that the decision to refocus on long-term bonds was driven by the underperformance of medium-term bonds in recent years. The Central Bank had initially opted for medium-term bonds in response to inflationary pressures, which led to lower-than-expected collections from auctions. The market preference for longer-term bonds due to their higher yields further contributed to the lackluster performance of medium-term bonds. To address this, the Central Bank decided to restructure its issuance calendar, reintroducing longer-term bonds with higher coupon rates. By reopening bonds with higher coupon rates issued prior to 2022, the Central Bank aimed to boost fund collection in auctions. The move has proven successful, with significant collections in recent auctions amounting to nearly 27% of the total collection for the fiscal year. This shift to long-term bonds with higher yields is expected to have ripple effects on interest rates in the economy. As investors move towards long-term bonds, depositors may seek higher returns, prompting banks to raise deposit rates. Additionally, commercial banks, which have been heavily reliant on the bond market for funding, may face increased interest expenses if Treasury bond yields rise. This could lead to a rise in lending rates, impacting both businesses and individuals in the private sector. To mitigate the potential crowding out effect and support economic stability, the Central Bank has implemented measures such as a facility for commercial banks to lend to the agriculture sector at below 9% interest rate. This initiative aims to encourage lending to a key sector while exempting the lent amount from reserve requirements. The Central Bank has also adopted an interest rate-based monetary policy framework, setting the policy rate at 5.5% with room for intervention if rates exceed 7.5%. Monitoring the market reaction to these changes will be crucial in the long run. Key indicators to watch include auction collections, interest rates, particularly interbank rates, and the response of deposit and lending rates. The focus will be on how the shift to long-term bonds impacts liquidity levels in banks and overall interest rate dynamics in the economy. With the recent success of auctions and positive market response, the Central Bank’s strategic shift to long-term bonds appears to be a step in the right direction for Tanzania's financial market.