The International Monetary Fund’s latest World Economic Outlook projections for 2020 pegs Tanzania’s GDP growth rate at 2% in 2020 from 6.3% in 2019. They attribute this likely economic slump to the adverse effects of COVID 19 pandemic on the global economy.
Further, the crediting rating agency, Moody’s, in its annual report for the first quarter of 2020 has also rated Tanzania at B1 negative (being a high-risk economy), due to being constrained by very low-income levels, a relatively weak institutional framework, and vulnerability to exchange rate volatility due to its high foreign currency denominated debt.
Irrespective of the above projection and overview, the Government of Tanzania is confident that its flagship infrastructural projects, including the Standard Gauge Railway (SGR) and the Julius Nyerere hydro-power plant which is planned to generate 2,115 megawatts, which are singly the largest contributors to growth in Tanzania, coupled with its reluctance to take drastic measures during the COVID 19 crisis, such as imposing a countrywide lockdown, will be the bedrock for sustaining and cushioning Tanzania’s economic resilience during these challenging times. This position is also amplified by the Bank of Tanzania’s (the BoT) monthly economic review for May 2020 issued on June 2020, which among others, indicate that (1) inflation remained low from 3.4% to 3.3%, (2) two bond auctions conducted by the BoT in April 2020 were both oversubscribed and, (3) the value of exports of goods and services increased to USD9,982.8 million in the year ending April 2020 from USD8,618.4 million in the corresponding period in April 2019.
However, on the ground, the government’s economic narrative may be interpreted differently. This is because the economic impacts of COVID 19 are clearly evident amongst all economic groups in Tanzania, that is, the high, middle, and the lower classes. This can be seen from the disruption in various sectors, most notably, the tourism and hospitality sector, the transportation sector, and overall, the supply chain.
For investors trading in shares at the stock market, that is, the Dar es Salaam Stock Exchange (DSE), they too, have not been left behind by this economic downturn, as evidently trading of these financial instruments has also been negatively affected. This is indicative in the month of May 2020 when the DSE’s total equity turnover plummeted by 73.4 percent as a result of a global shakeup due to COVID 19.
To get a better perspective of how Tanzania’s only stock market has/is performing so far, no transaction (equities market turnover) were recorded at the DSE on 5 June 2020, which is a clear sign of poor liquidity in the market. This uncertainty means slower business and less recoup by investors of the stock market value chain, undoubtedly resulting in loss of jobs and closure of businesses.
What this means is that financial instruments, more specifically shares that are traded at the DSE, are currently unappealing in view of the risk factor and volatility of these instruments, compelling investors to look elsewhere for better return and less risky investment.
This now brings us to why government securities at this point offer a better option for investors and a guaranteed coupon return.
What are government securities? These are capital debt instruments, which are in the form of treasury bonds or treasury bills issued by the Government of Tanzania, through the BoT, to investors with a promise of periodic interest payments and to repay the face value on the maturity date. Government securities are issued for purposes of raising funds for government expenditures. These are considered risk free since the government can, if necessary and at its discretion, print additional currency or raise taxes in order to redeem the bond at maturity. As opposed to other financial instruments traded at the DSE which are reliant on a listed company performing well and declaring profit, income derived from a government bond in the form of interest is guaranteed and issued irrespective of the volatility in the market.
Treasury Bond is a long-term debt security, ranging from 2 years to 20 years maturity period, issued by the government to investors on a price discount with a promise to pay periodic interests and face value upon maturity of the bond. Bond maturities are from 2 years with 7.82% interest, 5 years with 9.18% interest, 7 years with 10.08% interest, 10 years with 11.44% interest, 15 years with 13.5% interest, and 20 years with 15.49 interest.
Treasury Bill is a short-term security, with less than a year to maturity, issued by the government to investors at a discount but without interest payments. Treasury Bills have a maturity period of 35 days, 91 days, 182 days, and 364 days.
For an investor wishing to invest in government securities, they can do so in two (2) ways, that is, through the primary market or secondary market. In the primary market, one needs to open a Central Depository System’s account at the BoT through an investor’s commercial bank who will be a licensed broker. Alternatively, an investor can purchase government securities at the DSE through a licensed broker, this is called a secondary market. An investor will deposit funds with the broker after calculations of desirable bond prices and, and the broker will participate either in the BoT auction to buy the government securities in the primary market, or on the DSE to buy the government securities in the secondary market.
Note: This is not a legal opinion and the contents hereof are not meant to be relied upon by any recipient unless our written consent is sought and explicitly obtained in writing.
