The Bank of Tanzania’s (BoT) decision on New Year’s Eve to adopt market-determined coupon rates for government bonds is expected to boost market activity and attract greater foreign investor interest, analysts say.

The move, which replaces fixed rates with those influenced by supply and demand in the secondary market, is designed to enhance liquidity, improve price discovery, and ensure market efficiency.“This is pivotal for financial market development in Tanzania,” the BoT said. “Prior to this change, coupon rates on government bonds, once set, remained unchanged for multiple auctions over a considerable period, leading to misalignment with prevailing market conditions.”With this policy shift, Tanzania joins Kenya in adopting market-determined secondary bond rates, a system credited with invigorating domestic debt markets and increasing participation from both local and foreign investors.

Analysts predict the change will significantly boost investor interest in Tanzanian bonds, providing the government access to more competitive bids and potentially reducing borrowing costs.“The government should be able to get in more money. I think they should see more investor participation in their primary markets,” said Wesley Manambo, a global markets analyst at Nairobi-based Standard Investment Bank.“For as long as rates are determined by the market, you’re attracting investors who value a system where rates reflect market conditions. Even if investors are pessimistic, they can push for higher rates.”The shift comes as Tanzania seeks to bolster its domestic debt financing, which has traditionally been low and dominated by local institutional investors such as commercial banks, pension funds, and insurance companies.

According to the latest BoT data, domestic debt stood at $12 billion (Tsh33 trillion) as of October 2024, accounting for just 26.9 percent of Tanzania’s total debt stock of $45.1 billion.

Bonds held by commercial banks, pension funds, insurers, and BoT’s advances to the government made up 84.6 percent of the domestic debt, leaving retail and foreign investors holding a mere 15 percent.

This scenario is likely to change following the policy shift.“Foreigners want a free-float market. A market that is determined by efficiencies and its inefficiencies,” argued Mr Manambo.

The International Monetary Fund, which is a key concessional lender to Tanzania, has been encouraging it to cut on commercial debt in favour of cheaper domestic and concessional loans, but progress has been slow.

In the year to October 2024, domestic borrowing improved by just $12 million, or 0.09 percent, while external loans rose by 13 percent to hit $32.9 billion. Most of the increase was in multilateral and commercial debt.

Tanzania’s reliance on external loans contrasts with its neighbours, which have more developed local bond markets.

In Kenya, local borrowings account for 51 percent of the total debt stock, with government securities dominating the domestic debt market. Participation by local and foreign retail investors in Kenya’s primary bond markets has been on the rise since last year.

In Uganda, domestic debt constitutes about 41 percent of total borrowings, while in Rwanda, it stands at around 27 percent. Both countries demonstrate stronger performance in local bond markets compared to Tanzania.

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