Financial repression in Tanzania: its impact on savings, investment, credit and growth

The study analyses the genesis, growth and transmission mechanisms of financial repression in Tanzania and its impact on the Tanzanian financial system, the saving-investment process, credit availability and economic growth. The study establishes that in the process of implementing policies of financial restriction which aim at restricting the flow of financial system resources to the private sector in favour of the public sector, financial repression is generated. Firstly, financial restriction mechanisms involving the abolishment of free entry and competition in the financial sector, promotion of segmentation and creation of public sector monopolies in the financial sector, imposition of interest rate ceilings, rigid fixed exchange rate, and the maintenance of administrative credit allocation and controls and administrative foreign exchange allocation and controls are brought into play. Secondly, the operation of the financial restriction mechanisms produces inadequate generation of funds for the public sector from the financial system, inflation induced by inflationary financing of the public sector deficits, dependence on foreign aid, negative real interest rates and overvalued real exchange rates. Thirdly, the interaction of the effects of financial restriction generates financial repression. Financial repression in Tanzania has thus been closely related to the implementation of state policies which aimed at developing the public sector and restricting the growth of the private sector. Financial repression which had been identified in the seminal works of McKinnon (1973) and Shaw (1973) as resulting from distortions in financial prices which induce disintermediation and restriction of the saving-investment process is examined for its effects in Tanzania. An empirical analysis testing the crucial tenets of the McKinnon-Shaw hypotheses within the Tanzanian setting has revealed the following conclusions. Firstly, implicit financial repression tax revenue defined as the resources expropriated from the process of financial intermediation, reflecting expropriation of the flow of financial resources from ultimate savers to ultimate borrowers dominated by the public sector has been quite significant. Secondly, interest rate liberalization resulting in an increase in the real deposit rate arrests disintermediation and facilitates an increase in savings intermediation and credit availability to previously unpreferred groups, as well as an increase in private sector and aggregate national savings. Thirdly, the effect of the Tanzanian financial system on investment efficiency and economic growth is negative. This negative effect has resulted from an inefficient Tanzanian financial system. Fourthly, under an environment of exchange rate overvaluation, real exchange rate depreciation stimulates private and public sector savings as well as private, public sector and aggregate investment, investment efficiency and economic growth. Fifthly, the applicability of the complementarity and debt-intermediation hypotheses to the saving-investment process in Tanzania are positively established. The policy implications from the study thus suggest the need for intensifying the policies of liberalization in a coordinated and sustained way in sufficient depth to eliminate the problem of financial repression and bring about improvements within the Tanzanian financial system, the saving-investment process and economic growth. Phenomenon and the pH modulation of metabolism were found interesting and worth further studies.