(Adds details, comment)
DAR ES SALAAM, March 6 (Reuters) - Tanzania's central bank cut its discount rate to 12 percent from 16 percent to help spur lending and boost economic growth, the first time it has lowered borrowing costs since 2013.
The cut, which the central bank said in a circular to commercial banks seen by Reuters becomes effective on Monday, follows a steep drop in private sector credit growth last year.
"The discount rate which is applicable to banks borrowing from the Bank of Tanzania as a lender of last resort will also be used to discount Treasury securities," the circular said.
Tanzania's economy is East Africa's second-biggest.
The International Monetary Fund warned in January that tight fiscal and monetary policies threatened its forecast for growth of around 7 percent in fiscal year 2016/17, which ends in June.
The central bank's decision to slash the rate it charges commercial lenders to borrow from it -- one of its main monetary policy tools -- should help unlock funding for key business sectors, analysts said.
The finance ministry has said the economy probably grew 7 percent in 2016, slightly less than the 7.2 percent targeted.
Lending to the private sector grew by 2.5 percent in 2016 after expanding 26.8 percent a year earlier, according to data from the central bank. New lending to the agriculture, construction, transport and communication sectors was dramatically curtailed after a spike in non-performing loans,
Donath Olomi, chief executive of the Dar es Salaam-based Institute of Management and Entrepreneurship Development, said the rate cut aimed to stimulate growth by encouraging banks to lend rather than investing in Treasuries and government bonds.
"The government also needs to issue a signal to boost investor confidence, which has fallen because of various actions by public officials that are seen to have undermined the sanctity of private ownership," he told Reuters.
President John Magufuli's government has unnerved investors since it came to power in Nov. 2015 by cracking down on tax avoidance and promising to review contracts.
Tanzania's mining ministry on Friday banned exports of copper concentrate and other metallic mineral ores with immediate effect, causing a plunge in the share price of London-listed Acacia Mining Plc.
Reporting by Fumbuka Ng'wanakilala; Editing by Duncan Miriri and Catherine Evans