Liquidity squeeze halves BoB�s interest expenses
Brian Benza | Tuesday May 26, 2015 17:08
Due to a prolonged period of rapid credit growth, which was ushered in by the central bank’s cap on BoBCs, commercial banks last year found themselves short of loanable funds with their total investments in the mopping instruments often falling below the “tolerable” cap.
As part of its open market operations, the BoB regularly auctions BoBCs to mop up excess liquidity on the money market, thus managing interest rates and other trends. For banks, the BoBCs represented regular, risk-free assets in which to invest deposits held and earn tidy returns.
Addressing the media in Gaborone yesterday, director of monetary and financial stability, Kealeboga Masalila said a combination of the cap in BoBCs as well as the lower interest rates regime contributed to the fall in the interest payments to the commercial banks.
“Interest expenses last year fell 46 percent to P196 million from P369 million in 2013.
“The lower interest rates environment as well as the cap to P5 billion on the amount the commercial banks can invest in the liquidity mopping instruments contributed to the fall in interest payments,” he said. Interest costs have always been the biggest expense in the BoB’s income statement and their rise over the years has drawn criticism from experts who questioned the bank’s policies.
Since 2011 the central has thus gradually reduced the amount that the banks can invest in the risk free instruments.
The policy intervention was aimed at reducing the interest cost the BoB was paying on outstanding BoBCs by firstly limiting the liquidity held by banks, and secondly, reducing the amount of BoBCs available for auction. In the past five years, excess liquidity in the banking system, as represented by outstanding BoBCs, has thus declined from P17.7 billion as at end-2010 to P4.6 billion in February 2015.
Similarly, the central banks’ interest expense has followed a downward trend, falling from the peak of P2.1 billion in 2008 to P1.3 billion in 2010 before falling further to P 913 million in 2011.
As a result of the liquidity squeeze, the central bank’s role in the open market operations has been reversed from liquidity mopping to provision.
In April, the central bank halved the primary reserve requirement for banks to 5 percent to unlock P2.3 billion in loanable funds.
While the central bank governor has urged banks to direct more efforts towards deposit mobilisation and financial inclusion, industry officials say that other measures may be necessary to encourage more deposit inflows into the banking system as a whole, rather than just competition between banks to reshuffle existing deposits.
“This could include encouraging deposits from non-residents, or stimulating the transfer of resident deposits from foreign currency accounts (FCAs) – which account for around 15% of total deposits - to Pula accounts,” analysts reckon.
Meanwhile, Masalila said the central bank net income also took a knock in 2014 to P4.1 from P7 billion in 2013, due to lower currency revaluation gains as the pula depreciation by lower rates.
The BoB however recorded a higher net income to government of P2.4 billion from P1.5 billion in 2013 as the central banks reduced the reserves for currency revaluation.