Motswedi Securities financial researcher and analyst Tlotlo Ramalepa believes the recent announcement by Bank of Botswana that the Primary Reserve Requirement for commercial banks has been reduced was a step in the right direction that will enhance liquidity. He spoke to, SUNDAY STANDARD financial reporter VICTOR BAATWENG.
VB: The Central Bank on Friday announced the reduction of Primary Reserve Requirement (PRR) from 10 to 5 percent. What is the possible impact of such a decision on the financial sector, consumers (household debt and inflation), and domestic economy? (Given the link the financial sector has to other economic sectors)?
TR: There has been an increase in loan to deposit ratio within the banking space, indicating that there is a liquidity squeeze. Therefore the reduction will enhance liquidity and the banks will be able to lend more to consumers. We do not anticipate any major impact on inflation by this development.
Because banks will have more to lend to households and the private sector, they will earn more interest income (which has already came under huge pressure due to the lower interest rate environment). This will ultimately propel the economy given that the financial sector is the fourth largest contributor to GDP (as according to the GDP Statistics for Q3:2014). The reduction will also succour other economic sectors as availability of funds will facilitate private sector growth through ease of access to funding, ultimately creating job opportunities.
VB: The Central Bank says it took the decision to ease the prevailing tight liquidity in the financial sector. Is the move sufficient or there are more monetary instruments that the Central Bank can implement?
TR: There was need to ease liquidity as we have seen the loan to deposit ratio within the banking industry reaching almost 90percent, hence the reduction of the reserve requirement ratio.
VB: Any further insight on the matter would be of great use.
TR: It is very important for consumers to note that the Central Bank is not only a regulator of the commercial banks, but also plays a major role in monetary stability, contributes to the financial and economic well being of the country. Thus it is our view that the reduction will assist banks and ultimately steer economic growth.