Sunday, May 29, 2022

BoB defends its monetary policy

Bank of Botswana (BoB) leapt to the defence of its Monetary Policy while at the same time conceding that local commercial banks are making “abnormal profits” that raise concern through lending interest rates.

The move by the central bank follows an article carried by Sunday Standard a fortnight ago that stated that local commercial banks were making a killing out of Bank of Botswana Certificates (Bobcs) and the lending interest rates.

The Sunday Standard article was based on Professor Roman Grynberg’s research that showed that, under the current tools used by Bank of Botswana, commercial banks are making huge profits from unbelievable interest rates while at the same time getting huge returns from Bobcs at no risk.
He said the huge interest rate spread have enabled the banks to ‘consistently earn higher rate of return on assets than their counterparts in Sub Sahara Africa during 2005/6 period.

“On the basis of the time commercial banking sector in the period under study can be described as super-normal,” he said.

However, this week, the Central Bank defended its tools used in its “effective monetary policy” such as the Bobcs and the setting of the Bank Rate, which it said have been successful in controlling excess liquidity in the market despite the fact that it has rarely brought inflation within its target range. The Bank said the issuing of the expensive Bobcs was a necessary evil given that when they were introduced, the country did not have Treasury Bills.

The Bobcs were introduced in 1991 as a form of mopping excess liquidity in the market but later were curved as a reserve for the chosen commercial banks – mostly British and South African owned banks.

“There is no question that there are costs involved in implementing an effective monetary policy, be it in Botswana or any other country; and ,depending on prevailing macroeconomic conditions, these costs can be substantial.

“In Botswana, the direct cost of Monetary Policy implementation is most clearly indicated by interest paid on outstanding stock of Bobcs. This is the direct result of the need to absorb excess liquidity that continues to characterise the financial markets,” the Central Bank in a statement that it put up in newspapers in response to Sunday Standard article.

“While imposing a cost, a direct counterpart of BoBCs on the Central Bank’s balance sheet is the acquisition of assets in the form of foreign exchange reserves. In turn, these reserves are then invested to yield the Bank additional foreign exchange earnings. At times, these may exceed the cost of issuing BoBCs, although this is not necessarily the case. The Bank’s own analysis of the past decade indicates that, overall, the net financial cost of issuing BoBCs has been modest.
However, it is important to understand that even when the cost of issuing BoBCs exceeds the return on the reserves, it cannot be concluded from this that the overall benefits are outweighed by the costs,” the Bank added.

Professor Grynberg had questioned the rationale of paying the local commercial banks higher interest rates than what the country through Bank of Botswana is getting from investments overseas in the form of foreign reserves.

He added: “There are very considerable direct cost of the current monetary policy. The most significant are the cost of interest paid to banks that have every symptom of earning very high profits by the standard of Sub Sahara Africa.

“Not only are the costs substantial i.e. 2.5 percent of the GDP in 2008, up from 1.1 percent in 1999,” he said.

He said the interest that is being paid to the banks comes from national assets being foreign reserves that constitute the bulk of the central bank’s interest earnings.

Between 2002 and 2006, he argued, the central bank was paying more interest to commercial banks than what it was getting from interest on Bobcs.

“.. .Bank of Botswana was paying more to commercial banks in interest payment on Bobcs than it was earning on the interest on foreign exchange reserves and therefore the BOB was running down those reserves in order to maintain its policy of open market operation,” Professor Grynberg said.
He said in 2008 BoB earned 3.64 percent interest on foreign exchange reserves while on the other hand it paid 11. percent to commercial banks on Bobcs.

The Central Bank further admitted that the cost of banking in the country was very high but insisted that the bank rate was necessary as a benchmark to guide the open market operations. It said there is concern on the wide margin between the deposit and lending interest rates but was quick to add that there is no direct relation to the issuance of the Bobcs.

The local commercial banks are the most profitable in Sub Sahara Africa and they also outperform a great number of those in Europe.


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