Sunday, May 9, 2021

BoBCs cost Botswana economy ÔÇô Magang

A macroeconomic book written by former cabinet minister now businessman, David Magang has challenged the importance of the Bank of Botswana Certificate known as BoBCs.

The Reserve Bank introduced BoBCs in 1991 with the intention of limiting the amount of money in circulation in the country. The move was also a strategic and a proactive check on domestic inflation as it provided an incentive for commercial banks to keep a sizeable portion of customers’ deposits at the Central Bank while earning a reasonable return.

Available figures show that by May 1991, the value of BoBCs was pegged at P200 million, reaching the highest level ever of 19.9 billion in 2010. The 2010 value translated into 97 percent of total deposits. Money market figures also shows that before the record figures registered in 2010, the banking sector was characterised by excess liquidity, super normal profits and low deposits rates. The trend was associated with making savings ‘unattractive’ to depositors as banks paid low interest rates. The Bank of Botswana however intervened with new regulatory changes resulting in what economic experts describe as ‘deposits’ and ‘credit growth’.

Last year Reserve Bank Governor, Linah Mohohlo confirmed that the she had decreased the amount of Bank of Botswana Certificates (BoBCs) issued for liquidity absorption. Excess funds were further sterilised by increasing the Primary Reserve Requirement in stages from 3.25 percent to 10 percent over the five-year period to 2011.

“These factors have contributed to the overall reduction of BoBCs from a peak of P20 billion in October 2010 to the current level of about P6 billion. Correspondingly, the proportion of deposits that were on-lent increased markedly, as reflected in the intermediation ratio, which rose from 46 percent in 2007 to about 80 percent currently,” Mohohlo said at the BOCCIM National Business Conference held in Maun last year.

However, given these figures, Magang says BoBCs have created more problems that they have mitigated. “Firstly, they have had the effect of dampening commercial bank lending to business in that banks were making more money from BoBCs than from the interest they earned from loaned out funds”

A deep look into the BoB figures shows that until 2010, commercial banks were heavily reliant on the BoBCs as a strong driver of interest income. As a result, in July 2011, the Reserve Bank increased commercial banks’ primary reserve ratios and also capped BoBCs at P10 billion, as part of measures to restrain runaway interest costs. Magang is of the view that the costs of BoBCs were exacting quite a financial toll on Bank of Botswana.
The book, HYPERLINK “https://www.facebook.com/hashtag/delusions?

source=feed_text&story_id=10153138471024096” Delusions?┬áof Grandeur, The Paradoxies and Ambivalences in Botswana‘s Macroeconomic Firmament, has its foreword written by former deputy governor at Bank of Botswana Dr. Keith Jefferies who is now running an independent economic consultancy firm. Also acknowledged as contributors to the books is Botswana Institute of Development Policy Analysis (BIDPA)-Senior Research Fellow, Professor Roman Grynberg as well as Associate Professor at the Department of Economics at University of Botswana Professor Brothers Malema.

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