Sunday, May 29, 2022

Botswana pays heavily for its monetary policy

The Central Bank’s monetary policy sharply came under criticism for enabling the local commercial banks to rip-off customers through huge interest rates while at the same time milking the country of billions of pula through Bobcs.

In his paper, entitled “Cost of Botswana Monetary Policy”, which is currently circulating within a close net of people, Professor Roman Grynberg charged that the tolls that are employed by Bank of Botswana have enabled commercial banks to profit 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.

He blamed the central bank’s Bank Rate, which he said acted as a price setter but the depositors were getting a raw deal on the other hand.
He pointed out that over the years, the 88-day deposit rate has largely become unattractive because the low interest that it offers compared to the prime rate.
The move, he said, has resulted in low saving culture in the country.

“What is important to note is that the ex post spread, i.e. what commercial banks are actually charging customers for advances minus what they are actually paying depositors, is significantly larger than the indicator or ex ante spread,” he said.

One of the issues that he took the central bank head on is the Bank of Botswana Certificates (Bobcs) that was introduced in 1991.

At the time of its introduction, the aim was to mop up excess liquidity in the market but now it has become a special preserve of the commercial banks as they are primary dealers. The Bobcs are risk free asset classes paying huge interest rate on 90-day basis.

“However, Botswana is unique in Africa in that it is a small open economy with a fully convertible currency and hence the use of traditional formula, i.e. the creation of Bobcs, has proven to be a very expensive intervention in the market, which is arguably unnecessary as market could have resolved the matter through nominal interest and exchange rate adjustments if it had been permitted to function,” he said.

He added: “There are very considerable direct costs 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.
“The costs are 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, that 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 11.0 percent to commercial banks on Bobcs.

“The nominal cost interest paid to commercial banks on Bobcs was P 2.06 billion in 2008 but the opportunity cost to BoB and the public was P 1.4 billion in 2008. By way of comparison, it is worth noting that this direct cost was slightly less than the government’s recurrent health budget of P 1.7 billion,” he added.

He said one of the indirect costs associated with Bobcs include lack of interest from commercial banks to fund business as demonstrated by the high rejection rate of loan applications.


Read this week's paper