In a bid to reduce rising costs of issuing Bank of Botswana Certificates (BoBCs), the Bank of Botswana has reduced the amount of the certificates issued to absorb excess liquidity with effect from the beginning of this month (November).
Responding to Sunday Standard enquiries on the recently adopted measures, the bank’s spokesperson, Andrew Sesinyi, issued a statement in which he explained that due to the recurring surpluses in the country’s balance of payments over the years, the domestic banking system has had excess liquidity.
He said since the 1990s, these funds have had to be sterilised by issuance of BoBCs in an effort to support a level of interest rates at any point in time that would promote financial savings and prudent lending.
“The Bank of Botswana continued to incur rising costs of issuing more BoBCs to mop-up increased levels of excess liquidity. It is, however, recognised that access to BoBCs could impede commercial banks’ initiatives to seek alternative bankable projects. After a careful review of the current market and economic conditions, the Bank has acted to encourage banks to look more towards financing viable projects that would support economic development and diversification, and reduce the level of outstanding BoBCs,” read the statement in part.
According to the Central Bank’s 2010 Annual Report, the total amount of BoBCs increased from P17.030 million in 2009 to P17.641 million in 2010.
Sesinyi said, given the circumstances of rising costs incurred by the Central Bank, a decision had been taken to reduce the amount of BoBCs issued to absorb excess liquidity, although he did not answer the specific question on how much interest the Central Bank had paid to primary dealers (commercial banks) since the weaning out of secondary a few years ago.
On the impact the decision would have on the mopping up of excess liquidity, he said it (excess liquidity) is to be absorbed through government treasury bills and bonds.
“The added beneficial effects of government securities include availing the opportunity for the general public to invest in government paper as well as distributing the income more widely,” said Sesinyi.
He added that as a result of the Central Bank’s direct action of November 2011, the amount of BoBCs outstanding has reduced by approximately P3 billion to about P10 billion.
The move by the Central Bank could hurt the commercial banks’ profit margins given that the banks have, in the past, gained handsomely from the interest paid on the outstanding certificates.
Attempts to solicit comments from commercial banks at the time of going to press were futile as the central bank’s statement was issued late Friday.