Solomon Sekwakwa, the Permanent Secretary in the Ministry of Finance and Development, who is also a board member of the central bank on Tuesday, admitted to the Public Accounts Committee that there has been a financial liquidity squeeze in the domestic banking sector.
The confirmation by Sekwakwa was made in response to the Tati East Member of Parliament Guma Moyo’s request to put clarity to the liquidity contraction which he insisted is felt on the ground but is however viewed differently by the central bank.
The liquidity condition is an issue that had been sidestepped by the Bank of Botswana, perhaps out of the uneasiness that it might raise unnecessary alarms, or, even undermine the shrewd supervisory role it has proven to execute seamlessly for the many years that it has been in existence.
“There was or is for some time now a problem of liquidity contributed by various variables, and what BoB did to reduce the reserve rate requirement was in part to inject liquidity into the banking sector and to advice banks on gaps that the Ministry saw with the way that they manage. Our hope is to see continual improvement,” he said.
The central bank however is of the view that the description of the condition as a “crisis” is not rightly placed given that it opted to define the situation in a lighter and softer tone. It asserts that the condition is a mere reduction and prospective drying up of excess liquidity, which the banking sector had become accustomed to in the years prior to the contraction of loanable funds.
“Liquidity in the banking system has decreased in the previous 2-3 years in the context of slow growth in deposits together with relatively faster growth in credit expansion” states the 2014 BoB annual report.
The report however indirectly speak to the imbalance as a matter likely to result in a shortage of loanable funds thereby conveying the impression that the current situation has not yet come to that point, “beyond the current situation, the substantial decrease in liquidity could portend a transition to an environment in which banks require funding by the central bank. This is the case in most jurisdictions where markets are characterised by overall liquidity shortage; and open market operations predominantly involve liquidity injection by the central bank. Accordingly, given its role, the Bank will, as the need arises, adjust open market operations and invoke relevant instruments to accommodate system-wide liquidity shortage, while maintaining consistency with the monetary policy stance,” says the report.