Monday, March 4, 2024

Financial Stability Council says Covid-19, economic structure could affect stability in the long run

Botswana’s financial sector is not facing imminent financial instability but should the current impacts of Covid – 19 persist long-term stability cannot be guaranteed, the Financial Stability Council (FSC) has said.

The FSC was officially launched in February 2019 and comprises senior officials of the Ministry of Finance and Economic Development (MFED), the Bank of Botswana, Non-Bank Financial Institutions Regulatory Authority (NBFIRA), and Financial Intelligence Agency (FIA).

FSC held its meeting on August 25, 2020 to deliberate on recent developments in the country’s financial sector, as well as to address regulatory and public interest issues relating to the stability, performance, and prospects for the domestic financial sector.

At the meeting, members of the FSC noted emerging vulnerabilities and elevated risks within the domestic economy which requires close monitoring.

“These risks are associated with the structure and performance of the economy, as well as the impact of the Covid-19 pandemic”, said FSC this week.

Amongst other things, FSC singled out Botswana’s reliance on a single commodity (diamonds) for export earnings.

Before the arrival of the Covid 19 pandemic in the local shores, the diamond industry was starting to show signs of recovery from the past challenging three years. The Covid 19 outbreak however has hampered its recovery, dimming optimism, and threatening to push the domestic economy into a prolonged recession.

De Beers – Botswana’s long-time diamond mining partner ended 2019 with a flicker of hope after a slight uptick in rough diamond sales in what has been the company’s most challenging year since the 2008 financial crises.

The arrival of Covid 19, however, has affected global trade by rattling supply chains and pressing down on consumer demand.

The FSC also singled out, as one of the risks to the economy, bank lending that is dominated by credit to the retail and household sectors, including a significant proportion of unsecured personal loans. The council says Botswana’s household sector is vulnerable to sudden and sharp increase in borrowing costs.

Botswana’s accommodative monetary policy has been able to support credit growth albeit at a declining rate. Available official figures show that annual growth in commercial bank credit went from double digit growth between 2009 and 2014, and from there on, the credit growth pace has slowed to single digit growth. The annual growth rate has averaged 7 percent since 2015.

The recent data shows that commercial banks credit slightly decelerated to 6.4 percent in the second quarter of 2020, from 6.5 percent in the corresponding period in 2019. Still, the growth in credit was subdued in comparison to the 10.7 percent recorded in March 2020, partly reflective of the effects of COVID-19 on the demand for loans as the economy was on lockdown during that time.

As of May 2020, total credit extended by commercial banks was P63.8 billion, a record high.  A further breakdown of the data shows that about 63.2 percent of the loans is held by households while the share of business credit is 36.8 percent. Household loans increased by 10.1 percent in the twelve months to June 2020, compared to 9.7 percent in the corresponding period in 2019. The increase in household credit was, however, lower than the 15.1 percent recorded in March 2020. The large share of household credit is concentrated on unsecured lending, accessed through scheme loan arrangements, and motor vehicle loans.

In considering prospects for financial stability in Botswana going forward, the Council observed that the Covid-19 pandemic and the necessary disease containment measures will continue to have an adverse effect on economic performance in the short term.

The council says the Covid – 19 impacts elevate risks to financial stability, “In particular potential increase in default of bank loans and insurance premiums payments or contributions to pension funds, as well as early pension withdrawals emanating from loss of employment.”


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