Thursday, October 6, 2022

Gaolathe says that there is a liquidity crisis

Contrary to what the Governor of the Bank of Botswana, Linah Mohohlo, said late last month, Gaborone Bonnington South MP, Ndaba Gaolathe, has come out to boldly state that the country’s banking sector is in dire straits.

Addressing a press conference last month, Mohohlo refuted claims that there was any liquidity crisis in local banks.

“I would like to underscore an important fact, and that is, the banking sector in Botswana is sound and profitable. Profitability has of course declined as expenses increased faster than income, and the situation varies from bank to bank. In the 12 months period to January 2015, the aggregate industry balance sheet grew healthily by 11 percent, with deposits growing by 7 percent and credit growing by 13 percent. A tightening of bank liquidity has been evident. What is key is that all banks continue to comply with the necessary requirements such as the statutory liquid asset requirements. Recent economic and market developments have had no adverse impact on levels of capital in the banking industry, with the aggregate Capital Adequacy Ratio at 19 percent as at January 2015, and above the prudential limit of 15 percent,” she told journalists.

That was not the impression of Gaolathe who is no lightweight in matters of high finance. Days earlier, he had noticed an urgent motion with the Speaker, Gladys Kokorwe, to, in his words “assist navigate the ensuing liquidity crisis in Botswana’s banking system.” The motion reads in full: “The current liquidity crisis in the banking system is compromising the ability of banks to lend money, as loanable funds have almost dried up even for credit-worthy borrowers. This ‘credit crunch’ is inhibiting economic growth or even job creation.┬áThe health of some key sectors of the economy is also at risk, with real prospects for retrenchments and widespread job loss.┬á

Hence measures that were implemented in response to historical excess liquidity need to be reconsidered in the light of changed conditions. Government and/or the Bank of Botswana should activate measures to ease the liquidity crisis.” As evident here, whereas Mohohlo’s statement plays down the incidence of a credit crunch, Gaolathe’s motion explicitly says that such condition actually exists.

Why the motion didn’t make it to the floor is an altogether different story that involves uncommon intrigue in the conduct of parliamentary business; of relevance here is that the MP and the central bank governor used diametrically opposed language to describe the same thing. In reaction to the latter, Gaolathe states: “The use of words to describe economic circumstances is relative. Part of her job, I suppose, is to manage any sense of alarm.┬á However, the liquidity situation in the banking system is serious enough to potentially harm the economy if not attended to in a timely and decisive fashion.┬á The crisis was already apparent, and could worsen if left unattended.”

At the BoB press briefing, Mohohlo announced a reduction of the Primary Reserve Requirement for banks from the current 10 percent to 5 percent which took effect on April 1, 2015, releasing approximately P2.3 billion to augment the commercial banks’ loanable funds.

As regards whether this is adequate, Gaolathe’s response is that at this point it is hard to say.

“The decision is significant though. The halving of the reserve requirement is significant enough to make some difference and to signal genuine intent to address the liquidity crunch. It also takes a bit of time to determine the real effect,” the MP says.


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