Bank excess liquidity decreased during the first quarter of 2020, falling from 6.6 percent of total assets in December 2019 to 5.1 percent in March 2020, Econsult latest economic review has shown.
From a lay man’s perspective, as a consequence of excess liquidity, market interest rates have stayed low.
This means it was cheaper for companies and people to borrow money during the April-June 2020 period, thus helping the economy recover from the financial and economic crisis, and allowing the banking system to build up liquidity buffers. This reflected the greater increase in bank lending as compared to bank deposits during the period.
Getting back on the 2020 second quarter economic review by economists Sethunya Sejoe and Kitso Mokhurutshe, which runs from April to June, the bank lending was valued at P64.6 billion in March 2020, up by 3.0 percent which is P1.9 billion from P62.8 billion in December 2019.
During the same period, bank deposits rose by 2.0 percent an equivalent of P1.5 billion, ending March 2020 with a value of P77.3 billion. “Banks also reduced their holdings of low return earning assets such as cash and treasury bills during Q1 which has also contributed to the reduction in excess liquidity,” shows the research note.
During the difficult times of countrywide lockdowns which were experienced in April-May, the Bank of Botswana also implemented monetary policy measures to support economic activity.
The Bank Rate was reduced to 4.25 percent, and both nominal and real interest rates are expected to decrease to reflect the policy changes.
Along with other bank interventions such as the three months holiday period for loans repayments which ran from April to end June: households and businesses were positively assisted as these initiatives eased their loan servicing burdens and reduced the cost of borrowing.
BoB also reduced the Primary Reserve Requirement Ratio from 5 percent to 2.5percent, thereby injecting liquidity into the banking system. Up to date the two researchers worried that data are not yet available, but about P1.6 billion is estimated to have been injected into the banking system.
Another notable change was the downward adjustment of the rate of crawl of the Pula exchange rate to an annual rate of -2.87 percent in 2020. Sejoe and Mokhurutshe said this supports the export competitiveness of locally produced goods.