Monday, September 28, 2020

Silver linings amid Covid-19 pandemic

Interest rates are at an all time low, but domestic businesses have found access to credit a bit tight, even forcing some to take a cautious approach to avoid on taking more debt due to uncertainties caused by the coronavirus outbreak. 

With bank rate at 4.75 percent, an all time low, there was high expectation that businesses will take up more credit to spur economic activity that has been thwarted by covid-19 containment measures. However, local firms surveyed by Bank of Botswana, perceived access to credit to be tight in the second quarter of the year but added that they will rather borrow from the domestic market than to seek funding from other markets.

For the mean time though, like in the previous survey, most firms preferred to finance their business operations mainly from retained earnings and loans, rather than using a combination of the two. Retained earnings as a source of finance was more prevalent among the mining and quarrying, manufacturing, water and electricity; trade, hotels, restaurants, transport and communications sectors. These are some sectors that have been hard hit by Covid-19 restrictions, making them risky clients.  On the other hand, most of the firms in the finance and business services sector planned to fund their businesses through loans.

According to the most recent financial statistics from the central bank, total credit decreased by 0.9 percent to P63.8 billion in May. The share of credit to businesses was 36.8 percent, same rate as in April, a reflection of stagnated credit flow to the firms. Annual growth in commercial bank credit was 7.8 percent in May, lower than the 9.9 percent in the previous month.

Besides slashing the bank rate in April, BoB also increased bank liquidity by reducing primary reserve requirements, while the government had issued loan guarantees for businesses that will seek to tap on bank loans during the lockdown that ended in May. 

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