Wednesday, January 27, 2021

The constrained economic state indicates that the consumer is under pressure

These are tough times, in which the consumer is hamstrung and faces a situation where there are limited choices for the use of money. The household is also narrowing as demonstrated by a slowdown in activity. One does not need to look far for the causes of sluggish activity in the household sector. Unabated, unemployment continues to gnaw a hole through the economy. Workers have not experienced a real wage increase in the past five years and debt continues to grow as an alternative source of income.

The odds are stacked against consumers and there exist limited options to escape the mounting pressure. The 2014 Bank of Botswana supervision report indicates that the public prefers to hold cash as opposed to saving it in banks. According to the report, the cash to M2 ratio, which is a measure of liquidity preference, increased from 25 percent in 2013 to 27 percent in 2014. The preference to hold cash over savings could be clear indications that, with all the competing uses of money in today’s world, consumers end up with nothing extra to deposit in banks as savings.

Pressure on the consumer has been growing increasingly over an extended period of time and now seems to be causing immense strain. The BoB banking supervision report indicates that even though total deposits remained highly concentrated in the private sector as reflected by an increase in distribution, the household sector likewise experienced a marginal rise from 24 percent in 2013 to 25 percent in 2014. Analysis provided by experts highlights that the business sector is equally strained, as indicated by the lack of expansion, deficiency of employment opportunities and minimal pay increases. This sluggish pace of the business sector comes back to the consumer, given that it reflects among other things the lack of real wage growth. The restrained possibility of wage growth means that consumers inevitably become trapped in seeking alternative sources of income to meet their ever increasing cost of living. The report cites that total credit to the household sector was P25.2 billion, which represented 55.8 percent of total loans and advances.

“The unsecured personal loans constituted the largest proportion of loans to the household sector, at 60.4 percent in December 2014; down from 62 percent in December 2013. This was followed by mortgage and motor vehicle loans at 30.5 percent and 5.7 percent, respectively,” states the report.

On the other hand, the local research and stock broking firm, Motswedi Securities has predicted that there is potential for a further bank rate cut.

“Our forecast is that September inflation reading will come out even lower, falling below three percent following the downward review of fuel prices early this month,” states Motswedi Securities.

The reduced cost of borrowing which would result from a bank rate cut would be a positive prospect to the business sector as it would favourably induce productive activities. The positive effect is also expected to trickle to consumers.

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