BoB interest expenses hit all-time low
Mbongeni Mguni | Tuesday June 10, 2014 17:38
The 2013 figure is a far cry from the record high of P2.1 billion recorded in 2008 as well as the P913 million that the BoB reported in 2011 after it introduced several measures to rein in the stubborn trend. In July 2011, the BoB increased commercial banks’ primary reserve ratios and also capped Bank of Botswana Certificates (BoBCs) at P10 billion, as part of measures to restrain runaway interest costs.
At a briefing on the 2013 Annual Report yesterday, BoB management revealed that the central bank’s interest expenses reached new lows last year, on the back of several factors.
Traditionally, interest costs are the biggest expense item on the BoB’s income statement and their levels are closely scrutinised as they mirror the cost of monetary policy to the taxpayer.
“Our interest expense was down because we had a lower rate of interest on a smaller value of BoBCs,” explained the Bank’s head of Monetary and Financial Stability, Kealeboga Masalila.
By December 31, 2013, the stock of BoBCs was pegged at P5.5 billion from P8.7 billion the year before, while BoBC yields fell from 4.66 percent at the beginning of the year to 3.06 percent, due to the 200 basis point drop in the bank rate.
Masalila said the stock of BoBCs declined last year due to a lower need for the central bank to mop up excess liquidity in the market.
Through the weekly and 91-day auction of BoBCs, the Bank influences liquidity conditions in the domestic money market. This, in turn, maintains short-term market interest rates in line with the monetary policy stance.
For banks, the BoBCs represent regular, risk-free assets in which to invest deposits held and earn tidy returns.
“There was a lower level of excess liquidity in 2013 or conversely, we can say there was a higher rate of financial intermediation, or the translation of deposits into loans,” Masalila said.
“The lower liquidity was also associated with a lower rate of increase in government spending during the year.”
He added that the BoB expected to maintain its accommodative monetary policy stance, which it adopted in 2012 after years of a neutral stance.
Where the neutral policy sought to neither over-stimulate nor unnecessarily slow the pace of economic growth, the accommodative stance seeks to counter waning economic growth by reducing interest rates.
This subsequently boosts credit output and supports aggregate demand. Although lending to businesses shrank last year, the BoB expects a ‘lagged impact’ of the interest rate reductions via stronger business borrowings this year.