From December 11, the Primary Reserve Ratio or PRR, which is a proportion of deposits banks are required to keep at the BoB in order to manage liquidity or cash flows, will be reduced from a rate of 2.5% to zero.
The move will allow banks to have access to an additional P2.1 billion for lending activities, as a liquidity crunch first noted as far back as May, deepens.
Debswana and consequently government are both experiencing a sharp drop in revenues due to the prolonged downturn in diamonds which stretches back to the third quarter of last year. The result has been lower spending by both and lower levels of liquidity in the banking sector where other depositors such as corporates and households are smaller players.
Debswana and the government are not only the single biggest depositors in the local banking sector but also major drivers of economic activity both directly and indirectly, through their spending.
According to central bank figures, liquidity, or the amount of cash available for banks to lend and cover other commitments, fell from P20 billion in May to P6.71 billion on October 8, to P5.19 billion on November 15. The latest figures, checked by the BoB last week, showed a liquidity level of P1.7 billion in the local banking sector.
“Government spending is a very important part of the liquidity of the banking system and if there’s no inflows of government spending into the banking system, it becomes an issue,” BoB governor, Cornelius Dekop told Mmegi during a briefing yesterday.
Asked what the central bank would do if the move to a zero percent PRR did not result in the desired effect on liquidity, the governor said the BoB had other tools at its disposal to boost liquidity in the banking sector.
“We have many tools for liquidity management and some of them will be last resort that we would not like to mention here, but they are available. “What we are doing is alleviating a situation, not solving a total problem. “If we don’t do this, the banks may start pricing their products differently which may affect the consumer. “Long-term structural liquidity can also affect the current financial stability we enjoy.”
The central bank is calling the current situation a “structural decline in liquidity” to reflect the fact that rather than being a temporary affair, the liquidity crunch has deeper roots.
“There has been a consistent decline and that’s why we call it a structural liquidity shortage,” deputy governor, Tshokologo Kganetsano, told Mmegi. “This is a signal to say what are the sources of liquidity in our banks or economy? One is government spending and another is Debswana sales. “To the extent that we have a downturn in the market and the government does not have the same buying power, we are seeing this situation. “This is the extent to which our economy is too dependent on an export commodity and on government, hence the gospel of economic diversification should be spread across.”
Meanwhile, draft estimates from the Finance Ministry show that the budget could suffer a P18.6 billion in the current financial year, the worst in history in absolute figures. As a percentage of GDP, the forecast shortfall is second only to the COVID-19 slump, at least in terms of deficits in recent years.
The latest estimate is more than double the P8.7 billion deficit initially forecast in the February budget speech.
The draft Budget Strategy Paper, an annual blueprint produced by the Finance Ministry as part of the budget process, also expects mineral revenues to drop to P8.7 billion from the original forecast of P25.2 billion.
The drop is largely due to the downturn in diamond sales.
“On account of the prevailing budget performance the revised outlook points to a significant mismatch between the anticipated expenditure and the relatively lower expected revenue. “To close this gap, additional stringent public expenditure control measures over and above those implemented in August 2024 are necessary to ensure fiscal sustainability in the short-term,” notes accompanying the draft estimates read.
In August, the government announced that it was slashing spending on travel, conferences, new vehicles, and other non-core items, while also delaying some development budget projects to later in the financial year with the hope that diamond sales would have recovered.
In its latest update, the Finance Ministry said there was a “pressing need to introduce further interventions” in the upcoming financial year in order to “steer the budget towards a sustainable fiscal path”.
The measures include improving the efficiency of spending around projects, reprioritising some planned public works as well as boosting domestic revenue mobilisation and tax collection. The Finance Ministry added that measures would be taken to clamp down on corruption and wastage.
While no plans have been detailed on how the wider deficit will be financed, the government has stepped up its local market borrowing this year, having increased its domestic debt ceiling in February to P55 billion from P30 billion.
The latest update did not provide forecasts on the performance of the economy this year, but the draft estimates said growth would be “significantly lower than the earlier projection of 4.2 percent”.
For its part, the BoB on Thursday said the local economy was expected to contract this year and “moderately recover in 2025”.
