Establishing the right business environment

SHARE   |   Sunday, 30 November 2014   |   By Linah K. Mohohlo

The Bank of Botswana is proud to be associated with BOCCIM’s biennial National Business Conference in many ways, including the tradition of hosting this very first event of the programme.

With its relevant and appropriate theme, “Opening Botswana to the World: Attracting FDI and Ensuring that Botswana’s Firms can Compete in the Global Economy,” this Conference will keep us engaged in exploring ways and means that can enable Botswana’s firms, both domestic and foreign, to compete successfully in the global economy.  We expect to hear from the Keynote Speaker, Mr Mark Cutifani, how a multinational corporation assesses the business environment and what it looks for in the investment climate before making the critical decisions that have the potential to create shareholder wealth. I trust that he will also share views on employment creation opportunities and important ways for generating government revenues that the country needs to transition to higher income status on a sustained basis. 

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The Conference theme will require us to look at the topical issue of how to establish the right business environment in which firms in Botswana can prosper and engage in sustainable import substitution.  A good part of the Conference will be allocated for parallel break-out sessions to address issues that affect the competitiveness of the country’s industries.  The key to becoming a globally competitive economy will, no doubt, require us to effectively deal with the scarcity of skilled manpower,  while we continue to invest in human capital development.

It is equally important to consider how best to follow through the diamond value chain (including cutting and polishing), and ensure that we are sufficiently competitive at it. I believe that the Conference will want to address ways and means of attracting foreign direct investment and, in this context, the role of the exchange rate policy, monetary policy and the banking sector in general, among others, in promoting a vibrant and globally competitive Botswana economy.

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By the way, in respect of the banking sector, I would like to take this opportunity to dispel one apparent perception that the banking system is experiencing an overall tight liquidity situation. In particular, I would like to correct the misconception that, in order to alleviate the perceived liquidity shortage, the Bank of Botswana needs to inject liquidity into the banking system.

The fact is that liquidity in the banking system is not tight.  On the contrary, there is excess liquidity in the banking system which currently stands at approximately P3 billion. This means that banks continue to hold excess investable funds over and above the statutory liquid assets requirement.  What is not disputable, however, is that there has been a significant decrease in excess liquidity in the last 2–3 years, due to a combination of factors.  For instance, excess liquidity declined as banks increased their lending while at the same time the Bank of Botswana decreased the amount of Bank of Botswana Certificates (BoBCs) issued for liquidity absorption.  Excess funds were further sterilised by increasing the Primary Reserve Requirement in stages from 3.25 percent to 10 percent over the five-year period to 2011. 

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It is also the case that the laudable efforts by the Government to streamline the disbursement of funds to parastatals and local authorities also helped to reduce excess liquidity. Banks will recall that in the past, some of the funds disbursed by the central Government to parastatals and local authorities could remain unspent for some time. These funds would be passively held on deposit at banks (earning very low interest rates, if at all) and ultimately finding their way into BoBCs. This is no longer the case, at least not on the scale of yester-years. The efficiency achieved in remitting tax revenues through the Real Time Gross Settlement (RTGS) system and electronic funds transfers (EFTs) has also reduced the period of time money stayed in customer deposit accounts before being credited to Government accounts at the Bank of Botswana.

Moreover, the sluggish growth in personal incomes in the last few years also contributed to the muted expansion in bank deposits which, when matched against the faster increase in credit, resulted in a decline in excess liquidity.  There has also been a substantial externalisation of funds by institutional investors, such as fund managers and pension funds; this could be an indication that there may be limited opportunities in the domestic market for such entities to achieve their investment (return) objectives.

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All told, these factors have contributed to the overall  reduction of BoBCs from a peak of P20 billion in October 2010 to the current level of about P6 billion.  Correspondingly, the proportion of deposits that were on-lent increased markedly, as reflected in the intermediation ratio, which rose from 46 percent in 2007 to about 80 percent currently. 

Nevertheless, given the overall excess liquidity of approximately P3 billion in the banking system as a whole,  any temporary liquidity shortages experienced by individual banks should initially be dealt with through inter-bank borrowing and, ultimately, if need be, through recourse to Bank of Botswana facilities.  There will, of course, be occasions when the banking system as a whole could face relatively tight liquidity.  Whenever such circumstances arise, the Bank will, as part of its mandate of lender of last resort, readily provide such liquidity to the banking system; but only on terms that make inter-bank funding the preferred alternative. 

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For the sake of emphasis, I would like to remind all concerned that BoBCs are not investment instruments; they were never meant to be.  They are, of course, part of instruments that can be used for meeting the liquid asset requirements and for collateral in inter-bank lending

After operating for over two decades in a market with substantial liquidity surpluses, Botswana banks are now in a transitional phase towards a more normal banking environment when they can no longer afford to turn away deposits, as was the case before the introduction of BoBCs in 1991. Instead, going forward, banks will need to be more innovative in attracting and appropriately remunerating deposits.  Banks are also transiting from a high interest rate environment, rapid balance sheet growth and relatively high profits on the back of high interest rate spreads, to a period of low interest rate environment and a more competitive market.  I must add that the resultant reduction in interest rate margins is a welcome development for bank customers.  

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We are also witnessing a transition towards a period when banks will increasingly need to take prudent and calculated risks in lending; a  period when monetary operations will entail, in the main,  liquidity injection (not withdrawal) by the Bank of Botswana, still using BoBCs, to support the monetary policy stance.  

During this transitional phase it is normal to expect credit growth to slow down as banks consolidate their balance sheets, review their business strategies and seek remedies to some unforeseen challenges.  This is normal.  In general, banks are encouraged to jointly find solutions to common problems that may emerge. And, on its part, the Bank of Botswana stands ready to work with banks individually and collectively to overcome any huddles along the way. I can confirm that a dialogue on this and related matters is on course.

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With these pertinent remarks, Ladies and Gentlemen, I wish you a pleasant evening and productive deliberations during the Conference. 

I thank you for your attention. 

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*Mohohlo is the governor of Bank of Botswana.



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