Zambia will cut government borrowing from the banking sector in 2010 and introduce a single treasury account to help bring down interest rates and encourage banks to mobilise savings, a minister said on Wednesday.
The government currently borrows an average 620 billion kwacha in treasury bills and government bonds a month, according to data obtained from commercial banks.
Presidential Affairs Minister Ronald Mukuma said in a statement commercial banks did not need to take risks by lending money to the private sector when the government was borrowing at high interest rates and offering risk-free investment.
“The government will retire a substantial amount of maturing bonds and treasury bills next year. This, I hope will enable commercial banks to lend to the private sector.”
He said commercial banks relied on government deposits rather than trying to lure savings. The government was also concerned about the increasing spread between lending and savings interest rates.
“As a response to this, the government has decided to establish a single treasury account next year. This means that most government accounts in commercial banks will be closed.” [quote]
Financial analyst Miles Sampa said the move would increase market liquidity and reduce interest rates to the private sector but warned that the increasing cost of funds could hurt new banks that had invested huge capital in the last two years.
“The withdrawal of government participation could also impede monetary development and further compromise the central bank’s supervisory role. The central bank must be careful not to be turned into a commercial bank,” he said.
The central bank said early this month it would introduce a fixed benchmark interest rate in 2010, in a policy shift intended to deepen financial markets and lower commercial bank lending rates.
Zambia has operated an open market system since it liberalised economic policies in the early 1990s. Under the current regime, Zambian commercial banks determine their own lending rates without any official reference point.
Commercial banks operating in Zambia include Standard Chartered Bank Plc, Barclays Bank Plc, Zanaco which is part-owned and managed by Rabobank, Finance Bank which is partly owned by Credit Suisse, Citigroup and Stanbic Bank, a unit of South Africa’s Standard Bank.
[Reuters]
I seriously think Mr Sampa is overpaid by Finance Bank. How does a financial markets expert say on one sentence that interest rates will fall but the cost of funds will rise. This does not make sense. Reduction in government borrowing from banks means the private sector shall have more funds to lend out (crowding in). Also, what does he mean that the central bank risks becoming a commercial bank? Shallow analysis. D+
Further, for the sake of policy credibility and accountability, such statements should be made by the Ministry of Finance (through the Minister or the Secretary to the Treasury). This is because the Ministry would tell the nation whether the reduction in bank borrowing means that the budget deficit shall reduce in future or that this move means higher borrowing from abroad and the central bank. The last alternatives lead to high external debt (we know this story from HIPC) and high inflation (another familiar story from the early 90’s)
This is long overdue – the government has been crowding out private enterprise. Zambian banks have had it too easy, let the start risking their capital to business now.
This is good news. The banks have been riding on govt securities. Here in the UK, commercial banks peg their interest rates to govt interest rates. I am not an economis but I know that having such a reference point is a good check on bank interest rates.
This Mr Sampa has just realised that days of easy pickings are over. Also he implies the new banks were banking on govt borrowing. Shame. They may as well collapse as they are good for nothing. We need banks atht can give loans to businesses, at lower interest rates.
I am ashamed to acknowledge that i had no idea this was happening in my country, i have been outside the country for the past 14 years. i just found out while googling for zambian treasury bonds! The banks have really been having it easy. No one wonder ordinary zambians can only dream of getting a loan from a bank!