As long as the Treasury keeps flaunting price incentives, it is conceptually difficult to cap the extent to which commercial banks can keep buying Treasury bonds.
As largely expected, the monetary policy committee of the Central Bank of Kenya (CBK) at its May 2017 meeting held the benchmark rate at 10 per cent.
In their assessment, everything seems well-anchored. Which is fine. I mean these guys monitor a whopping 232 macro-indicators on a monthly basis.
That’s quite exhaustive. But for the umpteenth time, the committee expressed concerns around slack in private sector credit growth.
What’s really happening? Commercial banks are not lending. So then what are commercial banks doing with their liquidity?
Busy buying Treasury Bonds. This is not a joke by the way. At the close of quarter one this year, commercial banks’ net claims on central government (essentially, commercial banks’ lending to Treasury) grew by 12 per cent year-on-year.
At the same time, private sector credit growth came in at a dismal four per cent year-on-year.
So now we have a situation where credit growth to public sector is outpacing credit growth to the private sector—which is not an ideal situation for an economy like Kenya. And I can’t blame commercial banks.
Between August 2016 and May 2017, the CBK, on behalf of the National Treasury, sold Treasury bonds worth Sh230 billion at an average rate of 13 per cent.
At this rate, it is more profitable for a bank to lend to the National Treasury than engage in risky lending, where they can only charge a maximum of 14 per cent in local currency terms.
For one, lending to the Treasury comes with the benefit of zero associated costs. Additionally, credit risks are almost negligible. It’s almost a no-brainer.
Central Bank’s ‘red-green’ tactics in the domestic bond market has continued to entrench disconnect between monetary and fiscal policies, hence helping driving up aggression among bidders.
When you reject bids, only to open a tap for the same bids two days later, aren’t you entrenching the wrong signal among market participants? I still find this a bit puzzling.
Back to my point. I think the committee should act on the fact that commercial banks are sitting on piles of un-deployed liquidity—and worse still, they are busy lending to the government—by withdrawing some of these liquidity from the system.
Indeed banks are sitting on so much un-deployed funds. Between August 2016 and May 2017 period, the CBK rejected bids for Treasury bonds worth a whopping Sh162 billion.
I estimate that slightly more than half of it came from banks. That’s still colossal liquidity that is still in search for home.
Secondly, the CBK itself, between February and May 24, has had to mop up liquidity from commercial banks to the tune of Sh567 billion via the two policy instruments: repos and term auction deposits.
If indeed the slack in private sector credit growth is a central concern to the committee, then it’s time to consider raising cash reserve ratio (CRR) until lending activities pick up.
Such an action will also serve to signal a non-accommodative stance towards lazy banking.
Otherwise, as long as the Treasury keeps flaunting price incentives, it is conceptually difficult to cap the extent to which commercial banks can keep buying Treasury bonds.
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