A Dangerous lack of confidence in the Economy

The Business & Financial Times this morning reports that the investment of banks in treasury bills has reached a 10-year high. 79.1% of the portfolio of banks is in t-bills. Astounding.

It is therefore no wonder that even as the inflation rate rose to 19% in January, the t-bill interest rate kept falling and is currently at 22.5%.

The government is able to borrow cheaper but certainly they cannot be happy about what is happening now. Banks running to the safety of government debt squeezes the credit supply of businesses and consumers, affecting both production and consumption which drive the economy. Chasing safer securities also denies the needed liquidity to the stock market, which is down 1.21% since the start of the year. It appears banks are not confident in the ability of the private sector to generate returns and are therefore seeking shelter in government debt.

If something is not done, a self-fulfilling prophecy of doom will start and the spiral would be difficult to stop. What will happen is the credit squeeze will make it difficult for even businesses doing fairly well to access credit. This will make it more difficult for them to settle existing liabilities and therefore increase the size of non-performing loans on the balance sheets of banks. This will lead to an even tighter credit squeeze which will lead to businesses failing. And the cycle continues. Of course failing businesses and reduced consumer spending will lead to worse economic growth which will reinforce the rush to safety in government debt securities. A serious crisis could arise out of nothing more than a lack of confidence.

Preventing banks from buying government securities may not work as they may decide to just park the cash. What is needed is targeted government spending with the money they are borrowing cheaply in productive areas that will create returns for the private sector and encourage lending once again.

Perhaps there are better suggestions on how to tackle this. But what is clear is that not acting is a dangerous option.

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Jerome Kuseh

Accountant | Economist-in-Training | Financial Analyst
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