Nov 17, 2014, 10:13 AM
drop in interest rate on treasury bills from 27 per cent down to 10 per cent
within six months of coming into office of the Barrow government is good for
business and the country, the Minister of Finance said this week.
Responding to questions from journalists at the signing of the $56 million budget support from the World Bank to The Gambia, the minister said lower interests on treasury bills also ignite investments in the private sector by encouraging people to invest in the productive sectors of the economy that would create employment for the youth.
Nyang Njie, an independent economist, said the reduction on treasury bills interest rate “is a good thing”.
He however expressed concern that the reduction is a bit sudden and the trend suggests further drops from 4 to 5 per cent in the coming months and “that bothers me”.
“There needs to be a balance between easing the domestic interest rates and control over the exchange rhythm,” Njie said, adding that the drop in interest rate is “a good thing for the economy”.
At end 2016, The Gambia’s Net Domestic Borrowing reached 11.4 per cent of nominal GDP; this compared to a target of 1% NDB to GDP, highlight growing fiscal pressures that have led to an unsustainable debt situation, according to the revised budget estimate submitted to the assembly end June.
“It is true that double digits interest rates are high during the Jammeh era. Hence it is good thing reducing the country’s appetite to borrow but going too fast will create a problem. It needs to be incremental rather than rapid to avoid consequences,” Njie said.
He pointed out that one of the first likely consequences of the sudden drop in interest rate is that people will move from treasury bills to forex as next alternative in terms of liquid investment.
“Forex is also highly liquid,” the economist said.
However, Finance Minister Sanneh told journalists the challenge is for such wealth to be invested into the productive base of the economy rather than kept in banks just to multiply profits.
Treasury bills have been used as storage of wealth that causes crowding out effects. Instead of depositing funds into banks, people would be buying treasury bills because its yields are attractive than those on deposits in the banks.
The fear is that investors in treasury bills will withdraw their funds to buy forex instead as the alternative source of wealth storage, creating pressure on the dollar and as a result, forex rates would go up thus resulting in inflation.