The
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.
