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WAIFEM member banks dilate on monetary operations and liquidity

Apr 1, 2014, 9:23 AM | Article By: Osman Kargbo

Monetary operations and liquidity management is being given a thorough analytical study at the Paradise Suites Hotel in Kololi to assess how critical it is to the conduct of monetary policy, by the central banks of The Gambia, Ghana, Liberia, Nigeria, Sierra Leone and other member countries of the West African Institute for Financial and Economic Management (WAIFEM).

Senior officials from the central banks and other financial and economic departments of the member countries are receiving a five-day training (31 March – 4 April 2014) on various topics bearing on the main theme of the course: Monetary Operations and Liquidity Management.

The theme is critical because the higher the volatility in monetary or liquidity conditions, the higher the costs of liquidity management, hence the achievement of the objectives of monetary policy, said the Deputy Governor of the Central Bank of The Gambia, Oumie Savage-Samba, who delivered the keynote address at the workshop.

“An efficient and effective framework for management of liquidity is at the very heart of the conduct of monetary policy,” she noted, saying generally, central banks implement monetary policy through the control of the level of liquidity that is consistent with a non-inflationary output growth.

“In other words, liquidity management entails the management of central bank’s balance sheet through monetary operations to steer monetary and liquidity conditions towards the attainment of the target for inflation,” she said.

“This is critical because the higher volatility in monetary or liquidity conditions, the higher the costs of liquidity management and hence the achievement of the objectives of monetary policy.

“Moreover, liquidity management by central banks can have short and long-term implications, depending on the nature of operations.”

While short-term effects are felt in financial markets, she noted, the long-term implications are especially relevant for the real sector “which is impacted with long and variable lags”.

“However, liquidity management in most of the countries in the sub-region is even made more difficult as a result of the presence of structural and persistent excess liquidity; which is the excess of the quantity of reserves kept with the central bank by deposit money banks plus vault cash over the required level,” Mrs Samba said.

“Excess liquidity may arise due to the presence of asymmetric sector, and the underdeveloped nature of money markets.”

The CBG deputy governor also cited poor banking infrastructure as a factor with negative impact on liquidity, saying where the banking infrastructure is inadequate, commercial banks may hold excess liquidity because “they are unable to track their position at the central bank on real time because of undeveloped payment systems.”

“It is also argued that the existence of excess liquidity could be because of the non-existence or development of a liquid and competitive bond market,” she notes.

“When there is excess liquidity in the economy, the transmission mechanism of monetary policy, which runs from a tightening of liquidity conditions to changes in interest rates and then to economic activity, is altered and possibly interrupted completely.”

She said further: “Let me reiterate that monetary and fiscal policies are important short-term demand management tools utilized by the policy makers of modern market economies to drive their economies on the desired path of economic growth, relative price stability and poverty reduction.

“Upscaled public sector liquidity forecasting can help to avoid expenditure over-runs and burgeoning domestic debt.”

In his remarks on the occasion, WAIFEM’s Director of Financial Sector Management Ousman Sowe said the course was organised to upgrade the knowledge and skills of participants in liquidity forecasting techniques and money market secondary operations for managing system-wide liquidity in line with the targets of monetary policy.

“The second pillar of the course is to introduce participants to fiscal liquidity forecasting techniques, and short-term determination of the public sector borrowing requirement to engender better cash management and avoid excessive borrowing,” Mr Sowe, who deputised WAIFEM director general, added.

The course covers principal features of the main macroeconomic sectors, such as fiscal policy and central bank liquidity management, monetary and fiscal condition, liquidity forecasting techniques, cash planning, forecasting government cash flows, forecasting foreign exchange flows, inter bank market liquidity, and case studies from the various countries.