Money circulating, investments to increase

MBABANE – Investments and money circulation in Eswatini continues to increase as the country continues to battle economic effects of COVID-19. The Central Bank of Eswatini (CBE) this week announced that Broad money supply (M2) increased by 6.1 per cent month-on-month and 4.1 per cent yearon-year to E21.6 billion in September 2022. Economist Sibusiso Dlamini said change in the money supply has long been considered to be a key factor in driving macro-economic performance and business cycles.

He said an increase in the supply of money typically lowers interest rates, which in turn, generates more investments and puts more money in the hands of consumers, thereby stimulating spending.

MATERIALS

“Businesses respond by ordering more raw materials and increasing production. The increased business activity raises the demand for labour,” he added.

The economist said a country’s money supply has a significant effect on a country’s macro-economic profile, particularly in relation to interest rates, inflation, and the business cycle.

CBE said Broad money supply (M2) reached E21.6 billion at the end of September 2022, reflecting growth of 6.1 per cent month-on-month and 4.1 per cent year-on-year, in line with the increase in private sector credit.

They said the rise was recorded in Narrow money supply (M1), mainly driven by demand deposits of the business sector, while quasi money supply declined, due to savings deposits of the business sector. They mentioned that Narrow money supply (M1) closed the review month at E9 billion, higher by 16.2 per cent compared to August 2022 and 6.6 per cent over the year.

CBE added that growth was observed in both components of M1; Emalangeni outside depository corporations and transferable (demand) deposits.

Consequently, Emalangeni outside depository corporations and transferable (demand) deposits rose by 19.2 per cent to E803.2 million and 15.9 per cent to E8.2 billion, respectively.

They said quasi money supply fell by 0.05 per cent month-on-month and rose by 2.4 per cent year-on-year to close the month under review at E12.6 billion.

COMPONENTS

An analysis of the components of quasi money supply revealed that saving and time deposits trended in opposite directions, with savings deposits decreasing by 5.3 per cent to E2 billion, due to a decline in deposits of the business sector and time deposits increasing by 1 per cent to E10.7 billion, due to a rise in deposits of households.

CBE added that the banks’ liquidity ratio fell to 31.6 per cent from 34.8 per cent in August 2022.

They said the contraction was due to a fall in the banks’ balances held with the central bank as well as cash in their tills, largely on account of withdrawals made by the banks on behalf of their customers over the review month.

“Overall liquidity position of banks’ assets amounted to E6.6 billion at the end of September 2022, declining by 5.5 per cent month-on-month and 17 per cent year-on-year,” mentioned CBE. CBE further added that credit extended to businesses reached E8.3 billion at the end of September 2022, up by 3.9 per cent month-on-month and 17.8 per cent year-on-year.

GROWTH

The growth in credit to businesses was evident in the following subsectors; community, social and personal services (17.6 per cent), distribution and tourism (6.6 per cent), construction (2.8 per cent), real estate (2.7 per cent), agriculture and forestry (1.4 per cent), manufacturing (1.2 per cent) as well as mining and quarrying (0.1 per cent).

In contrast, credit to the transport and communication sector declined by 0.2 per cent over the month under review.

Market interest rates will remain low following the increase in the overall liquidity position of banks. CBE said the overall liquidity position of banks amounted to E7 billion at the end of August 2022, higher by 8.9 per cent from the previous month and lower by 5.6 per cent year on year. This was mentioned in the CBE monthly statistical statement released yesterday. CBE said the month-on-month growth was on account of an increase in the banks’ balances held with the central bank, cash holdings in tills as well as investments in government securities.

“Consequently, the banks’ liquidity ratio rose to 34.8 per cent at the end of August 2022 from 32.3 per cent in July 2022,” he said.

Economist Sibusiso Dlamini said as a consequence of excess liquidity, generally, market interest rates would remain low. He said this meant that it was cheaper for companies and people to borrow money, thus helping the economy recover from the financial and economic crisis, and allowing the banking system to build up liquidity buffers. “Ways in which a company can increase its liquidity ratios include paying off liabilities, using long-term financing, optimally managing receivables and payables, and cutting back on certain costs.”

DETERMINANTS

Dlamini added that there were two major determinants of Banks’s liquidity position. The first is its ability to convert assets to cash to pay its current liabilities (short-term liquidity). The second is its debt capacity.

He said internal factors affecting the liquidity of banks include the bank’s capital base, asset quality, deposit base, level and quality of management, balance sheet demand and liabilities, quality of securities and loan portfolio, peculiarities of the customer base, bank image, and attraction of funds from external sources.

“The principal reason banks have a liquidity problem is that the amount of deposits is subject to constant, and sometimes unpredictable, change. Consequently any development that affects the stability of deposits directly involves the liquidity of banks,” added the economist.