GOL’s 20% interest rate attracts investors, cuts money for businesses to borrow and depositors to withdraw – Global News Network
THEPress release from the Iberian People’s Party
The Liberian People’s Party calls on Liberian lawmakers and stakeholders to encourage President George Weah to end the practice of cutting cash held by commercial banks, which will suffocate the economy. The Central Bank of Liberia (CBL), instead of instituting measures to increase the liquidity reserves of commercial banks, offers attractive interest rates to commercial banks (CBs) to lend money to the government.
Subsequently, CB, with limited liquidity, will not be able to lend adequate loans to businesses and clients will not withdraw part of their deposits. And, rightly so, disillusioned depositors have complained and will continue to complain.
Previous and current administrations, commenting on the cash crunch, said the following: (1) Former President Ellen Johnson Sirleaf, in September 2016, said world prices were affecting Liberia’s cash position; (2) in 2017, former CBL Governor Mr. Milton Weeks said Liberia’s cash position was weak as outgoing remittances were greater than inward remittances; and (3) in 2018 House of Representatives Speaker Mr. Bhofa Chambers said CB coffers were empty because some elites were accumulating money etc. to undermine the Weah administration.
Once again soliciting liquidity from investors, the CBL offers 20% as a monetary rate. Unfortunately, the offer will not only reduce liquidity held in commercial banks, but it will undermine Liberia’s stability. Businesses, the engine of economic growth, will not borrow enough liquidity to grow; (2) borrowing money from banks will not be necessary since the government had already saved USD 44 million in 2020/21, 2021/22 and 2022/23 respectively through reduced spending on “the use of goods and services ; and (3) providing additional liquidity to authorities that have not recognized the proceeds from the previous sale of promissory notes may not encourage them to practice good record keeping.
In short, if a country depends on business expansion to thrive, then the government, whose total revenue ($ 523 million) represents about 50% of Liberia’s real gross national product, should not cut public spending. and at the same time reduce the liquidity deposited in commercial banks.
How and why do commercial bank executives choose government promissory notes and reject corporate and personal promissory notes? It’s easy to understand. Remember that commercial banks (i.e. like any investor) not only look for higher interest rates (i.e. higher income), but also look for terms of favorable payment. In addition, lenders can use government promissory notes as collateral for other financial arrangements.
Government officials know that profit-seeking investors will buy promissory notes that offer attractive interest rates. Therefore, in 2019, the government offered to pay 30% interest on its promissory notes. It was reduced to 25% in 2020, and it is now 20% in 2021. On the other hand, in 2018, companies paid 12.4% interest to commercial banks, and the interest rate remained unchanged in 2019 and 2020. In addition, the government offered to repay its debts in “… a period of 2 weeks, 1 month, 3 months, 6 months and 12 months. (Webster defines tenor as “the time until a loan is due.”
The statements below are taken from page 43 of CBL’s 2020 Annual Report.
“Transactions on the financial markets have been characterized by the issuance of CBL bonds. During the first quarter of the year, the Bank offered L $ 7.0 billion at different maturities (2 weeks, 1 month, 3 months, 6 months and 12 months) with an effective annual return of 30.0% . However, during the second quarter of the year, the Council, at its meeting, reduced the interest rate by 500 basis points to 25.0% in line with the inflation projection for the second quarter of 2020. … ”
The local Liberian newspaper, “the Analyst,” said that “… following its quarterly meeting on 18e and 20e from August 2021, the Board of Governors of CBL lowered the key rate to 20%. The reduction could indicate that CBL is aware that reducing commercial banks’ liquidity reserves is not good for the economy. However, since the CBL’s interest rate is 7.6% (i.e. 30% minus 12.4%) higher than the interest rate offered by companies, commercial banks will continue to buy government promissory notes. Page 42 of CBL’s 2020 Annual Report shows that the average interest rates for loans were 12.4%.
Is it a prudent decision to reduce the purchase of goods and services by $ 44 million and at the same time reduce the liquidity held by commercial banks? The Liberian People’s Party does not believe that cutting spending and taking money out of commercial banks is good for the country.
Therefore, LPP calls on stakeholders to advise President Weah’s administration to inject money into the economy, thereby enabling employers (newspapers, local traders, farmers, etc.) to purchase goods and services such as paying employees. Let us remember that a hungry population is an angry population.
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