THE Central Bank’s push to increase goods and services in the economy since 2009 seems to have paid off, highlighted by increased private sector credit and growth in government expenditure on domestic goods and services.
The Central Bank stimulated aggregate demand through reduced yields on Government paper by limiting issues and availing liquidity in the banking system to encourage banks to lend to the public.
An increase in aggregate demand would ensure that economic growth is sustained.
These efforts have also been supported by Government expenditure on goods and services, which is a key component of aggregate demand.
“Government revenue also grew during the month under review, reflecting an increase in aggregate demand,” said Dr. Adam Mugume, director of research at the Central Bank.
He explained that the Central bank is now active in the market to mop up excess liquidity through issuing more government paper and repurchase agreements (Repos).
“Regarding aggregate demand, there are signs of improvement after slackening in 2009. We have seen positive signs reflected by real currency in circulation. From end of 2009, real currency demand has been growing and private sector credit has also grown,” he said on Thursday.
To highlight the indicators, he added that private sector credit grew by 25.1% year-on-year in June 2010 compared to 21% in May 2010.
“Personal loans continued to account for the largest share of credit, absorbing 21.2% of all outstanding loans. The trade and commerce and building and construction sectors followed with shares of 119.2% and 18.6% respectively,” he said.
He cited growth in industrial production and quarterly GDP figures as an indicator that economic activities are growing while at the same time stock market volumes were picking up.
“The Indicator is that capital market picked up with trade registering an increase in July compared to June. Total turnover rose by 12.5% from 0.9b in June to 1 trillion in July,” he said.
The Central Bank has increased offer amounts of Treasury bills from sh90b to the current sh95b in line with increased aggregate demand and a step up in government spending plans. It had earlier increased Treasury bill auction offers from sh60b at the beginning of the year to sh90b in June.
In the past, a delay in government spending plans at the beginning of the new financial year created a liquidity crunch that fueled an increase in volatility in short-term market rates.
Last year, the bank announced more active presence in the market which has resulted in the stability of short-term rates and eliminating the annual liquidity crunch that used to characterise the market during that period.
The Bank uses a combination of government paper and foreign exchange to manage structural (long-term) liquidity while repurchase agreements (Repos) are used to fine-tune short-term liquidity conditions.
Because of the Repo system, interbank market rates have been ranging between 3-4% from a high of 12% last year.
The Central Bank has to contend with challenges of managing lumpy liquidity injections by government that is not in line with the framework earlier agreed on between the two parties.
For example in the month of July, the Central Bank had expected government to spend sh400b including wages and salaries that account for sh130b of that expenditure.
However, because of the delay in tax remission, there was a shortfall in the programme expenditure, which was then paid at the beginning of August.
“When the salary is paid in August, plus that month’s expenditures, it becomes a lumpy injection within a short time. The only medicine is usage of Repos,” he explained.
However, the challenge arises if the lumpy injection is done after the bank has already reached the limit of its Repo framework.
“Our Repo limit according to our framework is sh200b. If there is excess liquidity yet you have exhausted your sh200b Repos, then it’s a challenge and you have to re-issue them to ensure required liquidity in the system.
Even with the increase in offers, most of the auctions have been oversubscribed, highlighting the high level of demand for the securities.
The August 25 auction was oversubscribed by sh91.5b, with about sh95b on offer.
Yields on government securities inched up with the August 25 auction registering 4.983%, 5.447%, and 6.334% for the 91-day, 182-day and 364-day compared to 4.617%, 5.254% and 6.01% respectively from the previous auction on August 12.
Mugume, however, noted that yields on government securities that had reduced due to easing in monetary policy during the most part of 2010 are expected to inch up this financial year.
“Going forward, we don’t expect yields to be low because if 91-day TB is about four percent yet inflation is higher which means that is a negative return on investment for holding a treasury bill.
Inflation is likely to remain in the range of five percent, and the yields will remain within 5-6 going forward,” he added.
