Botswana in household debt risk

 

Gaborone –  The International Monetary Fund (IMF) has cautioned the banking sector in Botswana of potential vulnerabilities arising from the ballooning household debt and unsecured loans.  When issuing a statement following the completion of Article IV consultation with Botswana, the monetary fund noted that there are potential vulnerabilities stemming from the high concentration of bank loans to household and the acceleration in growth of unsecured lending. 

This sentiment was shared by the central bank, which noted in its statistics that, 70 percent of loans taken from commercial banks in 2012 were of an unsecured nature.  The central bank figures show that business loans only make up 23 percent of the total debt to banks.

However, IMF was cognisant of the fact that the country’s banking system was profitable and well-capitalised with relatively low nonperforming loans. 

Although it pointed out the absence of a comprehensive data on the overall level of household indebtedness, IMF maintained that household leverage had increased significantly in recent years.

The fund also observed that consumer price inflation decelerated markedly to 5.8 at end of June 2013, just below Bank of Botswana’s (BoB) medium-term objective range of 3-6 percent. Inflation deceleration was in part due to a base effect of increased administrated prices last year. It also noted that “core inflation, which excludes administered prices, has also declined.”

Meanwhile, the IMF was of the view that the country’s real GDP growth would remain at about four per cent in 2013. The growth was expected to pick up slightly to 4.5 percent in 2015 supported by the increased electricity production and a recovery in the mining sector, and subsequently stabilise at around 4 percent.

“Headline inflation is likely to remain close to the upper end of the BoB’s medium-term objective range in 2013.” The IMF said Botswana had been in current account deficit since the 2008-09 financial crises but this was expected to narrow in the coming years.

Speaking at a panel of experts at the Debt Management panel discussion hosted by a company called Premier Wealth, University of Botswana lecture Dr Emmanuel Botlhale, observed that “Indebtedness is a disease, we have to learn to differentiate between good and bad debt.” 

According to Botlhale “The decisions we make today will impact our children in the future. If we are not careful, soon our banks will collapse under the weight of bad debt. Let’s prefer black ink over red ink.” The high levels of household debt, Botlhale said, had far-reaching effects, it has a societal impact, at micro level, where it affects the livelihood of the family and at macro level when it starts to affect the economy and create a national crisis. 

Another panellist, Dr Monee Monnane, from Botswana Institute for Development Policy Analysis said it was imperative to have a balanced economy with more assets than liabilities. 

Monnane cited the example of how banks make massive mark-ups on loans, with unsecured borrowing at 27 percent premium, while paying 3.5 percent on deposits; take in 21 percent of that loan as profit.  “Sometimes we may blame households for getting in to unsecure loans, yet there are little bankable channels,” he said.

September 2013
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