Maravi

Nkoma fears for economy

Nkoma fears for economy
By Joan Chirwa
Tuesday July 31, 2007 [09:52]

THE government’s decision to withdraw its money from commercial banks is going to have detrimental effects on the economy, Economic Association of Zambia (EAZ) treasurer Noel Nkoma has warned. Nkoma, who is also director of marketing and public relations at Finance Bank Zambia Limited said the decision was likely to trigger an increase in lending rates, which had over the past months reduced considerably.

“There is likely to be a credit crunch for the simple reason that if you move resources from commercial banks, two things are going to happen. The first thing is that there will be no surplus cash for out-lending to the productive sectors such as agriculture, small and medium-scale entrepreneurs (SMEs) and manufacturing, worse still for consumer or personal loans,” Nkoma said. “There is high demand for borrowing in this country and that is the reason why banks have been bringing down interest rates. So in the absence of cash in banks, interest rates will start going up again and in the process, they are going to hurt productive sectors of this country.”

Finance and national planning minister Ng’andu Magande earlier this year announced that the government would withdraw its money from commercial banks because it was borrowing the same money at high interest rates.

He said the money would therefore be channelled to the central bank.
And secretary to the treasury Evans Chibiliti also indicated that about K700 billion of government money was lying idle in commercial banks.

Chibiliti said withdrawing these funds was in the best interest of the government.
But Nkoma said: “The Economics Association of Zambia is deeply concerned by the withdrawal of government money from commercial banks. What we are hoping is to have the two stakeholders engaging in discussions in order to resolve the matter and come up with a win-win situation.”

Nkoma further warned of industrial failures as a result of reduced liquidity of banking institutions following government’s decision to withdraw its huge deposits in commercial banks.

“The industry will now be requiring double the amount of money being used now to feed into their production line. This is because cash will not be readily available and we will have a cycle of industrial failures which is basically liquidation,” Nkoma said. “All the progress made by the country will be stagnant. Government is the key player in the economy and if it decides to take its money from commercial banks, then there will be no economy. The solution is not to withdraw cash from commercial banks and take it to central bank because it doesn’t have branches around the country. What spurs production is consumer demand and if the consumer law is taken out, then there will be no demand.”
Nkoma however said the government was raising a valid point to withdraw its money from commercial banks because it was borrowing its own funds, but noted that an agreement could be appropriate for the benefit of the economy.

“The solution is upon the commercial banks through the Economics Association of Zambia, the Bankers Association of Zambia and the government to sit and harmonize the discrepancies. At the end of the day, if that money is sitting in the commercial banks and being deployed into the economy through lending, government is then justified to ask for interest on that money so that there is a win-win situation,” Nkoma said. “The trend world over is that commercial banks are bankers of the government. Even in countries like South Africa, commercial banks handle government accounts. If the commercial banks do not have the liquidity, they will not be attracting clients to borrow. If consumer lending is high, then the economy is vibrant.

“What makes a strong economy today is consumer lending. Now this money, if taken to central bank will just be idle. The function of central bank is to ensure financial stability and ensuring that the banking sector is healthy and sound.
“The central bank does not interact with members of the public because it is a banker of last resort. It is a bank where commercial banks with liquidity problems can go and get financial help so that they can operate viably.”

Labels: BANKING, EAZ, NOEL NKOMA

posted by MrK @ 3:39 AM