For the first time in 4 years, Gambia government borrows at a single digit rate.
On Wednesday 5th April 2017, just a day before the parliamentary election, the yield on the 91-day of the Gambia government treasury bills fell to its lowest level within the last four years. A new 9.32%, as per Central Bank tender results.
The Treasury bills rates have been falling since Dec 2016. However, the last time government borrow at single digit rate through the domestic treasury bills was May 2013 at 9.83%.
Figures from the Central Bank of Gambia (CBG) as at Wednesday morning (12 Apr 2017), the subsequent week also shows that the rate for 91-days bills still stays within the single digit yield.
What could cause this decline and what are the potential impacts on the general interest rate? Read our analysis below the table:
| Date/Tenor | 91 | 182 | 364 |
|---|---|---|---|
| 5-Apr-17 | 9.32% | 11.90% | 13.12% |
| 28-Dec-16 | 13.30% | 15.21% | 16.81% |
| 30-Dec-15 | 17.65% | 18.08% | 21.77% |
| 31-Dec-14 | 14.01% | 16.34% | 19.08% |
| 27-Dec-13 | 15.95% | 17.11% | 18.54% |
| 17-Apr-13 | 9.17% | 9.97% | 10.86% |
Why are treasury bills rate declining
At the end of 2016, the yield on the 91-day treasury bills was 13.30% and compared to Jan 2016 at 17.63%.
Generally, a decline in treasury bills rates could be a result of two major factors: A drop in the inflation rate or an increase in liquid cash within the banking system which leads to increase in demand for short-term investments.
How does inflation affect T-bill yield ? investors are reluctant to purchase bills when the yield on their investments would be less than the inflation rate; such investment becomes a net loss in terms of real returns. Low inflation can lead to higher treasury prices and lower yields. Conversely, prices tend to be lower when inflation is higher. However, the reports from the Gambia Bureau of Statistic and IMF press release, the annual inflation for Feb 2017 was 8.8% compared to 6.9% and 7.9% in Feb and Dec 2016 respectively.
Furthermore, our observation shows that the rate decline could be due to the decision of the Government to reduce borrowing and cost of borrowing. This was signalled in the 2017 budget speech made to the National Assembly by the former finance minister in December 2016.
Additionally, the relatively slow pace of the growth of bank lending could also compel commercial banks to consider government bills which equally may force the interest rates to drop further if government appetite for borrowing has not increased.
If the situation continues, this low rate will help the government to significantly save as it will reduce the interest expenses which is a larger chunk of the current expenses.
Learn about the features of Treasury Bills
Effect on Savings and Loan Interest rates
The drop in treasury bills rates have already affected the fixed deposit rates and will affect savings interest rates soon, as the banks will try to minimise the drop in their net interest revenue. Customers should not be surprised if savings interest rates fall as low as 4% or 3%. Investors with current treasury bill portfolio will also face reinvestment risk as the rates decline further.
In addition, we expect that at the next monetary policy committee (MPC) meeting the policy rate will be drop drastically which will also mean a reduction in interest rates on both corporate and consumer loans.
A major challenge lies ahead if interest on investments and savings account goes down whiles the inflation rate continue to increase.
Nonetheless, treasury bills are still the highest yield short-term investment instruments in the Gambia. Please let me know in the comment box if you need any further clarification or comment.
Be the first to comment