How to absorb excess liquidity in the banking sector?
The Moldovan banking sector is awash with liquidity. In the past the National Bank of Moldova (NBM) used to absorb about 30% of the money base. As of today, it has to absorb ca. 45%. Thus, we estimate excess liquidity at ca. MDL 6 bn.
The origin of excess liquidity lies in the bankruptcy of three banks in November 2014. In order to calm the situation, the NBM had to provide emergency loans worth MDL 13.5 bn. The absorption of excess liquidity is necessary for conducting an effective monetary policy, but it comes at a cost. According to our estimations, the two main currently used instruments of the NBM, reserve requirement and own certificates, cost more than MDL 1 bn per year. This weakens the financial situation of the NBM and could have a negative effect on its independence.
In order to improve the situation, we recommend a set of measures. Firstly, the effective interest rate on reserve requirements should be reduced. Secondly, the NBM should sell its historic government bonds worth MDL 2.3 bn, in a coordinated manner with the Ministry of Finance. Thirdly, own certificates should only be used for fine tuning. Fourthly, if necessary, the Ministry of Finance should support the NBM in improving the situation. Although this topic is quite technical, it has wide implications for macroeconomic stability. Progress in this field would reinforce the successful recent path of macroeconomic stabilisation in the country.
