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BoB double edged sword rate cut hovering on banking sector

Botswana and other developed economies usually take monetary decisions such as to adjust repo rate or interest-rate to keep inflation within a target range for the health of economic activities or cap the interest rate concurrently with economic growth to safeguard economic momentum.

As a globally recognised banking norm or custom, the repo rate determines the Bank rate to which the central bank lends money to commercial banks and this then affects the amount they lend to their consumers.  But the decision to cut or hike the repo rate may also come with disadvantages, hence central banks are often seen to be taking tough political decisions which come as a double edged sword. In the case of Botswana, a surprise development by Bank of Botswana (BoB), at the August Monetary Committee Policy meeting, decided that the repo rate be cut by 25 basis points from 5 percent to 4.75 percent, came with ripple effects according to banking and finance pundits.

According to the recent Stockbrokers Botswana banking sector study, the rate cut will result in a “squeeze” in banks’ Net Interest Margins (NIMs) with no or little pass on effect to deposit rates considering that these are already very low and the need for banks to remain competitive to attract funds. The stockbroker advised that a cut in repo rate or any future slash on the interest rate, will need the banking sector to be vigilant as there will be need to diversify and grow non-interest income.

It came as a surprise when BoB made an important development  in the banking sector by slashing the Bank rate by 25 basis points from 5 percent to 4.75 percent at August MPC meeting. The central bank August repo rate cut came as an unexpected shock to many because BoB has maintained the Bank rate for two years. The last time such a big development in Botswana’s monetary policy occurred was in October 2017, when the Bank rate was reduced by 50 basis points from 5.5 percent to 5 percent.

A lot of questions as to why the rate was cut in August were relentless, with some suspecting the move as political, given that elections were a month away. However, the central bank marshalled its position, saying the interest rate slash was more forecast based as it was a way of resuming domestic monetary policy easing in the backdrop of slow economic growth and inflation.

 Furthermore BoB also suggested that what is rolling out both for the domestic and external economic activity provides scope for easing monetary policy to support economic activity. “With inflation low and stable and inflation expectations well anchored, improving total factor productivity remains key in promoting sustainable and inclusive economic growth,” BoB Governor Moses Pelaelo told journalists after the August rate cut decision.

BoB August move to cut Bank rate was a huge leap, a jump on the bandwagon, as policy makers across were taking aggressive albeit surprise decision to cut their interest rates. Many economists believe this was a general response to the trade war between China and the US, an economic sneeze which got the entire globe to catch economic flu.

In August when Botswana slashed its benchmark rate, there have been a net 14 cuts by policy makers across the world and this is the highest number since central banks around the globe ramped up measures on how to attain growth in the wake of global financial crisis.
In October emerging market and developing economies policymakers slashed interest rates further, as their central banks were joining the US Federal Reserve Bank in efforts to shore up their economies. This month a group of 37 developing economies showed a net 9 cuts last month (October), after a net 11 cuts in September.

Botswana’s economic influential neighbor and big import player, South African Reserve Bank (SARB) in South Africa, decided to cut by 25 basis points, from 6.75 percent to 6.50 percent in July, a month later this country shed the same percent.  South Africa shed Bank rate due to inflationary and economic reasons same as Botswana.


Another surprise is coming soon as the banking sector, experts and observers have not ruled out another cut of 25(or more) basis points rate cut in the short term. BoB has not had the penchant of hiking rates since 2008; instead the central bank has always been keeping the benchmark rate at lows from the highs of 15.5 percent in 2008 to the lowest current levels at 5 percent before slashing it further to 4.75 percent three months ago.

Stockbrokers Botswana in its banking research further said it has conducted interviews, had conversations with the banking fraternities, discussing prediction on the future of the banking sector. Part of the predictions was expectation of another 25 basis points rate cute.
“Conversations with the titans of banking have also led us to believe that we have not reached the bottom of the cycle as yet. There is a general expectation of another 25 bps rate cut in the short term; which spells further pressure on industry NIMs and the increased need to diversify and grow non-interest income,” said Stockbrokers Botswana in its recent banking study.

Financial consultant Fitch Solutions in July this year had forecasted that BoB will cut bank rate by 50 basis point, from 5 percent to 4.5 percent this year and maintain the rate until 2020. Barely a few weeks in the month of August, Governor Pelaelo pronounced the 25 basis points rate. Filtch’s predictions were vindicated despite its rating cut being 25 percent less than BoB’s slash.  Fitch Solutions is the industry-leading provider of credit, debt market, and macro intelligence solutions and primary distributor of credit ratings’ sister agency Fitch Ratings.

Fitch Solutions’ forecast on Botswana that time was due to the slowed economic growth and muted credit growth that has struggled to rebound from a steady decline between May 2012 and September 2017. This year, just into the second quarter, credit growth was 6.5 percent as compared to 2011/18 average of 13.2 percent and this hindered growth of private consumption and investment.

In latest statistics, annual commercial bank credit growth for the year to September 2019 slowed to 6.1 percent compared to 8.1 percent in the same period last year.  According to Stockbrokers Botswana, this slowdown was a result of a contraction in lending to businesses on the back of decreased utilization of existing credit facilities, loan repayments by some firms in certain sectors and base effects from higher credit growth in the second half of 2018. However household credit growth continued to increase substantially as it is driven by this financial year civil servant salary increment, says Stockbrokers Botswana.

October Inflation

Latest Statistics Botswana data shows that prices have decreased to 2.4 percent from 3 percent in September 2019. This decrease in inflation during October 2019 reflects the easing in the rate of annual change in prices for some categories of goods and services, led by ‘Transport’ (from 6.2 to 2.7 percent – largely because of base effects associated with fuel price increase in October 2018). 

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Debswana-Botswana Oil P8 billion fuel partnership to create 100 jobs

18th May 2022
Head-of-Stakeholder-Relations

The partnership between Debswana and Botswana Oil Limited (BOL) which was announced a fortnight ago will create under 100 direct jobs, and scores of job opportunities for citizens in the value chain activities.

In a major milestone, Debswana and BOL jointly announced that the fuel supply to Debswana, which was in the past serviced by foreign companies, will now be reserved for citizen companies. The total value of the project is P8 billion, spanning a period of five years.

“About 88 direct jobs will be created through the partnership. These include some jobs which will be transferred from the current supplier to the new partnership,” Matida Mmipi, Head of Stakeholder Relations at Botswana Oil, told BusinessPost.

“We believe this partnership will become a blueprint for other citizen initiatives, even in other sectors of the economy. Furthermore, this partnership has succeeded in unlocking opportunities that never existed for ordinary citizens who aspire to grow and do business with big companies like Debswana.”

Mmipi said through this partnership, BOL and Debswana intend to impact citizen owned companies in the fuel supply value chain that include transportation, supply, facilities maintenance, engineering, customs clearance, trucks stops and its support activities such as workshop / maintenance, tyre services, truck wash bays among others.

“The number of companies to be on-boarded will be determined by the economics at the time of engagement,” she said. BOL will play a facilitatory role of handholding and assisting emerging citizen-owned fuel supply and fuel transportation companies to supply Debswana’s Jwaneng and Orapa Letlhakane Damtshaa (OLDM) mines with diesel and petrol for their operations.

“BOL expects to increase citizen companies’ market share in the fuel supply and transportation industries, which have over the years been dominated by foreign-owned suppliers. Consequently, the agreement will also ensure security of supply for Debswana operations, which are a mainstay of the Botswana economy,” Mmipi said.

“Furthermore, BOL will, under this agreement, transfer skills to citizen suppliers and transporters during the contract period and ensure delivery of competent and skilled citizen suppliers and transport companies upon completion of the agreement.”

Mmipi said the capacitating by BOL is limited to providing citizen companies oil industry technical capability and capacity to deliver on the requirements of the contract, when asked on helping citizen companies to access funding.

“BOL’s mandate does not include financing citizen empowerment initiatives. Securing funding will remain the responsibility of the beneficiaries. This could be through government financing entities including CEDA or through commercial banks. Further to this, there are financial institutions that have already signed up to support the Debswana Citizen Economic Empowerment Programme (CEEP),” Mmipi indicated.

While BOL is established by government as company limited by guarantee, it will not benefit financially from the partnership with Debswana, as citizen empowerment in the petroleum value chain is core to BOL’s mandate.

“BOL does not pursue citizen facilitation for financial benefit, but rather we engage in citizen facilitation as a social aspect of our mandate. Citizen facilitation comes at a cost, but it is the right thing to do for the country to develop the oil and gas industry,” she said.

Mmipi said supplying fuel to Debswana comes with commercial benefits such as supply margins. These have traditionally been made outside the country when supply was done by multi-nationals for a period spanning over 50 years. With BOL anchoring supply for Debswana, this benefit will accrue locally, and BOL will be able to pay taxes and dividends to the shareholders in Botswana.

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VAT in Africa Guide 2022 – Africa re-emerging

18th May 2022

PwC Africa has presented the eighth edition of the VAT in Africa Guide – Africa re-emerging. This backdrop of renewal informs on the re-emergence of African economies and societies which have been affected by the COVID-19 pandemic.

In this edition, which has been compiled by PwC Africa’s indirect tax experts, covers a total of 41 African countries. It is geared towards sharing insight with our clients based on the constantly changing tax environments that can have a significant impact on business operations.

Within Africa, governments continue to focus on expanding the tax net by improving revenue collection through efficient compliance systems and procedures. PwC Africa has observed that revenue authorities also continue to take a keen interest in indirect taxes as part of revenue mobilisation initiatives.

Maturing VAT system and upskilling SARS 

“In South Africa, VAT is becoming more relevant as a revenue source for the government,” says Matthew Besanko, PwC South Africa’s Indirect Tax Leader. “Strides have been made to upskill South African Revenue Service (SARS) staff and identify VAT revenue leakages, particularly in respect of foreign suppliers of electronic services to people and businesses in South Africa.”

Broadening the tax base and digital economy

In the past year, South Africa, Mozambique and Zimbabwe saw updates to their VAT legislation, or introduced specific legislation targeting electronically supplied services (ESS), which is in line with the global trend of attempting to tax the digital economy. “The expectation is that Botswana will also introduce VAT legislation in due course, while the National Treasury in South Africa has also made mention of revising the rules to account for further developments in the digital economy,” Besanko says.

South Africa’s National Treasury has also drafted legislation with the intention to introduce a reverse charge on gold, which is expected to come into effect later in 2022. While in Zimbabwe, revenue authorities have introduced a tax on the export of raw medicinal cannabis ranging between 10% and 20%, which came into effect on 1 January 2021.

ESG and carbon tax 

Key strides have also been made within the Environmental, Social and Governance (ESG) space. “ESG leadership, strategising and reporting is essential now for organisations that wish to flourish and remain relevant,” Kabochi says. He adds that companies need to consider how ESG and tax intersect, since tax is a significant value driver when businesses need to deliver on their ESG goals.

In South Africa, a carbon tax regime, which is being implemented in three phases, has been adopted. The second phase was scheduled to start in January 2023, however phase one was extended by three years until 31 December 2025.

Until then, taxpayers will enjoy substantial tax-free allowances which reduce their carbon tax liability. At the beginning of 2022, the South African government increased the carbon tax rate to R144 (about US$9), which is expected to increase annually to enable South Africa to uphold its COP26 commitments.

With effect from 1 January 2023, carbon tax payers in South Africa will also be required to submit carbon budgets and adhere to the provisions of the carbon budgeting system which will be governed by the Climate Change Bill. Where set carbon budgets are exceeded, the government plans to impose penalties. “At PwC, we are continuously focused on our renewed global strategy, ” The New Equation,” Kabochi says. “Through this strategy, a key focus area for PwC Africa is to support clients in adding value to their ESG ambitions and building trust through sustained outcomes.”

The New Equation is also an acknowledgement of the fundamental changes in the business environment in which PwC’s clients and other stakeholders operate. PwC continues to reinvent and adapt to these changes as a community of problem solvers, combining knowledge and human-led technology to deliver quality services and value.

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Economists project lower economic growth for Botswana

18th May 2022
CBD

Local and international economists have lowered their projections on Botswana’s economic growth for 2022 and 2023, saying the country is highly likely to fail to maintain high growth rate recorded in 2021 hence will not reach initial forecasts.

Economists this week lowered 2022 forecasts for Botswana’s economic growth rate, from the initial 5.3% to 4.8% and added that in 2023 growth could further decline to 4.0%. The lower projections come on the backdrop of an annual economic growth that recovered sharply in 2021 with figures showing that year-on-year real Gross Domestic Product (GDP) growth increased to 11.4%, up from a contraction of 8.7% in 2020.

Economists from the local research entity, E-consult, this week stated that the 2021 double digit growth that exceeded projections made at the time of the 2022 budget may be short lived due to other developments taking place in the global economy. E-consult Economist Sethunya Kegakgametse stated that the war in Ukraine has worsened supply problems in the global economy and added that before the war, macroeconomic indicators were seen as improving and returning to pre-COVID levels.

According to the economist the global economy was projected to improve in 2022 and 2023. Recent figures show that global growth projections have been revised downwards from the initial forecast of 4.9% in 2022 with the World Bank’s new estimate for global growth in 2022 at 3.2%.

The statistics also shows that International Monetary Fund revised their growth projections for 2022 and 2023 down by 0.8% and 0.2% respectively, falling to 3.6% for both years. “The outbreak of war has severely dampened the global recovery that was under way following the COVID-19 pandemic,” said the economist.

She stated that despite Botswana being geographically removed from the conflict, the country has not and will not be exempt from the disruptions in the global economy. “The disruptions to global supply chains resulting from the war will have a negative effect on both Botswana’s growth and trade activities.

The economic sanctions against diamonds from Russia will add uncertainty to the market which will have knock on effects to Botswana’s growth, exports, and government revenues,” said the economists who added that the disruptions are driving prices up and result with very high inflation in the local economy.

Kegakgametse projected that in an attempt to limit inflation Bank of Botswana will be forced to raise interest rate “Should the sharp increase in both global and local inflation persist, Bank of Botswana much like other central banks around the world will be forced to raise interest rates in a bid to control rising prices. This would mean an end to the expansionary monetary policy stance that had been adopted post COVID-19 to aid economic growth,” she said.

In the latest projections, the UK based economic research entity Fitch Solutions lowered 2022 real GDP growth forecast for Botswana from 5.3% to 4.8% “In 2023, we see economic growth rate decelerating to 4.0%,” said Fitch Solutions economists who also noted that the 2022 and 2023 economic growth projections may come out lower than the current forecasts, as it is possible that new vaccine-resistant virus variants may be identified, which could result in the re-implementation of restrictions. “In such circumstances, we cannot rule out that Botswana’s economy may post weaker growth than our baseline scenario currently assumes,” said the economists.

According to the projections, Fitch Solution stated that there is limited scope for Botswana government to increase diamond production and exports, following the economic sanctions imposed on Russian diamond mining companies operating in Botswana. The research entity added that De Beers is unlikely to scale up diamond output from Botswana in order to prop up diamond prices.

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