While acknowledging that the recent salary increment by government which was done for the 2019/20 financial year will lead to credit grown and increase in domestic demand, Bank of Botswana governor Moses Pelaelo said this will not overheat inflation beyond the objective range of 3 – 6 percent in the medium term.
The governor said this when delivering the Monetary Policy Statement of 2019 released this week. Pelaelo said despite expected spending in school fees which happens normally in the beginning of the year, inflation will not go overboard. He emphasized that people will take loans or credit will increase in banks, but that will not move inflation beyond its position which is a range of 3 – 6 percent. This is also despite the drought which is being experienced by the region and covers Botswana and its food import partners. Food prices may go up, but BoB does not see any sign of inflation overheating above range.
When making economic prospects for 2019 BoB said both external and domestic pressures on inflation are expected to be benign, and it is projected that inflation will remain within the 3 – 6 percent objective range in the short to medium term. “This forecast incorporates the estimated impact of the increase in public service salaries and prospects for continued accommodative monetary conditions.
Having said that, it is worth underscoring the point that any upward adjustment in administered prices and government levies and/or taxes and any increase in international commodity prices that is substantially beyond current projections present upside risks to the inflation outlook.” In contrast, downside risks to inflation arise from the restrained growth in global economic activity, the tendency of the ongoing technological progress to lower costs and the reduction in commodity prices,” said Pelaelo.
The 10 percent-6 percent recent increase in wages by government is expected to gobble close to P2 billion from government’s purse in a period of two financial years being 2019/20 and 2020/21. Economists believe the increase will help cushion purchase power to some point as they will be increase in personal incomes which will lead to credit growth in households hence increase in economic activity.
The BoB Monetary Policy Statement of 2019 released this week suggests that the domestic economy woke from a hangover of “subdued domestic demand pressures, as a result of the restrained growth in personal incomes and largely stable foreign inflation” of 2018. According to the Bank’s Monetary Policy Statement, last year was the year of restrained growth in the personal incomes as the nominal national increased only by a paltry 3 percent on average which was below the average inflation rate for the period resulting in erosion of purchasing power.
However, according to BoB governor Moses Pelaelo, the Bank did not lose monetary policy control as it maintained price stability with inflation remaining within the objective range of 3 – 6 percent in the medium term. According to the Bank, Inflation fell from 3.8 percent in November to 3.5 percent in December 2018.
“This favourable medium-term outlook for inflation is in the context of moderate growth in economic activity and a sound and stable financial system. Therefore, prospective developments augur well for maintenance of an accommodative monetary policy that supports productive lending to businesses and to households, for welfare enhancements that also drive 17 economic activities.
The Bank’s implementation of monetary policy will continue to focus on entrenching expectations of low, predictable and sustainable inflation, through timely responses to price developments; while at the same time, taking due care to ensure that policy decisions are consistent with ensuring financial stability and supportive of sustainable economic growth and employment creation,” said Pelaelo this week.
When looking back domestic output is estimated to have expanded by 5.1 percent in the twelve months to September 2018, compared to lower growth of 2.4 percent in the year to September 2017 and his expansion was mainly driven by sustained improvement in non-mining GDP growth and the recovery in mining output.
According to the Bank, inflation was low and stable, and fluctuated around the lower end of the objective range of 3 – 6 percent for most of 2018; and the outcome was broadly consistent with projections for the year. The BoB governor said the low rate of annual price increase was mostly due to the decrease in food inflation. Food price inflation decreased from 1.1 percent in 2017 to a negative 0.2 percent in 2018, however fuel prices increased significantly by 16.1 percent during 2018, due to upward adjustments in May, October and November.
“This compares to a relatively smaller increase of 9.5 percent in 2017. Overall, the increase in administered prices (including fuel prices, public transport fares, as well as 10 electricity tariffs) added 1.86 percentage points to inflation in 2018,” said Pelaelo. Pelaelo said the overall modest increase in prices in Botswana was in the context of subdued domestic demand pressures, as a result of the restrained growth in personal incomes and largely stable foreign inflation. According to the governor monetary policy was therefore conducted against the background of below-trend economic activity and a positive medium-term outlook for inflation and moderate fiscal expansion.
Government expenditure grew by 6.6 percent in 2018 compared to a contraction of 6.3 percent in the prior year. It should be recognized, in this respect, that beyond the increase in wages, the short-term impact of government spending on domestic demand is moderated to the extent that a significant component involves infrastructure and capacity development. “In the context of Botswana, this type of spending tends to be import intensive and the economic benefits of such public investments are derived in the medium to long term,” said Pelaelo.
Regarding wage developments, it is notable that government recurrent expenditure included a 3 percent salary increase with effect from April 1, 2018. Government increased salaries last year 1 April 2018 by 3 percent and BoB there was nominal national wages increased only by 2.3 percent- which was below the average inflation rate for the period-a development that suggest a modest impact on domestic demand and inflation.
According to last year’s statistics commercial bank credit accelerated from 5.6 percent in 2017 to 7.7 percent in 2018 and included a faster increase in lending to businesses, from 3.2 percent in 2017 to 10 percent in 2018. However for households, annual credit expansion fell from 7.2 percent in 2017 to 6.2 percent in 2018 and this is attributed to restrained growth in personal incomes as the last year 3 percent salary increment did not raise the bar any further.
In the households, this included a 7 percent increase in personal loans and 4.9 percent for mortgages, compared to respective growth rates of 9.2 percent and 4.8 percent in 2017. However Pelaelo said when looking at the monetary issue in a broad picture, the rate of credit growth continued to be supportive of economic activity, with minimal risk to financial stability.
The Global economy and the trade war
The domestic economy is forecast to grow by 4.2 percent in 2019, slightly lower than the estimate of 4.5 percent for 2018. According to BoB, the main factors expected to support growth in economic activity include conducive financing conditions associated with an accommodative monetary policy stance and a sound financial environment.
Therefore the budgeted 3.6 percent expansion in government spending in 2019/20 and the implementation of initiatives such as the doing business reforms, are expected to further support growth in economic activity and employment creation according to the Bank. According to BoB the global economy on the other hand is expected to grow by 3.5 percent in 2019, lower than estimated expansion of 3.7 percent in 2018. The Bank says the projected lower growth is premised on anticipated slower expansion in advanced economies, mostly reflecting subdued performance in the euro area.
The US GDP growth is forecast to decline from 2.9 percent in 2018 to 2.5 percent in 2019, as the impact of the fiscal stimulus dissipates while growth in emerging market and developing economies is projected at 4.5 percent in 2019, slightly lower than the 4.6 percent in 2018. According to the Bank the risks to the global economic activity are skewed to the downside, with prospects for escalation of trade tensions (trade war), tightening financial conditions, a no-deal Brexit and relatively weaker growth in China presenting key risks to the outlook.
“Global inflationary pressures are forecast to be modest in the short to medium term, reflecting below-potential output. In this environment, it is anticipated that monetary policy will remain accommodative in most economies, complemented by measures aimed at facilitating financial intermediation, while fostering resilience of the financial sector, to support growth in economic activity.
It is, therefore, notable, that the earlier anticipated monetary policy normalization (or increase of interest rates) in the advanced countries is being re-assessed and restrained with the advent of generalized weaker economic performance and heightened policy uncertainty,” said Bank of Botswana in its recent Monetary Policy Statement.
This week Minister of Finance & Economic Development, Dr Thapelo Matsheka approached parliament seeking lawmakers approval of Government’s intention to increase bond program ceiling from the current P15 Billion to P30 billion.
“I stand to request this honorable house to authorize increase in bond issuance program from the current P15 billion to P30 billion,” Dr Matsheka said. He explained that due to the halt in economic growth occasioned by COVID-19 pandemic government had to revisit options for funding the national budget, particularly for the second half of the National Development Plan (NDP) 11.
Botswana Stock Exchange (BSE) has this week revealed a gloomy picture of diamond mining newcomer, Lucara, with its stock devaluated and its entire business affected by the COVID-19 pandemic.
A BSE survey for a period between 1st January to 31st August 2020 — recording the second half of the year, the third quarter of the year and five months of coronavirus in Botswana — shows that the Domestic Company Index (DCI) depreciated by 5.9 percent.
Botswana Diamond PLC, a diamond exploration company trading on both London Stock Exchange Alternative Investment Market (AIM) and Botswana Stock Exchange (BSE) on Monday unlocked value from its shares to raise capital for its ongoing exploration works in Botswana and South Africa.
A statement from the company this week reveals that the placing was with existing and new investors to raise £300,000 via the issue of 50,000,000 new ordinary shares at a placing price of 0.6p per Placing Share.
Each Placing Share, according to Botswana Diamond Executives has one warrant attached with the right to subscribe for one new ordinary share at 0.6p per new ordinary share for a period of two years from, 7th September 2020, being the date of the Placing Warrants issue.
In a statement Chairman of Botswana Diamonds, John Teeling explained that the funds raised will be used to fund ongoing exploration activities during the current year in Botswana and South Africa, and to provide additional working capital for the Company.
The company is currently drilling kimberlite M8 on the Marsfontein licence in South Africa and has generated further kimberlite targets which will be drilled on the adjacent Thorny River concession.
In Botswana, the funds will be focused on commercializing the KX36 project following the recent acquisition of Sekaka Diamonds from Petra Diamonds. This will include finalizing a work programme to upgrade the grades and diamond value of the kimberlite pipe as well as investigating innovative mining options.
Drilling is planned for the adjacent Sunland Minerals property and following further assessment of the comprehensive Sekaka database more drilling targets are likely. “This is a very active and exciting time for Botswana Diamonds. We are drilling the very promising M8 kimberlite at Marsfontein and further drilling is likely on targets identified on the adjacent Thorny River ground,” he said.
The company Board Chair further noted, “We have a number of active projects. The recently acquired KX36 diamond resource in the Kalahari offers great potential. While awaiting final approvals from the Botswana authorities some of the funds raised will be used to detail the works we will do to refine grade, size distribution and value per carat.”
In addition BOD said the Placing Shares will rank pari passu with the Company’s existing ordinary shares. Application will be made for the Placing Shares to be admitted to trading on AIM and it is expected that such admission will become effective on or around 23 September 2020.
Last month Botswana Diamond announced that it has entered into agreement with global miner Petra Diamonds to acquire the latter’s exploration assets in Botswana. Key to these assets, housed under Sekaka Diamonds, 100 % subsidiary of Petra is the KX36 Diamond discovery, a high grade ore Kimberlite pipe located in the CKGR, considered Botswana’s next diamond glory after the magnificent Orapa and prolific Jwaneng Mines.
The acquisition entailed two adjacent Prospecting Licences and a diamond processing plant. Sekaka has been Petra’s exploration vehicle in Botswana for year and holds three Prospecting Licenses in the Central Kalahari Game Reserve (Kalahari) PL169/2019, PL058/2007 and PL224/2007, which includes the high grade KX36 kimberlite pipe.