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Inflation spikes, Interest rates remain low

The annual inflation rate in February has spiked by 9 percent to 3.4 from the recorded 3.1 in January. Inflation rate has been steadily increasing in the last four months, however it remains within the Bank of Botswana’s medium term objective range of 3-6 percent.


Statistics Botswana’s latest Consumer Price Index (CPI) report for February shows that Group indices were generally stable between January and February 2017, recording changes of less than 1.0 percent. The Alcoholic Beverages, Tobacco & Narcotics index gained the most, recording a rise of 0.7 percent between January and February. The increase was owed to the rise in the section indices of Alcoholic Beverages (0.8 percent).


Another notable change was in the Furnishing, Household Equipment& Routine Maintenance index group, advancing by 0.5 percent between the two months. The rise was attributed to the general increase in the section indices particularly Goods & Services for Household Maintenance section index which accounted for 0.8 percent.


The Food & Non-Alcoholic Beverages index group advanced recorded a rise of 0.4 percent between January and February. The rise was due to the increases in the section indices, particularly; Coffee, Tea & Cocoa (1.9 percent), Sugar, Jam, Honey, Chocolate & Confectionery (1.2 percent) and Meat (Fresh, Chilled & Frozen) (0.9 percent).


The All-Tradable inflation rate was 3.1 percent in February 2017, an increase of 0.5 of a percentage point on the January 2017 rate of 2.6 percent. The Imported Tradable inflation rate rose from 1.7 percent in January to 2.4 percent in February. The Domestic Tradable inflation rate and the Non-Tradable inflation rate both remained unchanged at 4.3 percent.


The Trimmed Mean Core Inflation rate registered an increase of 0.2 of a percentage point moving from 2.7 percent in January 2017 to 2.9 percent in February 2017. The Core Inflation rate by exclusion remained unchanged at 3.9 percent between January and February 2017.


While there has been a steady increase in inflation rate lately, the central bank in its Monetary Policy Statement (MPS) for 2017 projected that growth in personal incomes will continue to be restrained, contributing to modest overall domestic demand, with a dampening effect on inflation in the medium term. Given prospects for benign external price developments, it is projected that inflation will remain within the 3 – 6 percent objective range in the medium term


According to the MPS, the domestic monetary policy in 2016 was conducted against the backdrop of below-trend economic activity (a non-inflationary output gap) and a positive medium-term inflation outlook. Inflation was restrained by slow growth in personal incomes, moderate increase in credit and the resultant subdued domestic demand. Moreover, foreign inflation was low, on average, with benign pressure on domestic prices.


The central bank explained that these developments provided scope for an accommodative monetary policy in support of stronger output growth. Thus, the Bank Rate was reduced by 50 basis points in August 2016 to 5.5 percent, resulting in the commercial banks' prime lending rate declining from 7.5 percent to 7 percent. Deposit interest rates also fell in line with the reduction in the Bank Rate. As at 30 December 2016, bond yields ranged from 2.4 percent to 5.4 percent for the shortest and longest maturities, respectively.


Despite an accommodative monetary policy stance, the recently released financial statistics for January by Bank of Botswana show that total credit extended by commercial banks decreased by P932 million (1.8%) from P52.2 billion in November to P51.3 billion in December. Loans to resident businesses decreased by P968 (4.5%) from P21.3 billion in November to P20.3 billion in December. Moreover, loans to non-resident businesses declined by P14 million (14%) from P99.2 million to P85.3 million in December.  There was a slight increase credit growth on the back of households loans which advanced by P57 million (0.2%) to P30.8 billion in December.


Within the resident business category, credit to parastatals decreased by P727 million (35.2%) to P1.3 billion. Year on Year, commercial banks credit growth for December 2016 was 6.2%, lower than the 7.6% registered in the previous month. The share of credit to the household sector was 60.1%, an increase from 58.9% in the previous month. The slowdown in annual credit expansion was mostly associated with the decrease in growth in lending to households from 12.8 percent in December 2015 to 7.6 percent in December 2016, largely reflecting the effect of restrained growth in personal incomes.


Household loans, with a share of 60.1 percent at the end of December 2016, continue to dominate commercial bank credit. It is also observed that the concentration of household credit is in unsecured lending (66.1 percent). However, the central bank says the risk to financial stability of this lending composition is moderated by the extent to which unsecured credit is diversified (relatively small amounts spread across many borrowers of differing risk profiles).


With interest rates at all time low, bank deposits were less preferred by those seeking higher returns. The January financial data indicates that total deposits held by commercial banks decreased by P1.3 billion (2.1%) from P63.8 billion in November to P62.4 billion in December. By holder, deposits of resident businesses decreased by P1.1 billion or 2.3%. Deposits fell for households by P930 million (6.3%) from P14.8 billion to P13.9 billion. The central government’s deposits decreased by P21 million (10.7%) from P192 million in November to P171.4 million in December.


On the other hand, deposits of local government increased by P517 million (26.0%) to P2.5 billion. There was significant growth in deposits by non-residents as they edged up by P166 million (122%) to P302.5 million. Within the business category, deposits for parastatals declined by P1.1 billion (15%) to P6.1 billion, whilst for private businesses they increased by P20 million (0.1%) to P39.4 billion. Businesses accounted for 73.4% of total deposits compared to 22.3% for households.


Bank of Botswana in the MPS for 2017 says one of the enduring challenges for commercial banks is the concentration of business deposits in their funding structure (mostly wholesale bulk deposits), part of which are for other financial institutions, potentially reflecting an imbalance in the market and the accompanying risk.

 

Notably, there was a significant deceleration in annual growth of household deposits from a growth of 16.8 percent in December 2015 to a contraction of 3.6 percent in December 2016. The central bank says this could reflect a potential financial strain on households arising from the sluggish growth in incomes. Similarly, annual growth in business deposits decreased significantly from 16.2 percent in December 2015 to 7.2 percent in December 2016.


While the impact of external factors on domestic prices in 2016 was also benign due to low average inflation in the trading partner countries, the relative strength of the Pula exchange rate against the rand and increasing domestic competitiveness moderated the impact of higher inflation in South Africa on domestic prices. However things could change this year as the Rand strengthens against the Pula. In the last 12 months up to January 2017, the Pula depreciated against the Rand by 8.8%, meaning the Pula’s weakening strength will offer less guard against imported tradable inflation rate as already evidenced by the latest CPI figures.


In a departure from tradition of secrecy, the central bank has announced that from now on, the bank will, after each meeting of the Monetary Policy Committee (MPC), through the Governor, deliver a statement at a press briefing to allow for interaction with the media and dissemination of the Bank's policy stance. The bank says there will also be public notification of the dates for the MPC meetings, initially for the subsequent half-year.

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Botswana on high red alert as AML joins Covid-19 to plague mankind

21st September 2020
Botswana-on-high-alert-as-AML-joins-Covid-19-to-plague-mankind-

This century is always looking at improving new super high speed technology to make life easier. On the other hand, beckoning as an emerging fierce reversal force to equally match or dominate this life enhancing super new tech, comes swift human adversaries which seem to have come to make living on earth even more difficult.

The recent discovery of a pandemic, Covid-19, which moves at a pace of unimaginable and unpredictable proportions; locking people inside homes and barring human interactions with its dreaded death threat, is currently being felt.

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Finance Committee cautions Gov’t against imprudent raising of debt levels

21st September 2020
Finance Committe Chairman: Thapelo Letsholo

Member of Parliament for Kanye North, Thapelo Letsholo has cautioned Government against excessive borrowing and poorly managed debt levels.

He was speaking in  Parliament on Tuesday delivering  Parliament’s Finance Committee report after assessing a  motion that sought to raise Government Bond program ceiling to P30 billion, a big jump from the initial P15 Billion.

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Gov’t Investment Account drying up fast!  

21st September 2020
Dr Matsheka

Government Investment Account (GIA) which forms part of the Pula fund has been significantly drawn down to finance Botswana’s budget deficits since 2008/09 Global financial crises.

The 2009 global economic recession triggered the collapse of financial markets in the United States, sending waves of shock across world economies, eroding business sentiment, and causing financiers of trade to excise heightened caution and hold onto their cash.

The ripple effects of this economic catastrophe were mostly felt by low to middle income resource based economies, amplifying their vulnerability to external shocks. The diamond industry which forms the gist of Botswana’s economic make up collapsed to zero trade levels across the entire value chain.

The Upstream, where Botswana gathers much of its diamond revenue was adversely impacted by muted demand in the Midstream. The situation was exacerbated by zero appetite of polished goods by jewelry manufacturers and retail outlets due to lowered tail end consumer demand.

This resulted in sharp decline of Government revenue, ballooned budget deficits and suspension of some developmental projects. To finance the deficit and some prioritized national development projects, government had to dip into cash balances, foreign reserves and borrow both externally and locally.

Much of drawing was from Government Investment Account as opposed to drawing from foreign reserve component of the Pula Fund; the latter was spared as a fiscal buffer for the worst rainy days.

Consequently this resulted in significant decline in funds held in the Government Investment Account (GIA). The account serves as Government’s main savings depository and fund for national policy objectives.

However as the world emerged from the 2009 recession government revenue graph picked up to pre recession levels before going down again around 2016/17 owing to challenges in the diamond industry.

Due to a number of budget surpluses from 2012/13 financial year the Government Investment Account started expanding back to P30 billion levels before a series of budget deficits in the National Development Plan 11 pushed it back to decline a decline wave.

When the National Development Plan 11 commenced three (3) financial years ago, government announced that the first half of the NDP would run at budget deficits.

This  as explained by Minister of Finance in 2017 would be occasioned by decline in diamond revenue mainly due to government forfeiting some of its dividend from Debswana to fund mine expansion projects.

Cumulatively since 2017/18 to 2019/20 financial year the budget deficit totaled to over P16 billion, of which was financed by both external and domestic borrowing and drawing down from government cash balances. Drawing down from government cash balances meant significant withdrawals from the Government Investment Account.

The Government Investment Account (GIA) was established in accordance with Section 35 of the Bank of Botswana Act Cap. 55:01. The Account represents Government’s share of the Botswana‘s foreign exchange reserves, its investment and management strategies are aligned to the Bank of Botswana’s foreign exchange reserves management and investment guidelines.

Government Investment Account, comprises of Pula denominated deposits at the Bank of Botswana and held in the Pula Fund, which is the long-term investment tranche of the foreign exchange reserves.

In June 2017 while answering a question from Bogolo Kenewendo, the then Minister of Finance & Economic Development Kenneth Mathambo told parliament that as of June 30, 2017, the total assets in the Pula Fund was P56.818 billion, of which the balance in the GIA was P30.832 billion.

Kenewendo was still a back bench specially elected Member of Parliament before ascending to cabinet post in 2018. Last week Minister of Finance & Economic Development, Dr Thapelo Matsheka, when presenting a motion to raise government local borrowing ceiling from P15 billion to P30 Billion told parliament that as of December 2019 Government Investment Account amounted to P18.3 billion.

Dr Matsheka further told parliament that prior to financial crisis of 2008/9 the account amounted to P30.5 billion (41 % of GDP) in December of 2008 while as at December 2019 it stood at P18.3 billion (only 9 % of GDP) mirroring a total decline by P11 billion in the entire 11 years.

Back in 2017 Parliament was also told that the Government Investment Account may be drawn-down or added to, in line with actuations in the Government’s expenditure and revenue outturns. “This is intended to provide the Government with appropriate funds to execute its functions and responsibilities effectively and efficiently” said Mathambo, then Minister of Finance.

Acknowledging the need to draw down from GIA no more, current Minister of Finance   Dr Matsheka said “It is under this background that it would be advisable to avoid excessive draw down from this account to preserve it as a financial buffer”

He further cautioned “The danger with substantially reduced financial buffers is that when an economic shock occurs or a disaster descends upon us and adversely affects our economy it becomes very difficult for the country to manage such a shock”

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