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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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Business

New study reveals why youth entrepreneurs are failing

21st July 2022
Youth

The recent study on youth entrepreneurship in Botswana has identified difficult access to funding, land, machinery, lack of entrepreneurial mindset and proper training as serious challenges that continue to hamper youth entrepreneurship development in this country.

The study conducted by Alliance for African Partnership (AAP) in collaboration with University of Botswana has confirmed that despite the government and private sector multi-billion pula entrepreneurship development initiatives, many young people in Botswana continue to fail to grow their businesses into sustainable and successful companies that can help reduce unemployment.

University of Botswana researchers Gaofetege Ganamotse and Rudolph Boy who compiled findings in the 2022 study report for Botswana stated that as part of the study interviews were conducted with successful youth entrepreneurs to understand their critical success factors.

According to the researchers other participants were community leaders, business mentors, Ministry of Trade and Industry, Ministry of Youth, Gender, Sport and Culture, financial institutions, higher education institutions, non-governmental institutions, policymakers, private organizations, and support structures such as legal and technical experts and accountants who were interviewed to understand how they facilitate successful youth entrepreneurship.

The researchers said they found that although Botswana government is perceived as the most supportive to businesses when compared to other governments in sub-Saharan Africa, youth entrepreneurs still face challenges when accessing government funding. “Several finance-related challenges were identified by youth entrepreneurs. Some respondents lamented the lack of access to start-up finance, whereas others mentioned lack of access to infrastructure.”

The researchers stated that in Botswana entrepreneurship is not yet perceived as a field or career of choice by many youth “Participants in the study emphasized that the many youth are more of necessity entrepreneurs, seeing business venturing as a “fall back. Other facilitators mentioned that some youth do not display creativity, mind-blowing innovative solutions, and business management skills. Some youth entrepreneurs like to take shortcuts like selling sweets or muffins.”

According to the researchers, some of the youth do not display perseverance when they are faced with adversity in business. “Young people lack of an entrepreneurial mindset is a common challenge among youth in business. Some have a mindset focused on free services, handouts, and rapid gains. They want overnight success. As such, they give up easily when faced with challenges. On the other hand, some participants argue that they may opt for quick wins because they do not have access to any land, machinery, offices, and vehicles.”

The researchers stated that most youth involved in business ventures do not have the necessary training or skills to maintain a business. “Poor financial management has also been cited as one of the challenges for youth entrepreneurs, such as using profit for personal reasons rather than investing in the business. Also some are not being able to separate their livelihood from their businesses.

Lastly, youth entrepreneurs reported a lack of experience as one of the challenges. For example, the experience of running a business with projections, sticking to the projections, having an accounting system, maintaining a clean and clear billing system, and sound administration system.”

According to the researchers, the participants in the study emphasized that there is fragmentation within the entrepreneurial ecosystem, whereby there is replication of business activities without any differentiation. “There is no integration of the ecosystem players. As such, they end up with duplicate programs targeting the same objectives. The financial sector recommended that there is a need for an intermediary body that will bring all the ecosystem actors together and serve as a “one-stop shop” for entrepreneurs and build mentorship programs that accommodate the business lifecycle from inception to growth.”

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Business

BHC yearend financial results impressive

18th July 2022
BHC

Botswana Housing Corporation (BHC) is said to have recorded an operating surplus of P61 Million, an improvement compared to the previous year. The housing, office and other building needs giant met with stakeholders recently to share how the business has been.

The P61 million is a significant increase against the P6 million operating loss realized in the prior year. Profit before income tax also increased significantly from P2 million in the prior year to P72 million which resulted in an overall increase in surplus after tax from P1 million prior year to P64 million for the year under review.

Chief of Finance Officer, Diratsagae Kgamanyane disclosed; “This growth in surplus was driven mainly by rental revenue that increased by 15% from P209 million to P240 million and reduction in expenditure from P272 million to P214 million on the back of cost containment.”
He further stated that sales of high margin investment properties also contributed significantly to the growth in surplus as well as impairment reversals on receivables amounting to P25 million.

It is said that the Corporation recorded a total revenue of P702 million, an 8% decrease when compared to the P760 million recorded in the prior year. “Sales revenue which is one of the major revenue streams returned impressive margins, contributing to the overall growth in the gross margin,” added Kgamanyane.

He further stated professional fees revenue line declined significantly by 64% to P5 million from P14 million in the prior year which attributed to suspension of planned projects by their clients due to Covid-19 pandemic. “Facilities Management revenue decreased by P 24 million from P69 million recorded in prior year to P45 million due to reduction in projects,” Kgamanyane said.

The Corporation’s strength is on its investment properties portfolio that stood at P1.4 billion at the end of the reporting period. “The Corporation continues its strategy to diversify revenue streams despite both facilities management income and professional fees being challenged by the prevailing economic conditions that have seen its major clients curtailing spending,” added the CEO.

On the one hand, the Corporation’s Strategic Performance which intended to build 12 300 houses by 2023 has so far managed to build 4 830 houses under their SHHA funding scheme, 1 240 houses for commercial or external use which includes use by government and 1 970 houses to rent to individuals.

BHC Acting CEO Pascaline Sefawe noted that; BHC’s planned projects are said to include building 336 flat units in Gaborone Block 7 at approximately P224 million, 100 units in Maun at approximately P78 million, 13 units in Phakalane at approximately P26 million, 212 units in Kazungula at approximately P160 million, 96 units at approximately P42 million in Francistown and 84 units at approximately P61 million in Letlhakane. Emphasing; “People tend to accuse us of only building houses in Gaborone, so here we are, including other areas in our planned projects.”

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Business

Commercial banks to cash big on high interest rates on loans

18th July 2022
Commercial-banks

Researchers from some government owned regulatory institutions in the financial sector have projected that the banking sector’s profitability could increase, following Bank of Botswana Monetary Policy Committee recent decision to increase monetary policy rate.

In its bid to manage inflation, Bank of Botswana Monetary Policy Committee last month increased monetary policy rate by 0.50 percent from 1.65 percent to 2.15 percent, a development which resulted with commercial banking sector increasing interest rate in lending to household and companies. As a result of BoB adjustment of Monetary Policy Rate, from 1.65 percent to 2.15 percent commercial banks increased prime lending rate from 5.76 percent to 6.26 percent.

Researchers from Bank of Botswana, the Non-Bank Financial Institutions Regulatory Authority, the Financial Intelligence Agency and the Botswana Stock Exchange indicated that due to prospects of high inflation during the second half of 2022, there is a possibility that the Monetary Policy Committee could further increase monetary policy rate in the next meeting in August 25 2022.

Inflation rose from 9.6 percent in April 2022 to 11.9 percent in May 2022, remaining above the Bank of Botswana medium-term objective range of 3 – 6 percent. According to the researchers inflation could increase further and remain high due to factors that include: the potential increase in international commodity prices beyond current forecasts, logistical constraints due to lags in production, the economic and price effects of the ongoing Russia- Ukraine conflict, uncertain COVID-19 profile, domestic risk factors relating to possible regular annual administered price adjustments, short-term unintended consequences of import restrictions resulting with shortages in supplies leading to price increases, as well as second-round effects of the recent increases in administered prices “Furthermore, the likelihood of further increases in domestic fuel prices in response to persistent high international oil prices could add upward pressure to inflation,” said the researchers.

The researchers indicated that Bank of Botswana could be forced to further increase monetary policy rate from the current 2.15 percent if inflation rises persistently. “Should inflation rise persistently this could necessitate an upward adjustment in the policy rate. It is against this background that the interest rate scenario assumes a 1.5 percentage points (moderate scenario) and 2.25 percentage points (severe scenario) upward adjustment in the policy rate,” said the researchers.

The researchers indicated that while any upward adjustment on BoB monetary policy rate and commercial banks prime lending rate result with increase in the cost of borrowing for household and compnies, it increase profitability for the banking sector. “Increases in the policy rate are associated with an overall increase in bank profitability, with resultant increases in the capital adequacy ratio of 0.1 percentage points and 0.2 percentage points for the moderate and severe scenarios, respectively,” said the researchers who added that upward adjustment in monetary policy rate would raise extra capital for the banking sector.

“The increase in profit generally reflects the banking industry’s positive interest rate gap, where interest earning assets exceed interest earning liabilities maturing in the next twelve months. Therefore, an increase of 1.5 percentage points in the policy rate would result in industry gains of P71.7 million (4.1 percent increase), while a 2.25 percentage points increase would lead to a gain of P173.9 million (6.1 percent increase), dominated by large banks,” said the researchers.

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