Domestic inflation was mostly below the lower end of the Bank's objective range of 3 – 6 percent in 2016 against the background of benign domestic demand pressures, modest wage growth and favorable foreign price developments. This was revealed by Bank of Botswana’s Monetary Policy Statement (MPS) for 2017 report released on Tuesday.
The Monetary Policy Statement (MPS) is the Bank of Botswana's main medium through which stakeholders are informed of the framework for the formulation and implementation of monetary policy. The 2017 MPS reviews the previous year's economic and policy developments and also evaluates the determinants of changes in the level of prices and their impact on inflation in Botswana. The Statement also makes an assessment of economic and financial developments that are likely to influence the inflation path in the medium term and, in turn, the Bank's policy choices in 2017.
Inflation was below the lower end of the Bank's medium-term objective range of 3 – 6 percent for most of 2016 and decreased from 3.1 percent in December 2015 to 3 percent in December 2016. Global GDP growth is projected to be higher in 2017 than in 2016, while global inflation is forecast to increase as oil prices rise modestly and output gaps steadily contract.
“It is projected that inflation will remain low and stable in the medium term, consistent with the Bank's objective range. The Bank's formulation and implementation of monetary policy will focus on entrenching expectations of low and sustainable inflation, through timely response to price developments, while ensuring that credit and other market developments are in line with durable stability of the financial system. The Bank remains committed to monitoring economic and financial developments with a view to ensuring price and financial stability, without undermining sustainable economic growth.”
The report indicated that given projected low inflation in the medium term, the monetary policy stance was accommodative and the Bank Rate was reduced by 50 basis points to 5.5 percent in August 2016 to support economic activity; it was maintained at this level at the December 2016 meeting. The Bank also implemented an upward 0.38 percent annual rate of crawl of the nominal effective exchange rate (NEER) of the Pula effective January 2016, as inflation in Botswana was low compared to the average for the trading partner countries.
Bilaterally, the Pula depreciated by 7.5 percent against the South African rand, but appreciated by 8.9 percent against the SDR in the twelve months to December 2016.2 The real effective exchange rate (REER) depreciated by 0.77 percent year on year to December 2016, given that the differential between the lower inflation in Botswana and average inflation in trading partner countries was larger than the upward rate of crawl.
Furthermore, the MPS report reveals that, domestic monetary policy was conducted against the backdrop of below-trend economic activity (a non-inflationary output gap) and a positive medium-term inflation outlook. Moreover, foreign inflation was low, on average, with benign pressure on domestic prices.
Monetary policy implementation entailed the use of Bank of Botswana Certificates (BoBCs) to absorb excess liquidity9 in order to maintain interest rates that are consistent with the monetary policy stance; while reverse repurchase agreements (repos) were used to absorb excess liquidity between weekly auctions of BoBCs.
The report shows that monetary policy was conducted within a fiscal environment that was supportive of domestic economic activity, with 9.7 percent annual growth in government expenditure (twelve months to December 2016), slightly higher than 9.6 percent growth in the twelve-month period ending in December 2015. Development and recurrent expenditure increased by 20.3 percent and 6.1 percent, respectively, in the same period. The growth in recurrent expenditure included a 3 percent increase in salaries for civil servants, the impact on aggregate demand of which was not significant enough to generate notable inflationary pressures.
However it was reported that despite an accommodative monetary policy stance, annual growth in commercial bank credit decreased from 7.1 percent in December 2015 to 6.2 percent in December 2016, against a background of subdued economic activity and restrained growth in personal incomes. 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.
“The lower rate of increase in lending to households was mostly due to a slowdown in the yearly rate of expansion in unsecured loans to this sector from 15.5 percent to 8.3 percent in the same period. Meanwhile, the annual growth in mortgage lending to households also slowed from 7.2 percent to 6.3 percent in the same period. The share of mortgages in total bank households' credit decreased from 28.8 percent in December 2015 to 28.4 percent in December 2016. The lower growth of mortgage lending appears to be consistent with the weaker residential property market in 2016.”
For businesses, year-on-year growth in lending accelerated from a contraction of 0.3 percent in December 2015 to growth of 4.2 percent in December 2016. Even then, while lending to manufacturing, “other”, and construction expanded, credit growth to agriculture decelerated, while it was negative for other sector. Notably, there was a significant decline in credit for the mining sector, mainly as a result of the BCL group loan repayment in December 2016.
“In general, the non-inflationary increase in credit for consumption as well as business investment and operations is positive for the economy. In the circumstance, accommodative monetary policy stance and restricted liquidity absorption through BoBCs was appropriate.”
The report concludes by projecting 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. The forecast incorporates the effect of the expected increase in fuel prices as well as water and electricity tariffs.
“Any substantial upward adjustment in administered prices and government levies and/or taxes as well as any increase in international food and oil prices beyond current forecasts present upside risks to the inflation outlook. However, there are downside risks associated with the restrained global economic activity, technological progress and falling commodity prices.”
In 2017, the Bank's implementation of the exchange rate policy entailed a 0.26 percent upward rate of crawl of the NEER to stabilize the REER, given that inflation is projected to be around the lower end of the medium-term objective range of 3 – 6 percent. The crawling band exchange rate policy supports international competitiveness of domestic industries and contributes towards macroeconomic stability and economic diversification. The MPC this week decide to maintain the bank rate at 5.5 percent.
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.
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.
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”