The Bank of Botswana has decided to maintain the bank rate at 5.5% after it concluded that concluded that the outlook for price stability remains positive, with the inflation forecast within the 3 – 6 percent objective range in the medium term.
The central bank has been maintaining an accommodative monetary policy marked by reduction in the bank rate which was prevalent in 2015. There were two bank rate cuts in 2015, with the first cut in February that reduced the rate from 7.5 to 6.5 followed by a 50 basis point cut in August. In 2016, the bank slashed the bank rate by another 50 basis point, from 6% to 5.5% in August. Thereafter it has been maintaining the same rate as inflation rates continue to be below the bank’s medium term range.
“Subdued domestic demand pressures and benign foreign price developments contribute to the positive inflation outlook in the medium term. This outlook is subject to downside risks emanating from sluggish global economic activity and the resultant low commodity prices. It could, however, be adversely affected by any unanticipated large increase in administered prices and government levies as well as international oil and food prices beyond current forecasts,” the bank’s Monetary Policy Committee said in a statement.
The bank also added that the current state of the economy and both the domestic and external economic outlook, including the inflation forecast, suggest that the prevailing monetary policy stance is consistent with maintaining inflation within the Bank’s medium-term objective range of 3 – 6 percent. While Bank of Botswana has maintained the rate, the Federal Reserve Bank in USA has hiked its benchmark interest rate higher, announcing a move from the current 0.25-0.50% to a range of 0.50-0.75%, after indications that inflation has risen.
Inflation rates-for the most part of the year- have been below the central bank’s 3-6 medium term range. It first breached the bank’s lowest rung in January when inflation recorded was at 2.7% but then moved within the bank’s medium term range for the months of February and March, which recorded both recorded 3%. From there on, inflation rate fell again below the range, reaching the lowest levels in more than 2 years after recording inflation of 2.6% for August. However, inflation rates have been steadily increasing, threatening to breach the 3% mark again.
The annual inflation rate in November was 2.9%, up by 0.2% From the previous month, this is according to the recent Consumer Price Index (CPI) released by Statistics Botswana. The data collecting agency has also changed the base year, in the process introducing new items in the basket as well as adjusting weights across group indices.
Group indices were generally stable between October and November 2016, recording changes of less than 1 percent. According to the latest data from Statistics Botswana, inflation remained flat for several commodity groups, including: communication and education, with each group registering no change in overall prices. There was a slight increase of 0.1% across the housing, transport, recreation and culture, furniture, and miscellaneous group indices.
The biggest price increases were recorded in the Alcohol and Tobacco group index after recording a 0.6% increase following notable price increases in alcoholic beverages. An increase of 0.5% spread across the Food and Non-Alcoholic Beverages, and furniture group indices. The Food and Non-Alcoholic Beverages group is the second main constituent of the CPI at 16.51% and in the last 12 months the group’s overall price increased by 3.34%. Other notable increases were recorded in the clothing and Footwear at 0.4% as retailers prepare for a surge in demand during the holiday shopping season. Restaurants and Hotels also recorded an increase of 0.4%.
The All-Tradable inflation rate was 2.1% in November, an increase of 0.2% from previous month. The Domestic Tradable inflation advanced from 3.1% to 3.4% between September and October. The Imported Tradable inflation rate changed from 0.9% to 1.2%. The Non-Tradable inflation rate remained unchanged at 4.9 percent between October and November 2016.
The core inflation, which excludes items that are prone to volatile price movements such as food, petrol and electricity, decreased by 0.2% to end at 3.4% in October. Core inflation is thought to be an indicator of underlying long-term inflation. This is the second set of CPI figures after the statistics agency rebased the year from September 2006 to September 2016. The CPI rebasing covers a number of issues which includes the new basket and weights, area coverage as well as the methodology. The current index has September 2016 as its base and the weights were derived from the 2009/10 Botswana Core Welfare Indicator Survey (BCWIS) results.
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”