Bank of Botswana (BoB) says Headline inflation will revert back to the Bank’s 3-6 percent medium term objective range from the second quarter of 2020 going forward. This was revealed by the BoB Governor Moses Pelaelo when delivering the Monetary Policy Statement this week.
Inflation was below the lower bound of the Bank’s inflation objective range of 3 – 6 percent for most of 2019, against the background of modest domestic demand, the relative strength of the Pula against the South African rand which resulted in lower import prices. Lower inflation was also bolstered by limited range of increase in administered prices, as well as moderate foreign inflation resulting in decrease domestically from an average of 3.2 percent in 2018 to 2.8 percent in 2019, breaching the lower bound of the Bank’s 3 – 6 percent objective range for most of the year.
BoB says this was mainly because the increase in administered prices, in particular, fuel prices, public transport fares and electricity tariffs effected in 2018 was not repeated in 2019. Inflation decreased from 3.5 percent in December 2018 to 2.2 percent in December 2019. Meanwhile, food price inflation increased from -0.4 percent in December 2018 to 3 percent in December 2019 as a result of significant price increases for meat, fish and cereals.
Regarding core inflation measures, the 16 percent trimmed mean inflation decreased from 3.6 percent in December 2018 to 1.8 percent in December 2019, while inflation excluding administered prices increased from 1.8 percent to 2.5 percent in the same period. Pelaelo revealed that headline inflation is forecast to revert to within the Bank’s 3 – 6 percent medium-term objective range from the second quarter of 2020.
He explained that the projection takes into account the possibility of an increase in electricity and water tariffs in the second quarter of 2020, as well as the previously announced increase in public service salaries in the 2020/21 financial year. The projection also incorporates the effect of the 1.51 percent downward rate of crawl that is being implemented for the year 2020, which should potentially see inflation gravitating towards 4.5 percent in the midterm.
In October 2019 Bank of Botswana revised its inflation forecasts from the August 2019 forecasts to reflect the downward revision in both international food and fuel prices as well as the downward revision of South African inflation in the short-term. The Bank reiterated that this was because domestic fuel prices were no longer expected to increase in the last quarter of 2019 and the first quarter of 2020 as was previously anticipated.
This week BoB explained that the expected increase in government spending by 10.1 percent for 2019/20 financial year and the 13.8 percent increase in credit to households in 2019 are not expected to have any significant influence on domestic demand, hence inflation because of possible leakages in the form of payments for imports. Upside risks to the inflation outlook relate to any unanticipated substantial upward adjustment in administered prices and government levies and/or taxes, as well as the potential increase in international commodity prices beyond current forecasts.
These risks are moderated by continuing subdued global economic activity, the tendency of technological progress to lower costs and prices or dampen the rate of increase and the potential fall in international commodity prices. Domestically, the continuance of modest economic growth contributes to moderate domestic inflation. Meanwhile, according to the December 2019 Survey by Bank of Botswana, the business community expects inflation to be within the Bank’s objective range in 2020, suggesting that inflation expectations are well-anchored.
Bank of Botswana underscored that an evaluation of the determinants of inflation and factors affecting financial stability suggests maintenance of a continuation of low and predictable level of inflation into the medium term, and stable financial system. The modest domestic demand pressures and the restrained increase in foreign prices contribute to the positive inflation outlook in the medium term. The Bank says the current state of the economy and the outlook for both domestic and external economic activity suggests that the prevailing accommodative monetary policy stance is consistent with inflation being within the objective range of 3 – 6 percent in the medium term.
Since inflation is projected to be around the lower end of the Bank’s inflation objective range in 2020, amidst sluggish economic activity, BoB observed that the economy could benefit from a measured depreciation of the Pula against trading partners in order to boost exports and promote diversification; while there is no upside inflationary threat to the objective, hence the implementation of the 1.51 percent downward rate of crawl.
BoB Executives highlighted that 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.
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”