2020 MONETARY POLICY STATEMENT
by
Moses D Pelaelo
Governor
February 25, 2020
Introduction
Distinguished Guests, on behalf of the Board, Management and
Staff of the Bank, I am honoured and most delighted to welcome
you to the launch of the 2020 Monetary Policy Statement. I
extend a special word of welcome to the Guest of Honour,
Honourable Minister of Finance and Economic Development, his
Cabinet colleagues, Members of Parliament and all Distinguished
Guests attending this event for the first time. We are most
grateful to you all for having made the time to attend the launch.
Distinguished Ladies and Gentlemen, the publication and launch
of the Monetary Policy Statement is an important event in the
Bank's calendar of events, for a good public policy reason. It is
a key aspect of good governance, transparency and
accountability in the formulation and implementation of
monetary policy. Through the Statement, the Bank seeks to
promote an understanding of the monetary policy framework and
its objectives. This helps to guide the public's inflation
expectations towards convergence with the Bank's inflation
objective and, therefore, enhancing prospects for sustained
maintenance of low, stable and predictable inflation. Specifically,
the Bank uses the Monetary Policy Statement as an instrument
to report on the inflation trajectory and policy performance in the
past year; to outline and convey its prognosis of economic and
other policy developments going forward; and, in turn, the
prospective monetary policy response in the year ahead.
Background and Context
In essence, the Statement commits the Bank with respect to its
role in contributing to macroeconomic stability. In this regard, it
is propitious that the 2020 launch of the Monetary Policy
Statement follows a Budget Speech that proposes a new
direction for policy and economic management. In addition, and
coincidentally, the Bank, in collaboration with the International
Monetary Fund and other development partners, recently
concluded a workshop in Kasane on "fostering diversification to
escape the middle-income trap" for Botswana. The Workshop
benefitted from contributions by representatives of countries,
such as Chile, Costa Rica, Estonia, Mauritius and South Korea,
which are considered to have been successful in advancing
export and economic diversification.
Distinguished Guests, there are common themes that emerge
from both the recent Budget Speech and the Kasane Workshop;
and to which the Bank is also fully aligned. First, that Botswana
faces challenges of inclusive growth and evident structural
transition, from historically higher growth rates of early years of
its development to the current modest and inadequate levels to
propel the economy to high-income status by 2036. This is
reflected by, or indeed because of, weak traction of export-led
industrialisation strategy with a shrinking tradable sector and, in
general, narrow economic base, high unemployment rates, as
well as relatively high levels of poverty and income inequality,
even as levels of incomes and prosperity are increasing
somewhat. Clearly, this situation requires urgent attention if the
aspirations espoused in Vision 2036 and the desire to transit to
high-income status are to be realised.
Second, is the need for structural reforms and transformation to
improve productivity, ease of doing business, policy transmission
and impact, institutional performance and leadership
accountability, as well as the economic benefit of spending on
infrastructure development and social services. Third, is the
imperative to improve on implementation of reforms and
initiatives through timely evaluation of the impact and outcomes
of the reforms as well as performance of responsible entities.
Fourth, it is critical to maintain macroeconomic balance, some
aspects of which fall within the Bank's statutory mandate and,
therefore, covered in the Monetary Policy Statement. These
relate to stability with respect to prices (inflation), the exchange
rate and the financial sector. The other element of
macroeconomic stability is fiscal sustainability, which was
eloquently covered by the Honourable Minister in his maiden
Budget Speech. It would be remiss for me, however, if I do not
mention that, while Botswana is ranked 91 out of 141 by the
World Economic Forum 2019 Global Competitiveness Report, it
is ranked number 1, with 32 other countries, on the
macroeconomic stability pillar.
Honourable Minister and Distinguished Guests, the reason for
this background is to highlight the fact that the Bank is alive to
the development aspirations of the country and related
challenges. Furthermore, within the confines of its role and
mandate, the Bank contributes to efforts to address the
constraints to diversification and inclusive economic growth. In
essence, by focusing and consistently delivering on its specific
roles, the Bank contributes to maintenance of a conducive
macroeconomic environment for structural reforms and
transformation initiatives to gain traction, potentially leading to
higher rates of growth needed to elevate the economy to high
income status.
Policy Track Record
Honourable Minister, as we come to the end of the second
decade of the third millennium, it is important to reflect on the
Bank's contribution, thus far, to macroeconomic stability. After
all, a key role for a central bank, by which it is ultimately judged,
is the extent to which it succeeds in preservation of the value
and integrity of the national currency, Pula and thebe. Notably,
the evolution of the monetary policy framework from the early
2000s has resulted in beneficial transition from high and volatile
to the current low, stable and predictable inflation. Similarly, the
adoption of the crawling band exchange rate regime in 2005 and
the subsequent public announcement of its key parameters, the
coefficients of the basket currencies and the annual rate of
crawl, have contributed to stability of the inflation-adjusted
exchange rate. It was also key to the success in achieving the
inflation objective.
In addition, there has been, broadly, sound and effective banking
supervision as well as beneficial collaboration by the various
regulatory authorities that has contributed to stability of the
financial sector, its growth and enhanced support for broader
economic activity. A major lesson learnt from these
developments is a reinforcement of the position that
transparency, consistency and predictability of the policy
framework are essential ingredients for sustainable growth
objectives and public confidence.
Distinguished Guests, I have to admit, however, that the levels
of development of money and capital markets in Botswana need
to be raised significantly. This is with a view to improve on
transmission and potency of macroeconomic policies and to have
a greater impact on economic activity. As of 2017, the
composite financial index for Botswana (encompassing access,
efficiency and depth) was two thirds that of Namibia, and a third
and a quarter, respectively, of that for South Africa and
Singapore. Therefore, this is one of the areas to attend to in the
transformation agenda. Within such composite measures,
Botswana falls short of international norms by nearly every
metric and compares unfavourably with peer upper-middle
income countries. The nascent development of the interbank
market and stock exchange are good examples in this regard.
Of particular concern is the paucity of supply of high-quality
corporate debt instruments, fragmented credit markets and low
level of development of the government bond market. This
situation presents undue constraints and risks to long-term
infrastructure financing, fiscal sustainability and, more broadly,
a headwind to capital markets development. In other countries,
a vibrant and highly liquid government securities market provides
a source of funding for government spending, including local
authorities and other public sector entities. This option is
currently limited in Botswana and, therefore, its development
offers a viable avenue for cost-effective domestic resource
mobilisation for long-term investment and funding of government
projects.
Going forward, therefore, policy consultations, involving the
Ministry of Finance and Economic Development and the Bank,
are focussed on designing a transparent and more frequent
issuance of a sufficient quantum of domestic government
securities in a predictable arrangement that, hopefully, will
attract a larger pool of participants and support deficit financing,
with lower risks. This would be premised on the adoption of a
strong governance architecture around public debt management,
underpinned by the country's well-established track record of
prudent fiscal policy and strong institutions.
Furthermore, given the vulnerability of Botswana to trade
shocks, climate change and consequent prolonged droughts,
there is need to maintain sufficient fiscal and external buffers.
This means building sufficient resilience to afford the fiscal space
to undertake countercyclical stabilisation when necessary. The
contribution of the Bank, in this regard, is through continued
judicious management of the foreign exchange reserves to
preserve capital, generate returns for organic growth, and to
ensure availability of foreign exchange, necessary for
uninterrupted economic activity.
Monetary Policy Framework
Distinguished Ladies and Gentlemen, the objective of the Bank's
monetary policy is to achieve price stability, defined as a low,
stable and predictable level of inflation within 3 - 6 percent, in
the medium term. Monetary policy formulation is also aligned to
safeguarding stability of the financial system. In this regard,
price stability as well as conducive monetary and financial
conditions foster mobilisation of savings, productive investment,
prudent allocation of credit and international competitiveness of
domestic firms. In turn, a sound and stable financial system is
critical for effective transmission of monetary policy signals,
facilitating the flow of funds and liquidity, as well as risk
mitigation in support of economic activity. Overall, therefore,
the conduct of monetary policy and attention to financial stability
support the national objectives of employment creation and
sustainable economic growth. Price and financial stability also
help to preserve the value of incomes and long-term savings,
especially for low income earners and pensioners, with less
opportunity or wherewithal to protect their incomes or generate
wealth by other means.
At this juncture I will, in turn, address three areas, namely, global
trends that have influenced inflation in Botswana; highlights of
the conduct of monetary policy, both internationally and here at
home; and, finally, provide the medium-term inflation outlook and
outline the likely policy stance in 2020.
External Economic Developments in 2019
Global GDP growth declined to an estimated 2.9 percent in 2019
compared to 3.6 percent in 2018. The slowdown was
widespread across countries and regions. Global economic
performance and sentiments were negatively affected by trade
tensions between the US and China, as well as uncertain
prospects for Brexit. In the circumstances, global inflation eased
from 3.6 percent in 2018 to 3.4 percent in 2019. Inflation was
subdued in the Special Drawing Rights (SDR) countries,
increasing slightly from 1.7 percent in December 2018 to 2
percent in December 2019. In South Africa, inflation decreased
from 4.5 percent in December 2018 to 4 percent in December
2019. Therefore, average inflation for the trading partner
countries was constant at 2.9 percent in both 2018 and 2019.
Domestic Economic Developments in 2019
Domestic output expansion is estimated at 3.7 percent in the
twelve months to September 2019, compared to 5 percent in
the year to September 2018. The lower increase in output is
attributable to, in the main, weaker performance of the mining
sector. Growth in non-mining GDP also slowed, from 5.1 percent
in the year to September 2018 to 4 percent in the corresponding
period ending September 2019.
Inflation was below the lower bound of the objective range of 3
- 6 percent for most of 2019; and the outcome was broadly
consistent with earlier projections. Average inflation decreased
from 3.2 percent in 2018 to 2.8 percent in 2019, largely because
of base effects. This is because the increase in some
administered prices in 2018 was not repeated in 2019. Overall,
low inflation in Botswana was in the context of moderate
domestic demand pressures and benign foreign inflation. I
hasten to mention that food prices reversed the 0.4 percent
decrease in 2018 to a 3 percent increase in 2019.
The subdued pressure on inflation is also apparent from below-
trend economic activity, signified by a negative output gap, as
the economy continues to operate below potential. However,
Government expenditure grew by 15.4 percent in 2019
compared to an increase of 6.6 percent in the prior year. Within
this, personal emoluments rose by 14.4 percent, following the
April 2019 public sector salary increase, and this would have
been replicated by other major employers. Nevertheless, the
impact on inflation was muted. It should be recognised, in this
respect, that there is significant externalisation of spending by
both government and the private sector, including ready
availability of imports, hence moderate impact of increased
government expenditure and wages on domestic prices. The
other point to highlight is that the short-term impact of
government spending on domestic demand is moderated to the
extent that a significant component involves infrastructure and
capacity development. For Botswana, this type of spending
tends to be import intensive. Therefore, the economic benefits
of such public investments are derived in the medium to long
term.
At the same time, the recent labour force survey results, by
Statistics Botswana, for the third quarter of 2019, indicate an
unemployment rate of 20.7 percent. This reinforces the
assessment of below-potential performance of the economy,
modest aggregate demand and, consequently, subdued
pressures on inflation.
Distinguished Guests, the other component of demand, growth
in commercial bank credit, eased marginally from 7.7 percent in
2018 to 7.6 percent in 2019, driven by a deceleration in lending
to businesses, from 10 percent growth in 2018 to a contraction
of 1.7 percent in 2019. For households, annual credit growth
increased from 6.2 percent in 2018 to 13.8 percent in 2019, in
the context of the increase in public sector wages. Likewise,
faster growth was recorded for personal loans, while the increase
in mortgage loans was smaller in 2019 compared to 2018.
Overall, the rate of credit growth continued to be supportive of
economic activity, with minimal risk to financial stability.
Global Monetary Policy Implementation in 2019
Honourable Minister and Esteemed Guests, monetary policy
implementation in 2019 was mixed at the global level, in
response to weak economic performance and restrained inflation
across countries and regions. It was, however, generally
accommodative, with low levels of interest rates and continued
liquidity support to the financial sector in some of the major
economies.
Most central banks in the emerging market economies reduced
their policy rates, given the need to support economic activity.
For example, closer to home, the South African Reserve Bank
reduced the repo rate by 25 basis points to 6.5 percent in July
2019, and further to 6.25 percent in January 2020.
Domestic Monetary Policy Implementation in 2019
For its part, the Bank of Botswana continues to conduct
monetary policy through a forecast-based policy framework, and
that informs the response to deviations of inflation from the
objective range, in a forward-looking manner. The analysis also
involves assessment of divergence of actual output from
potential output (the output gap), a primary indicator of the
direction of future inflation. The forecast incorporates
projections of foreign inflation, exchange rates and changes in
domestic administered prices and taxes. In addition, the Bank
evaluates the risks associated with the projected outlook. In
determining the appropriate policy response, the inflation
forecast is considered alongside indicators of financial stability
and economic activity, including relevant information from the
quarterly Business Expectations Surveys.
In 2019, monetary policy was conducted in an environment of
below-trend economic activity and a favourable medium-term
inflation outlook; therefore, providing scope for maintaining an
accommodative monetary policy stance in support of stronger
output growth. Hence, the Bank Rate was reduced by 25 basis
points, from 5 percent to 4.75 percent in August 2019.
Consequently, the prime lending rate of commercial banks
declined from 6.5 percent to 6.25 percent. Deposit interest rates
generally increased despite the high levels of market liquidity.
This seemingly paradoxical outcome can be explained by the
funding structure of banks, characterised by competition for
corporate and other volatile institutional deposits that are
important for several of the commercial banks.
The increase in market liquidity that needed to be sterilised
resulted in outstanding Bank of Botswana Certificates (BoBCs)
of P8.6 billion in December 2019, an increase from P8.2 billion
in December 2018. BoBC yields decreased following the
reduction of the Bank Rate.
Distinguished Guests, as I indicated last year, the Bank
continuously evaluates monetary policy framework for
effectiveness and, where appropriate, makes changes. In 2019,
the Bank introduced the 7-day BoBC as the main instrument for
conducting monetary operations, replacing the then 14-day
paper, together with what we called 'reserves averaging' in the
determination of the Primary Reserves Requirement for banks.
This was with a view to improving the efficiency of liquidity
management and policy transmission. Both measures were
welcomed by the market, with a positive effect as expected; that
is, better liquidity management by both the Bank and the
commercial banks. Over time this is expected to reduce demand
for excess reserves held for precautionary purposes; therefore,
freeing up additional resources for productive lending by banks.
I am also pleased to report that the Financial Stability Council
(FSC), whose primary mandate is to coordinate macro-prudential
policy analysis and respond to threats to financial stability, was
launched in February 2019. As indicated, the Council comprises
the Ministry of Finance and Economic Development, Bank of
Botswana, Non-Bank Financial Institutions Regulatory Authority
and the Financial Intelligence Agency. The Council commenced
work and achieved three important milestones. First, is the
publication of the maiden Financial Stability Report in September
2019. The Report concluded that the Botswana financial sector
was sound, stable and resilient, even looking ahead. However,
there is a continuing need to address market conduct and
governance in some segments of the industry. Furthermore,
there are outstanding matters relating to effective compliance
with the anti-money laundering and combating the financing of
terrorism requirements. Notwithstanding, significant progress
continue to be made for the country to be removed from the
Financial Action Task Force (FATF) grey listing by December
2020.
Second, the Council adopted a macroprudential policy
framework for Botswana, which outlines the analytical
framework and tools to be deployed to mitigate systemic risk.
Third, consultations were initiated on prospects for establishing
a Deposit Protection Fund. The Fund would provide insurance
and a mechanism for paying out a predetermined amount of
customer deposits in the event of a bank failure. It will,
therefore, be complementary to the existing framework of
banking regulations, minimum prudential standards, ongoing
supervision and resolution frameworks. Subject to the outcome
of the industry consultations, the Financial Stability Council will
seek authority for promulgation of the law to establish the Fund.
Global Economic Prospects in 2020
Honourable Minister and Distinguished Guests, now looking
ahead, the global economy is expected to grow by 3.3 percent
in 2020, higher than the estimated expansion of 2.9 percent in
2019. The projection is premised on anticipated recovery of the
underperforming emerging market economies. Overall, risks to
the global economic activity are, however, skewed to the
downside. The key risks to the outlook include continuance of
geopolitical tensions, uncertain trade relations, social unrest in
some jurisdictions, as well as the adverse impact of Covid-19.
Global inflationary pressures are forecast to be modest in the
short to medium term given below-potential output. In this
environment, monetary policy will remain accommodative in
most economies, complemented by measures aimed at
facilitating financial intermediation, while fostering resilience of
the financial sector, to support growth in economic activity.
Domestic Economic Prospects in 2020
Distinguished Guests, the domestic economy is forecast to grow
by 4.4 percent in 2020, higher than the estimate of 3.6 percent
for 2019. The improvement is premised on conducive financing
conditions associated with accommodative monetary policy and
a sound financial environment. The implementation of ease of
doing business reforms and concerted efforts towards economic
transformation should also be positive for economic activity.
The crawling band exchange rate policy has served the country
well and will continue to complement monetary policy. This
bodes well for maintenance of international competitiveness of
domestic industries and macroeconomic stability. As announced
at the beginning of the year and broadly consistent with
Botswana's trade pattern, the weights of the constituent
currencies in the Pula Basket are 45 percent for the South African
rand and 55 percent for the SDR. A downward rate of crawl of
1.51 percent of the nominal effective exchange rate is also being
implemented in 2020. With low inflation, the policy framework
allows flexibility to further loosen real monetary conditions
through a downward crawl to enhance competitiveness of the
domestic industry and support economic growth.
Overall, both external and domestic pressures on inflation are
expected to be benign, and it is projected that inflation will revert
to within the Bank's 3 - 6 percent medium-term objective range
from the second quarter of 2020. The forecast incorporates a
possible hike in water and electricity tariffs, as well as the
announced increase in public service salaries in the 2020/21
financial year. Furthermore, it takes into account the small
impact of the 1.51 percent downward rate of crawl on import
prices. Having said that, I should be quick to caution that any
upward adjustment in administered prices and government levies
and/or taxes and any increase in international commodity prices
that is substantially beyond current projections present upside
risks to the inflation outlook. In contrast, downside risks to
inflation arise from prospects of weak global economic activity,
the tendency of the ongoing technological progress to lower
costs and prices as well as a possible fall in international
commodity prices.
Monetary Policy Stance
Distinguished Guests, based on available data, the current
projections suggest that domestic inflation will, in the short term,
revert to and remain within the Bank's medium-term objective
range of 3 - 6 percent. This favourable medium-term outlook
for inflation is in the context of moderate growth in economic
activity and a sound and stable financial system. Therefore,
prospective developments augur well for maintenance of an
accommodative monetary policy that supports productive
lending to businesses and households, resulting in welfare
enhancements that also drive economic activity. The
implementation of monetary policy will continue to focus on
entrenching expectations of low, predictable and sustainable
inflation, through timely responses to price developments; while
at the same time, taking due care to ensure that policy decisions
are consistent with durable financial stability and support
sustainable economic growth and employment creation.
Conclusion
Honourable Minister and Distinguished Guests, I wish to
conclude by underscoring that the continuing success in
achieving price and financial stability, to which the Bank remains
fully committed must, in the end, involve the cooperation of all
key players in the economy, including Government, parastatals
and the private sector. The other point to conclude with is that,
given that monetary and fiscal policies are expansionary for
longer, immediate and effective implementation of
transformation initiatives and structural reforms (so-called policy
rotation) would raise prospects for faster growth and economic
diversification, needed to attain high-income status within the
Vision 2036 period.
Honourable Minsters, Distinguished Guests, it is worth reminding
us all, that, in as much as prices matter, ultimately, total factor
productivity, global competitiveness of domestically produced
goods and services as well as innovation and environmentally
sound policies are critical for greater prosperity and social
welfare. Furthermore, nothing that I have said today suggest, in
any way, that, aggregate demand management is easy, however
one is well informed. On the contrary, central banks across the
globe are subject to intense and often critical scrutiny, especially
at periods such as now of "low inflation and for long" with the
likely danger of build-up of global financial vulnerabilities. All I
have tried to do, today, is to share with you the likely
considerations that would guide monetary policy decisions in
2020, putting these in the wider context of challenges facing not
just the domestic but also the global economy.
The Speaker of the National Assembly, Honourable Ministers,
Honourable Members of Parliament, Distinguished Guests, Ladies
and Gentlemen, I thank you for your kind attention.