2017 MONETARY POLICY STATEMENT
by
Moses D Pelaelo
Governor
February 27, 2017
Introduction
It is indeed a great pleasure and honour to welcome all of you, on
behalf of the Board, management and staff of the Bank, to the
launch of the 2017 Monetary Policy Statement. This is an
important and priority occasion in the annual calendar of events
for the Bank. We are therefore most grateful to all of you,
Distinguished Guests, for gracing the occasion with your presence
this morning.
The launch and dissemination of the Monetary Policy Statement is
consistent with the key governance imperatives of transparency
and accountability in the formulation and implementation of
monetary policy. The Statement seeks to promote an
understanding of the conduct of monetary policy and its objectives
and, accordingly, guide the public's formation of expectations. It is
on this occasion, that the Bank reports on inflation trajectory and
policy performance as articulated in the previous year's
Statement; outline and convey the Bank's perspective on
economic and other policy developments; and, in turn, how the
Bank intends to respond and implement monetary policy.
Esteemed Guests, I would like to start with recognition of the
immense contribution of the past leadership of the Bank in the
design and shaping of the current monetary policy framework, and
in particular, my predecessor, former Governor, Ms Linah
Mohohlo. She presided over important innovations that helped
engender policy credibility and performance in meeting the
inflation objective as well as fostering effectiveness and stability of
the banking system. As you would be aware, inflation in Botswana
has been, since June 2013, either within or below the desired
objective range. This is the single most important contribution to
demand management and macroeconomic stability that you can
ask of your Central Bank.
Indeed, the Bank's primary statutory mandate is to maintain price
stability. Along with this mandate, the Bank is responsible for
promotion of a safe and sound financial system as well as efficient
payments infrastructure. Price stability, which is defined as low,
stable and predictable level of inflation, fosters mobilisation of
savings, productive investment, prudent allocation of credit and
international competitiveness of domestic firms. In turn, a sound
and stable financial system is potentially more effective in policy
transmission and facilitating economic activity through the
provision of liquidity and risk mitigation. Therefore, Honourable
Minister, let me reaffirm that the Bank's mandate is aligned to, and
supports, the national objective of sustainable economic growth.
Improvement to the Monetary Policy Framework
Distinguished Guests, I will now mention some of the important
elements of the evolution of the monetary policy framework, over
the past two decades. First, is the clarity and definition of the
inflation objective and identification of the medium-term
performance horizon. Second, development of supporting
infrastructure and internal capacity to operate the forecasting and
policy analysis system that guides monetary policy decisions.
Third, the Bank formalised the institutional arrangements, in the
form of a Monetary Policy Committee whose regular meetings are
followed by a Press Release, as well as publication of the Annual
Monetary Policy Statement and Mid-Term Review. In addition,
changes in the exchange rate policy framework also helped
enhance the effectiveness of monetary policy. In particular, the
adoption of the crawling band exchange rate framework since
2005 and, later, public disclosure of the weights of the constituent
currencies in the Pula basket as well as the rate of crawl, has
supported the Bank's focus on the inflation objective. This
transparency in the management of the exchange rate helps to
anchor policy credibility and predictability and, therefore, informs
expectations and economic decisions.
As the Bank continues to focus on refining and making
improvements, it has been the intention to enhance transparency
and interaction with the market, as circumstances would be
propitious, with a view to further buttressing policy transmission
and credibility. In this regard, the Bank will, henceforth, pre-
announce the dates for the Monetary Policy Committee (MPC)
meetings for the ensuing half year; and, convene a Media Briefing
following each meeting of the MPC to announce the policy
decision. I hasten to add, Distinguished Guests, that these
initiatives are premised on availability, and should be a catalyst for
development, of an appropriate market infrastructure and
expertise, such as informed and robust market analysis and
strong financial journalism, as well as organised debt and credit
markets.
Honourable Minister, Ladies and Gentlemen, my message today
also addresses three other areas. First, I will briefly examine
global trends that have influenced inflation in Botswana; second, I
will highlight the conduct of monetary policy, both internationally
and here at home; and, finally, I will provide the medium-term
inflation outlook and, consequently, the likely policy stance.
External Economic Developments
Looking back, it is estimated that global output growth was 3.1
percent in 2016, compared to 3.2 percent in 2015, and weaker
than the projection of 3.4 percent early in the year. The lower
growth rate resulted from subdued economic activity in both
advanced and emerging market economies, while low commodity
prices continued to weigh down on economic performance in
commodity exporting countries. International oil prices, however,
recovered during 2016, partly in response to the agreement by
major producers to reduce production; therefore, potentially
generating upward pressure on inflation. Following a generalised
decrease in the previous two years, global food prices also
increased in 2016.
Due to these factors, global inflation increased slightly from 2.8
percent in 2015 to 2.9 percent in 2016, but much lower than the
forecast of 3.4 percent at the beginning of the year. As regards
Botswana's trading partner countries, inflation remained low in the
Special Drawing Rights (SDR) countries (comprising the United
States of America, euro zone, China, Japan and the United
Kingdom). Average inflation for these countries increased from
0.7 percent to 1.7 percent in the same period. In contrast, inflation
in South Africa breached the upper end of the target range,
peaking at 6.8 percent, mainly because of weakness of the South
African rand and food price pressures. Overall, average inflation
for the trading partner countries increased from 2.8 percent to 4.2
percent during 2016.
Domestic Inflation
In Botswana, inflation was low and stable, and fluctuated around
the lower end of the desired objective range of 3 percent, hence
broadly consistent with projections for the year. Inflation reached
a record low of 2.6 percent in August 2016. The low rate of annual
price increase was generalised across most categories of goods
and services. However, food price inflation increased from 0.7
percent in 2015 to 3.9 percent in 2016. Also, the reduction of 3.3
percent in fuel prices in 2016 was small compared to a 15.7
percent decrease in the prior year.
In addition to benign external price developments, modest inflation
in Botswana was also indicative of subdued domestic demand,
against the background of sluggish economic activity and
restrained growth in personal incomes. Among the influences on
domestic demand are growth in government expenditure, wages
and credit. Taking these three elements in turn, government
expenditure increased by 9.7 percent in 2016, virtually the same
rate of expansion as in the previous year. It should be
recognised, in this respect, 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. In the context of Botswana, this type of
spending tends to be import intensive and, also, the economic
benefits of such public investments are derived in the medium to
long term.
Turning to wage developments, it is notable that government
recurrent expenditure included a 3 percent salary increase for the
public service, which, as a matter of practice, guided parastatal
and private sector wage adjustments. Thus, in 2016, wages
increased, generally, by 5.2 percent, therefore, with a modest
impact on demand and inflation.
On credit developments, growth in commercial bank credit fell
from 7.1 percent in 2015 to 6.2 percent in 2016 in the context of
subdued economic activity and restrained growth in personal
incomes, which influenced both the demand and supply side. The
Bank also recognises challenges in the transmission of the
prevailing policy rates to lower lending interest rates. The
challenges relate partly to structural issues, such as uncertainty
about sustainability of funding sources and associated balance
sheet restructuring as well as tighter lending criteria by banks.
Against this background, the annual expansion in lending to
households fell from 12.8 percent to 7.6 percent and included
lower growth for personal loans and mortgages.
In contrast, growth in business credit increased to 4.2 percent,
from a contraction of 0.3 percent in 2015, but with varying
performance across sectors. Overall, the moderate increase in
bank lending supports economic activity and it is broadly
consistent with growth of nominal GDP.
Monetary Policy Implementation in 2016
Honourable Minister and Esteemed Guests: Monetary policy was
predominantly accommodative in advanced economies, with low
levels of interest rates; in some instances, interest rates are
negative, while liquidity support to the financial sector was
maintained. In this regard, notable developments include the
reduction of interest rates in the United Kingdom aimed at
mitigating the adverse impact of the decision to leave the
European Union (Brexit) and the second increase in interest rates
in the United States of America since 2008, given progress in
attaining full employment and price stability.
For emerging market economies, the direction of policy changes
was mixed, invariably reflecting differing macroeconomic
circumstances. Closer to home, the South African Reserve Bank
increased the policy rate by 75 basis points to 7 percent during
2016 in order to anchor inflation expectations around the country's
target range of 3 - 6 percent.
Domestic Monetary Policy Implementation
For its part, the Bank continues to conduct monetary policy
through a forecast-based policy framework that informs the
appropriate response to deviations of inflation from the desired
objective range. The analysis also involves assessment of
divergence of actual output (GDP) from potential output
(technically known as the "output gap"), which is the primary
indicator of the direction of future inflation. The forecast
incorporates projections of foreign inflation, exchange rate
movements and changes in domestic administered prices and
taxes. In addition, the Bank undertakes a careful evaluation of
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 Business Expectations
Survey conducted biannually by the Bank.
Monetary policy during 2016 was conducted in an environment of
below-trend economic activity and a positive medium-term
inflation outlook, providing scope for policy easing. Indeed, the
Bank Rate was reduced further by half a percentage point to 5.5
percent in August. Accordingly, commercial banks also reduced
the prime lending rate by half a percentage point to 7 percent.
Nevertheless, there was a build-up of excess liquidity in the
banking system as commercial bank credit expansion slowed
relative to the increase in deposits. Monetary policy was
implemented with a view to encourage productive commercial
bank lending and market efficiency, as well as ensuring cost-
effective absorption of excess liquidity in the banking system,
through a limited issuance of Bank of Botswana Certificates
(BoBCs). This was balanced with the need to keep money market
interest rates aligned with the monetary policy stance, a
consideration that allowed for some flexibility in the issuance of
BoBCs.
Honoured Guests, as in the previous years, monetary policy was
also implemented in a way that safeguards the stability of the
financial system. Notably, the slower household credit growth was
in line with modest increase in personal incomes, while the
restrained expansion in mortgage lending was also consistent with
a weaker residential property market. In this respect, the ratio of
non-performing loans to total credit was modest at just under 5
percent. Overall, the banking system satisfied, and in most cases,
significantly exceeded the minimum prudential requirements,
which is indicative of a generally healthy, sound and stable
financial system.
Economic Outlook and Projections
Now looking ahead, the global economy is expected to grow by
3.4 percent in 2017. The projected improvement is premised on
anticipated stronger emerging market economies, including a
recovery from recession in Brazil and Russia. In advanced
economies, growth is expected to be supported by relatively low
oil prices, improving labour markets and possible fiscal stimulus in
the United States of America. Nonetheless, global economic
performance is subject to uncertainty of the policy environment
associated with the potential for inward-looking and protectionist
trade policies as well as geopolitical tensions. Other downside
risks emanate from persistence of tight financing conditions in
some key markets and subdued commodity prices.
Global inflation is forecast to be 3.3 percent in 2017 as advanced
economies reflate to achieve the desired targets and as the effect
of the earlier decrease in energy prices dissipates. In emerging
market economies, inflation is expected to moderate as the effect
of previous currency depreciation tapers off in 2017. In this
environment, it is anticipated that monetary policy will remain
accommodative in most economies, complemented by measures
aimed at facilitating effective financial intermediation and fostering
resilience of the financial sector to support economic activity.
Domestic Economy
As the Honourable Minister indicated in the 2017/18 Budget
Speech, the domestic economy is forecast to grow by 4.2 percent,
an improvement from the estimated 2.9 percent for 2016.
Furthermore, the budgeted 6.5 percent expansion in government
spending, in 2017/18, should continue to be supportive of
domestic demand. Government spending comprises elements that
generate both short-term growth supporting demand and
expansion of productive capacity which, potentially, should sustain
future growth prospects.
The exchange rate policy will continue to complement the
monetary policy framework and it augurs well for maintenance of
international competitiveness of domestic industries and
macroeconomic stability. As announced at the beginning of the
year and consistent with Botswana's trade pattern, the weights of
the constituent currencies in the Pula basket were adjusted from
50 percent each to 45 percent for the South African rand and 55
percent for the SDR. Also, effective January 1 this year, the Bank
is implementing a modest upward rate of crawl of 0.26 percent for
the nominal effective exchange rate, lower than the 0.38 percent
in 2016. The upward crawl reflects the achievement in
maintaining domestic inflation at a rate lower than the average for
the trading partner countries.
Overall, both external and domestic pressures on inflation are
expected to be benign, and it is projected that inflation will remain
within the 3 - 6 percent objective range in the medium-term,
although, in the near-term, it is expected to rise modestly. This
forecast takes into account possible increase in some
administered prices, the impact of which, however, is not expected
to result in short-term inflation over-shooting the upper boundary
of the objective range of 3 - 6 percent. Having said so, it is worth
underscoring the point that any upward adjustment in these prices
that is substantially beyond current projections presents upside
risks to the inflation outlook. In contrast, downside risks to inflation
arise from the expected restrained growth in global economic
activity and the tendency of technological progress to result in
lower prices as well as a possible decline in commodity prices.
Conclusion and Monetary Policy Stance
Distinguished Guests, as I conclude my remarks, I would like to
restate that current projections, based on available data, suggest
that inflation in Botswana will, in the medium-term, remain within
the Bank's objective range of 3 - 6 percent. This positive
medium-term outlook for inflation is in the context of anticipated
higher GDP growth in 2017 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. The Bank's
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 enduring financial stability and supportive of
sustainable economic growth.
Honourable Minister and Distinguished Guests, it is important to
note that the continuing success in containing inflation within the
desired 3 - 6 percent medium-term inflation objective, to which the
Bank remains fully committed, must, in the end, involve the
cooperation of all key players in the economy, namely,
Government, parastatals and the private sector, for the good of
the country as a whole.
Let me also take this opportunity to remind the Media about the
scheduled Press Briefing, to be held tomorrow morning at 1130 in
the Bank, after the first MPC meeting of the year. The Briefing will
cover both this Monetary Policy Statement and announcement of
the Monetary Policy Committee decision.
Honourable Minister, Distinguished Guests; I thank you for your
kind attention.