KGORI CAPITAL BUSINESS CLUB SEMINAR
THE IMPORTANCE OF COMMUNICATION IN MACROECONOMIC
POLICY MANAGEMENT
by
Moses D Pelaelo
Governor, Bank of Botswana
October 3, 2017
Director of Ceremonies
I am pleased and indeed it is an honour to be part of this
important information sharing and empowering Seminar,
organised by the Kgori Business Press Club. The initiative
Bank's
for this forum resonates with the desire to contribute
to the development of informed financial and economic
journalism as a means of improving transmission of market
information, as well as incisive commentary on policy
analysis and decisions. For a number of reasons, a central
bank needs to continually interact and disseminate
information to stakeholders. Such interactions and
Bank's
communication clarify the role and, therefore,
reinforces the effectiveness with which it discharges its
mandate of ensuring price stability, sound financial and well-
functioning payments systems and, more broadly, financial
stability.
Director of Ceremonies, the subject of my remarks this
'The
morning is Importance of Communication in
Management.'
Macroeconomic Policy For this purpose, let
me distil macroeconomic policy into three distinct elements,
namely fiscal policy, monetary policy and exchange rate
policy; and for convenience add financial sector policies in
order to complete the interactive and inherent relationships
involved.
Distinguished guests, ladies and gentlemen, you will
appreciate that individually and together, these policies are
intended to affect the behaviour of economic agents, which
is, their response in terms of the supply and demand factors
of economic activity. At a broad level, this entails decisions
to invest, save, consume, and/or trade across borders. In
this regard, the relative incentives across sectors and
industries engendered by the various policies and
instruments will have an impact on the rate of economic
growth, in other words, the pace of increase in national
wealth and living standards. Evidence from the 2007/08
global financial and economic crisis indicates that if not well
managed and coordinated, macroeconomic and financial
policies also have the potential to undermine economic
growth.
At this point, distinguished ladies and gentlemen, let me
take a moment to illustrate the influence of the various
policies and related instruments on real economic activity:
Starting with Fiscal Policy - In a situation of slow economic
growth, fiscal policy might involve increase in expenditure
or reduction in taxes by Government to stimulate activity. In
the event, spending by government and lower taxes
generate an increase in demand, including consumption,
providing an incentive for businesses to invest and increase
operations to meet the higher demand; thus making positive
contribution to economic growth.
-
Monetary Policy With regard to monetary policy, again
assuming a need to support growth, a reduction of interest
rates by the central bank, in the right level of doses, will
lower the cost of finance, therefore, potentially leading to
higher demand by consumers and investment by businesses,
ultimately raising the overall rate of economic growth.
-
Exchange Rate Policy A discretionary devaluation or
maintenance of an undervalued exchange rate could be
undertaken in order to enhance the competitiveness of the
domestic industry in external markets and against imports.
This is relevant for supporting sustainable industrialisation
and diversifying sources of growth, and may similarly raise
overall rate of economic growth.
-
Financial Policies In this area, a sound, stable and
inclusive financial sector not only facilitates the conduct of
transactions and payments, but it is also the conduit
through which macroeconomic policies are transmitted to
real economic activity. Thus, there is need for continuous
attention to ensure the developmental aspects, as well as
integrity, safety, stability and a well-functioning financial
sector to support sustainable and inclusive economic
growth.
Distinguished Guests, I now to turn to the role of
communication in ensuring ultimate efficacy of the various
policies or actions and decisions. Efficacy or potency in this
regard would mean policy action having the desired or
intended outcome. In the examples given above, this would
mean higher rates of economic growth with respect to fiscal
and monetary policies and a faster pace of industrialisation
arising from the exchange rate policy.
Going back in history, there was a time when policymaking
was shrouded in secrecy, with policy framework and
actions designed to surprise the market; the language of
policy makers was coloured by obfuscation and ambiguity in
order to generate uncertainty. In particular, a mystique
surrounded central banks. The former Chairman of the US
Federal Reserve Bank (FED) Allan Greenspan even said in
" Since
1987, I have become a central banker, I have learned
to mumble with great incoherence. If I seem unduly clear to
said"
you, you must have misunderstood what I .
Indeed, in a Speech in 2014, the President of the European
Central Bank, Mario Draghi, pointed out that there was a
time when the FED would not even publish its interest rate
decisions. At the time the FED would let the outside world
derive the interest decisions from the market reaction; it
was only in 1994 that the FED decided to make its interest
rate decisions public in real time.
No doubt things have changed and economic policy making
" forward guidance"
now involves phrases such as as a real
policy tool designed to enable markets and the public to
anticipate the direction, magnitude and timing of policy
action. And in this regard, the manner and wording of
communication becomes crucial.
Therefore, I will argue that communication is an instrument
of macroeconomic policy, without which the desired
outcomes would not be realised or would be realised only
sluggishly. There are two related dimensions to this. First is,
economic and policy awareness that helps the public and
economic agents to anticipate policy action; the so called
expectations. Second is the direct relaying of information
on policy action and the intended outcome.
In both these cases, three pillars support effective
communication. On one side is the policy institutions, in the
middle, a vibrant and knowledgeable media, while an
economically aware, participative and responsive market
and economic agents are the third pillar. That said, in order
for the communication tool to be effective in
macroeconomic policy formulation, the institutions and
frameworks for policy need to have sufficient integrity. In
turn, integrity is derived from clarity with respect to
governance, policy setting, operational and accountability
frameworks, as well as transparency and consistency.
Regarding general awareness and understanding of
economic and financial matters, w e need to appreciate that,
generally, economies are characterised by business cycles
of varying lengths and intensity, driven by various factors.
While, there is no time to go into details, the message I am
relaying is that the various macroeconomic policies are
programmed to respond to such cycles. Therefore,
economic awareness entails understanding the state of the
economy, the current cycle, the direction or momentum,
and, therefore, anticipate policy direction. Thus, in terms of
macroeconomic indicators, an up-cycle is normally
characterised by acceleration in economic growth and credit
demand, and an increase in inflation. In this instance, a well-
informed market and public will anticipate that the next set
of policies would be contractionary. The converse is true,
where sustained low and falling inflation, depressed
economic grow th and credit demand should engender
expectations of expansionary or accommodative monetary
policies.
Therefore, in this environment of well-informed expectations
and trust in the stabilising capacity and potency of
instruments arsenal of the authorities, there is less risk of
market overreaction to the path of economic indicators.
Indeed, economic agents might take stabilising and policy
reinforcing decisions. Consequently, once a policy-setting
institution has built up integrity and reputation, markets and
economic agents generate belief and respond accordingly
because the institution consistently does what it says it will
do in given circumstances.
I will now illustrate, and indeed reinforce, how
communication is evolving with respect to two areas of
macroeconomic policy formulation in Botswana. You will
appreciate, that in the areas of monetary policy and
exchange rate policy, there is ongoing improvements and
clarity relating to institutional setting, policy framework and
parameters, instruments and decision-making cycles and
dissemination platforms. In my view such developments
have greatly improved understanding and efficacy of these
policies.
Regarding monetary policy, the Bank of Botswana has now
-
entrenched a price stability objective of 3 6 percent,
where the institutional set-up entails six pre-announced
meetings in a year, of the Monetary Policy Committee that
assess developments, economic outlook and make a policy
decision. A media briefing, and a Statement announcing the
policy decision and related background information follow
each meeting. The annual Monetary Policy Statement and
its Mid-term Review serve as the anchor for dissemination
of the monetary policy framework, policy analysis and guide
for expectations on economic and policy outcomes.
In this regard, awareness of the policy framework,
institutional arrangements for decision-making and
consistency, promote the necessary integrity and
transparency that foster efficacy of monetary policy. In
essence, economic agents are able to anticipate, as well as
respond to policy action. In addition, markets are more
aligned to the policy stance. We, therefore, view the
maintenance of a transparent and accountable monetary
policy and the related communication strategies, as
contributing to sustained attainment of the inflation
objective.
The exchange rate policy is also much more transparent. It
is now clear to the market that w e have a fixed exchange
rate, albeit in a crawling band arrangement, pegged 55
percent to the SDR and 45 percent to the South African
rand. It is also known that the exchange rate is continuously
adjusted using an annual rate of crawl based on the
difference in the projected inflation of the trading partner
Botswana's
countries and inflation objective; this rate of
crawl is public knowledge, typically announced at the
beginning of the year. Such transparency has removed
uncertainty in the management of the exchange rate. Thus,
economic agents can use market information and forecasts
with respect to the freely traded currencies (that constitute
the Pula basket) and inflation, to anticipate the Pula
exchange rate. In this regard, certainty about the policy path
helps to anchor economic decisions in a manner desired by
policy action, and that is supportive of industrialisation and
economic growth objectives.
Distinguished Ladies and gentlemen, effective
communication also entails common understanding and
usage of language. In this regard, there is need, on the part
of policy-setting institutions, for consistency in definitions,
in the meanings of adjectives attributed to magnitudes of
changes and movements in economic indicators, as well as
the wording/interpretation of policy action (or non-action).
To the extent that such common language is accepted and
used by the media, policy analysts and commentators, it
becomes a tool in policy formulation that has an intended
impact on economic decision making. However, on the
other hand, misreporting, either deliberately or due to lack
of understanding of some key concepts, could cause
unnecessary confusion in the market and, therefore, be
detrimental to the implementation of these macroeconomic
policies.
Communication also entails proper identification of
spokespersons for the policy setting institution and matters
on which they are responsible. A proper arrangement in this
regard, promotes credibility and effectiveness of policy
communication. For example, the Governor of the central
bank is normally and appropriately the singular voice on
monetary policy, while the Minister responsible for finance
or treasury, is the singular voice on fiscal policy.
In concluding, I want to point out that, dissemination
platforms are also an important component of policy
effectiveness, and determine the reach and credibility of
macroeconomic policy. For the Bank, w e find high-level
gatherings such as the launch of the Monetary Policy
Statement, Economic Briefings following publication of the
Annual report, as well as media briefings following
Monetary Policy Committee meetings, to be very important.
These facilitate both information dissemination, exchange of
ideas, as well as feedback and evaluation of their
performance. Extensive use of the w ebsite also allows for
wider and continuous access to information and external
contributions and commentary. The Bank also finds that
research and publications, as well as participation in
workshops and seminars, help to project the quality and
Bank's
content of the work, which also engenders credibility
and integrity of the sources of policy analysis and decisions.
Ladies and gentlemen, allow me to end here and I would be
happy to continue the dialogue as you make observations,
comments and ask questions.