2019 MONETARY POLICY STATEMENT
by
Moses D Pelaelo
Governor
February 25, 2019
Introduction
Distinguished Guests, I am honoured to welcome you, on behalf
of the Board, Management and Staff of the Bank, to the launch
of the 2019 Monetary Policy Statement. This is an important
occasion in the Bank's annual calendar of events. We are
therefore most grateful to you, Honourable Ministers and our
Distinguished Guests, for having made the time to attend
today's event.
The launch and dissemination of the Monetary Policy Statement
are key elements of good governance, transparency and
accountability in the formulation and implementation of
monetary policy. This is intended to promote an understanding
of the conduct of monetary policy and its objectives and,
accordingly, guide the public's inflation expectations towards
convergence with the Bank's inflation objective; enhancing the
prospects for sustainable maintenance of low, stable and
predictable inflation. Specifically, the Bank uses the Monetary
Policy Statement 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
and implementation in the ensuing year.
Distinguished Ladies and Gentlemen, the Bank's monetary
policy objective is to achieve price stability, defined as low,
stable and predictable level of inflation that is within 3 - 6
percent. Monetary policy formulation is also aligned to
safeguarding the stability of the financial system. In this regard,
price stability and 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 supports the national objectives of employment
creation and sustainable economic growth.
Improvements to the Monetary Policy Framework
Distinguished Guests, you will recall that when launching the
2018 Monetary Policy Statement, I shared with you the
prospective refinements and improvements to the monetary
policy framework due for implementation in 2018. Notable in
this regard, was the publication of Monetary Policy Reports to
further improve on communication of economic and policy
developments. I am pleased to report that, for the first time, the
Bank published two Monetary Policy Reports in August and
October 2018. Going forward, the Bank will, in addition to this
February Monetary Policy Statement, publish three Monetary
Policy Reports in April, August and October, within seven days
following the respective Monetary Policy Committee meetings.
For the June and December Monetary Policy Committee
meetings, detailed Press Releases will be issued. This is to
provide a continuous comprehensive update on inflationary
developments as well as a context to policy decisions. I must,
however, emphasise that all the six meetings of the Monetary
Policy Committee in a year are important and involve a careful
consideration of any of the three likely outcomes and policy
signals: that is, either to increase, decrease or maintain the level
of the policy interest rate, which is currently the Bank Rate.
I am also pleased to announce that, the Honourable Minister of
Finance and Economic Development approved the establishment
of the Financial Stability Council (the Council) for Botswana in
April 2018. A Memorandum of Understanding between the four
constituent members of the Council, namely, the Ministry of
Finance and Economic Development; Bank of Botswana; Non-
Bank Financial Institutions Regulatory Authority; and the
Financial Intelligence Agency, will be signed tomorrow, after the
first Monetary Policy Committee Meeting of the year. The
formation of the Council is a significant step towards facilitating
collaboration, cooperation and communication amongst the four
government agencies for the purpose of implementing macro-
prudential policy.
The other important facet relates to national contingency
planning for a financial sector crisis, anchored on proactive
macro-prudential assessments, stress testing and a deeper
understanding of cross-sectoral interactions of firms and
financial markets. Given the nature and construct of financial
intermediation and, in particular, the structure of balance sheets
of banks, things will and often go wrong. For these reasons,
the strengthening of financial sector safety nets, encompassing
effective crisis management, recovery and resolution plans as
well as a proposal for the establishment of a deposit insurance
scheme in Botswana, will form part of the agenda of the
Financial Stability Council in 2019.
On this breath, the Bank of Botswana is gravely concerned by
the incipient personal greed and reported governance failures in
some segments of the financial sector, which has the potential
to erode fiduciary responsibilities and, consequently, undermine
public confidence in financial markets. I can assure you,
Honourable Minister, and indeed the international community
that, for its part, the Bank will do all that is necessary, in
collaboration with all key stakeholders, to preserve the integrity,
safety and soundness of the financial system. This will include
working tirelessly to support Government actions and
programmes, coordinated by the Financial Intelligence Agency,
in continuing to build a robust and sustainable Anti-Money
Laundering and the Combating of the Financing of Terrorism
architecture for this country.
Honourable Minister, Distinguished Ladies and Gentlemen, the
Bank evaluates monetary policy implementation framework on
a regular basis for effectiveness, and introduces refinements
where necessary. In this respect, during this year, the Bank will
adopt what is known as "Reserves Averaging" in the
determination of Primary Reserves Requirement for banks and
also shorten the maturity of the 14-day BoBCs to seven days.
Under "reserves averaging", commercial banks do not have to
meet the primary reserve requirement daily but, rather, fulfil this
statutory requirement on an average basis over the maintenance
period, in our case, a calendar month. Reserves averaging,
which is used in some jurisdictions, has been shown to improve
liquidity management by commercial banks, foster more
effective resource allocation through the interbank market and
reduce the demand for excess reserves held for precautionary
purposes.
The reduction of the maturity period of the primary Open Market
Operations tool, namely, the 14-day Bank of Botswana
Certificates (BoBCs), to seven days, should enable shorter and
simpler forecasting horizon for liquidity management by both the
Bank of Botswana and commercial banks, with more accurate
outcomes. In turn, it is expected to provide a solid basis for the
starting point of the monetary policy transmission mechanism,
supporting the extension of the policy signal along the yield
curve. These enhancements require input and cooperation from
commercial banks and, in that regard, consultations with the
banks will commence shortly, with a view to ensure
implementation of these measures within a short period of time.
In addition, during the coming months, the Bank will consult the
market on further possible changes to monetary operations and
the "anchor policy rate"; for example, whether the Bank Rate or
the BoBC rate is the more proximate to market considerations
for policy transmission purposes. The objective of these
refinements is to enhance the potency of the policy rate in the
transmission of monetary policy signals as well as its influence
on subsequent market reaction and posture. Furthermore, there
is need to spur the development and efficacy of the money
markets, for the purposes of effective policy transmission, as
well as management, access and flow of liquidity among the
commercial banks. It is envisaged that these consultations will
be completed by the middle of the year.
Distinguished Guests, alongside these measures, designed to
ensure better structural alignment of short-term market rates
and desirable policy transmission, any notional ceiling on the
issuance of BoBCs will be lifted. This approach allows greater
scope and flexibility for unconstrained and, therefore, effective
liquidity absorption by the central bank in response to market
developments. In addition to these anticipated changes to
monetary operations, the Business Expectations Survey which,
hitherto, was conducted half-yearly, will be undertaken on a
quarterly basis. I must heartily thank those businesses that
dutifully participate in the Business Expectations Survey and
wish to appreciate their invaluable support and input into the
analysis of economic developments and policy responses. I
encourage those that are sometimes reluctant to participate, to
join us in facilitating comprehensive and informed data and
policy analysis.
Honourable Minister, Distinguished Ladies and Gentlemen, allow
me, at this juncture, to address three other 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, consequently, offering a view on the likely future policy
stance in 2019.
External Economic Developments in 2018
Global GDP is estimated to have increased by 3.7 percent in
2018, compared to 3.8 percent in 2017, with mixed
performance across countries and regions. Among the advanced
economies, growth strengthened in the USA, influenced by
fiscal stimulus and stronger consumer demand. In contrast,
performance faltered in the euro area, the UK and Japan. This
was affected, in the main, by policy uncertainty, adverse impact
of rising protectionist sentiments on global trade and constraints
to implementation of structural and policy reforms. For the
emerging market economies, output expansion remained strong,
although slowing slightly, in the context of waning financial
markets sentiment, trade policy uncertainty, weaker external
demand and concerns about China's economic outlook.
Global inflation rose from 3.2 percent in 2017 to 3.8 percent in
2018, mainly due to the increase in international oil prices during
most of 2018, which, however, was moderated by the decrease
in international food prices. In particular, inflation was subdued
in the Special Drawing Rights (SDR) countries, easing slightly
from 1.8 percent in December 2017 to 1.7 percent in December
2018. Inflation in South Africa also decreased from 4.7 percent
in December 2017 to 4.5 percent in December 2018. Overall,
average inflation for the trading partner countries fell from 3.1
percent to 3 percent in the same period.
Domestic Economic Developments in 2018
Domestic output is estimated to have expanded by 5.1 percent
in the twelve months to September 2018, compared to lower
growth of 2.4 percent in the year to September 2017. This
expansion was mainly driven by sustained improvement in non-
mining GDP growth and the recovery in mining output.
Inflation was low and stable, and fluctuated around the lower
end of the objective range of 3 - 6 percent for most of 2018;
and the outcome was broadly consistent with projections for
the year. The low rate of annual price increase was mostly due
to the decrease in food inflation. Food price inflation decreased
from 1.1 percent in 2017 to a negative 0.2 percent in 2018.
However, fuel prices increased significantly by 16.1 percent
during 2018, due to upward adjustments in May, October and
November. This compares to a relatively smaller increase of 9.5
percent in 2017. Overall, the increase in administered prices
(including fuel prices, public transport fares, as well as
electricity tariffs) added 1.86 percentage points to inflation in
2018.
Distinguished Ladies and Gentlemen, the overall modest
increase in prices in Botswana was in the context of subdued
domestic demand pressures, as a result of the restrained growth
in personal incomes and largely stable foreign inflation.
Monetary policy was, therefore, conducted against the
background of below-trend economic activity and a positive
medium-term outlook for inflation and moderate fiscal
expansion. Government expenditure grew by 6.6 percent in
2018 compared to a contraction of 6.3 percent in the prior year.
It should be recognised, in this respect, that beyond the increase
in wages, 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 the economic benefits of such public
investments are derived in the medium to long term.
Regarding wage developments, it is notable that government
recurrent expenditure included a 3 percent salary increase with
effect from April 1, 2018. However, nominal national wages
increased by 2.3 percent, on average, which was below the
average inflation rate for the period. These developments
suggest a modest impact on domestic demand and inflation. On
credit developments, growth in commercial bank credit
accelerated from 5.6 percent in 2017 to 7.7 percent in 2018
and included a faster increase in lending to businesses, from 3.2
percent in 2017 to 10 percent in 2018. For households, annual
credit expansion fell from 7.2 percent in 2017 to 6.2 percent in
2018, in the context of restrained growth in personal incomes.
This included a 7 percent increase in personal loans and 4.9
percent for mortgages, compared to respective growth rates of
9.2 percent and 4.8 percent in 2017. Overall, the rate of credit
growth continued to be supportive of economic activity, with
minimal risk to financial stability.
Global Monetary Policy Implementation in 2018
Honourable Minister and Esteemed Guests, monetary policy
implementation in 2018 varied at the global level, in response
to diverse economic performance and inflation developments
across countries and regions. It was, however, generally amply
accommodative, with low levels of interest rates and continued
liquidity support to the financial sector in the euro area and
Japan. However, policy rates were increased in the United
States of America towards normalisation and, in the United
Kingdom, in order to get inflation back to target.
Monetary policy implementation was also mixed in the emerging
market economies, with policy decisions mainly driven by the
need to support economic activity. Closer to home, the South
African Reserve Bank initially reduced the repo rate to 6.5
percent in March but later increased it to 6.75 percent in
November 2018 due to elevated upside risks to the medium-
term inflation outlook.
Domestic Monetary Policy Implementation in 2018
For its part, the Bank of Botswana 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
Surveys.
As I indicated earlier, monetary policy during 2018 was
conducted in an environment of below-trend economic activity
and a favourable medium-term inflation outlook. These
developments provided scope for maintaining an
accommodative monetary policy stance in support of stronger
output growth. Therefore, the Bank Rate was unchanged at 5
percent in 2018. Consequently, the prime lending rate of
commercial banks was maintained at 6.5 percent, while the
deposit rates were, similarly, virtually stable.
Monetary policy was implemented with a view to sustain
productive commercial bank lending and monetary operations
conducted to ensure alignment of market interest rates with the
monetary policy stance. Consequently, given the increase in
liquidity that needed to be sterilised, outstanding BoBCs
amounted to P8.2 billion in December 2018, an increase from
P6.3 billion in December 2017. BoBC yields increased modestly
in 2018, reflecting a continuing process of normalisation in the
money market interest rate structure.
Global Economic Prospects in 2019
Looking ahead, while global growth remains strong, the pace is
moderating. The global economy is expected to grow by 3.5
percent in 2019, lower than estimated expansion of 3.7 percent
in 2018. The projected lower growth is premised on anticipated
slower expansion in advanced economies, mostly reflecting
subdued performance in the euro area. The US GDP growth is
forecast to decline from 2.9 percent in 2018 to 2.5 percent in
2019, as the impact of the fiscal stimulus dissipates. Growth in
emerging market and developing economies is projected at 4.5
percent in 2019, slightly lower than the 4.6 percent in 2018.
Overall, risks to the global economic activity are skewed to the
downside, with prospects for escalation of trade tensions,
tightening financial conditions, a no-deal Brexit and relatively
weaker growth in China presenting key risks to the outlook.
Global inflationary pressures are forecast to be modest in the
short to medium term, reflecting below-potential output. In this
environment, it is anticipated that 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. It is, therefore, notable, that the earlier
anticipated monetary policy normalisation (or increase of
interest rates) in the advanced countries is being re-assessed
and restrained with the advent of generalised weaker economic
performance and heightened policy uncertainty.
Domestic Economic Prospects
Distinguished Guests, as the Honourable Minister of Finance and
Economic Development indicated in the 2019/20 Budget
Speech, the domestic economy is forecast to grow by 4.2
percent in 2019, slightly lower than the estimate of 4.5 percent
for 2018. The main factors expected to support growth in
economic activity include conducive financing conditions
associated with an accommodative monetary policy stance and
a sound financial environment. The budgeted 3.6 percent
expansion in government spending in 2019/20 and the
implementation of initiatives such as the doing business
reforms, are expected to further support growth in economic
activity and employment creation.
The crawling band exchange rate policy framework 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 were maintained at 45
percent for the South African rand and 55 percent for the SDR.
An annual upward rate of crawl of 0.3 percent of the nominal
effective exchange rate is also being implemented in 2019, in
order to stabilise the real effective exchange rate.
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 short to
medium term. This forecast incorporates the estimated impact
of the increase in public service salaries and prospects for
continued accommodative monetary conditions. Having said
that, it is worth underscoring the point 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 the restrained growth in global economic activity, the
tendency of the ongoing technological progress to lower costs
and the reduction in commodity prices.
Monetary Policy Stance
Distinguished Guests, based on available data, the current
projections suggest that domestic inflation will, in the medium-
term, remain within the Bank's 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 to households, for welfare enhancements that also drive
economic activity. 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 ensuring
financial stability and supportive of sustainable economic
growth and employment creation.
Conclusion
Honourable Minister and Distinguished Guests, as I conclude, 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, including Government, parastatals and the private
sector.
I thank you for your kind attention.