2018 NATIONAL BUSINESS CONFERENCE DINNER
-
Transition to High Income Status The Role of Monetary
Policy and Communication
Welcome Remarks
by
Moses D Pelaelo
Governor, Bank of Botswana
September 9, 2018
Distinguished Guests, Ladies and Gentlemen, good evening.
It is my honour to welcome you to this Dinner hosted by the Bank of
Botswana on the eve of the National Business Conference here in the City
of Francistown. On behalf of the Board, Management and Staff of the
Bank and on my own, I thank you all for honouring the invitation; your
presence here tonight is valued and highly appreciated.
Role of National Business Conference and Theme
The Bank of Botswana is privileged and accepts the honour to host this
Welcome Dinner to the 15th National Business Conference, organised by
Business Botswana, in collaboration with the Government under the
theme, "Breaking through to a High-Income Botswana - The Role of the
Private Sector in Charting the Path". This should provide an opportunity
to evaluate prospects for Botswana, with respect to structural
transformation, policies, strategies and, especially, implementation
frameworks that would enhance international competitiveness of local
firms and support the transition to high-income status in line with Vision
2036. I am reliably informed that, His Excellency the President of the
Republic of Botswana, Mr Mokgweetsi Eric Keabetswe Masisi will, in
addition to performing the official opening, actively participate in this
Conference and, in particular, share his thoughts on the growth of
business in Botswana in one of the sessions, tomorrow.
Background and Broad Structural Issues
Distinguished guests, it is common cause that the economy of Botswana
has, over the last 52 years, recorded impressive growth and structural
transformation, leading to the country attaining upper middle income
status, currently with a per capita annual income of approximately USD 8
000. Similarly, over the years, the country has enjoyed relatively sound
and stable macroeconomic and financial conditions. Despite episodes of
terms-of-trade shocks and volatile commodity prices during this period,
the economy has been largely characterised by relatively low and
predictable levels of inflation; balance of payments surpluses; substantial
foreign exchange reserves; stable real effective exchange rate; low public
debt; and continued pursuance of prudent fiscal policies. However, as we
country's
are well aware, in the last decade or so the growth momentum
seems to have lost steam. Evidently, this is constrained by several factors
including the narrow economic base, high levels of unemployment,
insufficient innovation and private investment spending, infrastructure
constraints, thin and fragmented markets as well as low level of financial
sector development and, relative to other upper middle-income countries,
less inclusive growth.
Distinguished Guests, the IMF Executive Board, on August 31, 2018,
completed the 2018 Article IV Consultation with Botswana, and as usual,
the Botswana authorities were commended for a track record of sound
policies that has supported strong growth and macroeconomic stability.
However, it is considered opportune to leverage on the favourable
prospects to accelerate implementation of structural reforms to unlock the
country's
growth potential. The specific areas highlighted by the IMF
include preserving priority infrastructure and social spending, restructuring
and privatisation of parastatals, promotion of private sector development
and economic diversification, sustained efforts to improve the business
climate, including facilitating foreign direct investment as well as skills and
realignment of education policies to eliminate existing skills mismatches.
Bank's
The Role in Supporting Economic Activity and Growth
As a contribution to the theme of this National Business Conference my
remarks, this evening, will focus on the role of monetary policy and
communication in transiting to high-income status and, also, take the
Bank's
opportunity to launch the maiden Monetary Policy Report.
Therefore, in a broad sense, the intent is to project the relevance and role
of the Bank of Botswana in contributing to the journey towards high-
income status for Botswana.
To give perspective, you will be aware, Distinguished Ladies and
Gentlemen, that the Bank exists to protect the value of the local currency,
currency management operations, monetary
the Pula and thebe, through
policy, exchange rate management, regulation and supervision of relevant
financial institutions and facilitating sound payments and settlement
frameworks. Essentially, the Bank promotes the desire and willingness to
hold the local currency, as well as to transact and save locally in Pula
premised on the quality and durability of the banknotes and coin; stable,
predictable domestic price changes; safety and soundness of the financial
system and reliable payment infrastructure. Inevitably, where central
banks fail to achieve these outcomes, or are constrained by political
interference, economic performance and development suffer
considerably; recent examples include Venezuela and Zimbabwe.
Overall, by fostering appropriate conditions, the Bank of Botswana has,
throughout its 43 years of existence, contributed to stability of the
macroeconomic environment and financial system, as well as integrity and
reliability of payments and settlement platforms; therefore, enabling
economic activity, as manifested in the ability to transact and access
financial services.
Distinguished Guests, we are, however, collectively looking ahead and, in
this regard,
there are several aspects of mandates and operations of the
Bank that require modernisation and upgrading in order to remain relevant
and contribute to national development aspirations and objectives.
Indeed, monetary policy and the various instruments, including
communication, can only be effective if undertaken alongside
improvements in other operations of the Bank and policy transmission
channels. AlIow me to highlight four relevant areas in this regard.
Bank's
Modernisation and Adaptation of the Functions
First, there is a need to adapt to changing domestic and global conditions
and, also, to ensure that the Bank of Botswana is appropriately positioned
to adequately address new developments and related challenges. Some
of these include fintechs, digital currencies and similar innovations as well
as adopt best practice, to sustain national development. In this regard,
there is ongoing review of the Bank of Botswana Act, the Banking Act and
proposals to promulgate a national payments law. The intention is to
enhance operational capability, predictability and integrity of policy and
regulatory frameworks, as well as to clarify institutional relationships and
promote accountability and transparency. Furthermore, one of the key
lessons from the 2008/9 global financial crisis is the need for joint, speedy
and coordinated response, by all relevant stakeholders, to any substantial
systemic risks emanating from any parts of the financial sector.
As part of the broader financial development architecture, there is a need
to re-configure institutional arrangements for the financial sector oversight
to achieve greater focus on macro-prudential dimensions of financial
stability policy and financial safety nets. The recent establishment of the
Financial Stability Council is a significant step towards protecting the
viability, integrity and sustainability of relationships and cross-holding of
exposures within the financial sector and with other economic sectors. As
I mentioned, this enables coordinated and decisive response when
needed; ultimately safety of savings and investments and prospects for
attracting more. Also, one of the key tenets, in this respect, include the
need for legislation for the establishment of a deposit protection scheme,
to further encourage patronage of the domestic financial system, in
particular broader financial inclusion.
Monetary Policy Framework
Distinguished Guests, the second area of continuing improvement that I
want to highlight relates to the role of the monetary policy framework in
facilitating a conducive environment for private businesses to thrive.
Broadly, an appropriate policy framework should encompass definition
and clarity of objectives and instruments, understanding and calibration of
transmission channels and, therefore, predictability and, in turn,
Bank's
accountability. It is for these reasons that the primary mandate of
price stability, is clearly defined as a sustainable level of annual inflation
-
that is within the medium-term objective range of 3 6 percent. The policy
is also formulated with a view to safeguarding the stability of the financial
system. In essence, protection of the value of the Pula and integrity and
safety of channels and platforms for holding money and transacting in
local currency.
Let me, once again, underscore the point that low and predictable level
of inflation and a conducive financial environment foster savings
mobilisation, productive investment and international competitiveness of
domestic producers which, in turn, contribute towards the broader national
objectives of sustainable economic development and employment
creation. Equally important is a sound and stable financial system
particularly the banking sub-sector, as it serves as the main transmission
channel for monetary policy signals and facilitating economic activity
through the provision of liquidity and risk mitigation.
It is also apparent to the markets and general public that the key
instruments of policy are the Bank Rate and the Bank of Botswana
Certificates. The former relates to the cost of money and decisions to
save or borrow, while the latter influences the quantity of loanable funds
in the banking system. In both cases, the operation of these instruments
affects prospects for demand and, in turn, its influence on the rate of price
Bank's
changes, with the focus being to maintain inflation within the
-
defined objective range of 3 6 percent.
The policy is predictable in the sense that the Bank publishes the medium
term inflation outlook, which informs the policy response. For example, a
forecast for sustained inflation above the objective would imply an
increase in interest rates and tightening of financing conditions, to help
moderate inflation. On the other hand, sustained lower inflation than the
objective range implies subdued economic performance and would
require reduction in interest rates to raise demand and stimulate economic
activity. However, for policy transmission to be effective it requires a sound
and responsive banking system. Thus, banks should cut interest rates
and increase lending when the Bank Rate is reduced, and accordingly
raise them when monetary policy is tightened and not be constrained by
internal and structural weaknesses. In this regard, the Bank is always
available to provide liquidity to the banking system and to solvent
individual banks, as needed, to ensure market sustainability and
appropriate policy transmission.
Market Development and Financial Inclusion
Bank's
Aligned thereto is the third developmental area, which is the role
in promoting the growth, spread and deepening of money and capital
markets and, also, financial inclusion. The development of a wide range
of money and capital markets institutions and instruments enables
substitution and access to a variety of purpose-fit saving and investment
channels as monetary policy and conditions change; therefore sustained
effectiveness of policy transmission in affecting market activity. A diverse
and deep market also allows banks to better manage liquidity positions,
hence the ability to effectively transmit policy. In addition, with enhanced
financial inclusion, changes in monetary policy are more effective as a
greater number of businesses, institutions and households, hold and have
exposures that are directly affected by the direction and level of interest
rates and availability of loanable funds and market liquidity.
Communication
Distinguished Guests, the fourth area of focus for the Bank, as we look
ahead, is communication. The Bank considers and uses communication
as a direct, practical and potent instrument of policy. It is, therefore,
important that in order to generate the desired response, communication
is recognised and acknowledged by the market and general public as a
policy instrument. However, this is to the extent that such communication
is backed by durable integrity and reliability of the Bank of Botswana,
premised on predictability and transparency. Public trust and reputation
of the Bank are essential elements for policy effectiveness. Central banks
such as the Bank of England, the European Central Bank and the US
Federal Reserve demonstrate such effectiveness where, for example,
issuance of forward guidance statements (without immediate actual
change in interest rates), generate market reaction; thus change in
economic behaviour and activity.
More generally, communication works best in an environment of economic
and policy awareness by the public as well as informed policy and market
analysis and commentary. The combination of economic developments
and dissemination of policy analysis and economic projections by the
Bank helps the public and economic agents to anticipate policy action; the
so-called expectations. For example, expectations about future inflation
and, therefore, interest rates, are a key determinant in formulating
investment and consumption decisions, hence economic activity.
Communication also facilitates accountability and various platforms and
media are used in this regard. Overall, increased transparency and
communication, regarding the policy framework, objectives and strategy,
as well as decisions and progress in meeting the objectives of the Bank
can contribute to desired market responses and policy effectiveness.
Bank's
Distinguished Ladies and Gentlemen, at the launch of the
Monetary Policy Statement, in February this year, I outlined the
refinements that the Bank continues to make to the monetary policy
framework relating to communication. I indicated that, the more recent
innovations that started in 2017 included the pre-announcement of the
dates for the Monetary Policy Committee meetings for the year ahead and
media briefings that follow each meeting to announce and engage on the
policy decision. I also indicated that, going forward and in an effort to
further improve on communication and transparency on economic and
policy analysis and implementation, the Bank will publish four Monetary
Policy Reports each calendar year, including the Monetary Policy
Statement. I am happy to announce that tonight the Bank is launching the
Bank's
first Monetary Policy Report to be published on the website
tomorrow morning. The Report is also available on the Bank of Botswana
branded memory sticks that will be distributed to the invited guests tonight.
There is also a limited number of hard copies.
The Report will be the main medium through which the Bank will inform
the public about the formulation and implementation of monetary policy.
public's
It serves to meet the expectation of a transparent and accountable
central bank in fulfilling the monetary policy mandate. The Monetary
Policy Reports in April, August and October will be preceded by the
Monetary Policy Statement in February each year.
Distinguished Guests, as I conclude, I would like to assure you that 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. At the same time, the
Bank will contribute to effective oversight of the financial system to ensure
sustained financial stability and integrity of the payments system, while
promoting market development and financial inclusion; as a growth
imperative and also important for policy transmission. Essentially, this is
the enduring contribution of the Bank to an enabling environment for
private sector growth and greater participation in economic activity;
therefore, enhanced prospects for economic diversification efforts,
employment creation, inclusive growth, and transition to high-income
status.
Let me wish you a fruitful conference and deliberations for the next two
days. Please enjoy your dinner. However, to conclude the formal
proceedings, allow me to call upon the Director of Research and Financial
Stability Department, Dr Tshokologo Alex Kganetsano to present a brief
outline of the Monetary Policy Report and also highlight its relevance in
influencing expectations and economic activity.
I thank you for your kind attention.