KGORI CAPITAL BUSINESS CLUB SEMINAR THE IMPORTANCE OF COMMUNICATION IN MACROECONOMIC POLICY MANAGEMENT by Moses D Pelaelo Governor, Bank of Botsw ana October 3, 2017 Director of Ceremonies I am pleased and indeed it is an honour to be part of this important information sharing and empow ering Seminar, organised by the Kgori Business Press Club. The initiative for this forum resonates w ith the Bank’ s desire to contribute to the development of informed financial and economic journalism as a means of improving transmission of market information, as w ell as incisive commentary on policy analysis and decisions. For a number of reasons, a central bank needs information to continually interact to stakeholders. Such and disseminate interactions and communication clarify the Bank’ s role and, therefore, reinforces the effectiveness w ith w hich it discharges its mandate of ensuring price stability, sound financial and w ell- functioning payments systems and, more broadly, financial stability. Director of Ceremonies, the subject of my remarks this morning is ‘The Importance of Communication in Macroeconomic Policy Management.’ 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 w ill appreciate that individually and together, these policies are intended to affect the behaviour of economic agents, w hich 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 w ill have an impact on the rate of economic grow th, in other w ords, the pace of increase in national w ealth and living standards. Evidence from the 2007/08 global financial and economic crisis indicates that if not w ell managed and coordinated, macroeconomic and financial policies also have the potential to undermine economic grow th. 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 w ith Fiscal Policy - In a situation of slow economic grow th, fiscal policy might involve increase in expenditure or reduction in taxes by Government to stimulate activity. In the event, spending by government and low er 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 grow th. Monetary Policy – With regard to monetary policy, again assuming a need to support grow th, a reduction of interest rates by the central bank, in the right level of doses, w ill low er the cost of finance, therefore, potentially leading to higher demand by consumers and investment by businesses, ultimately raising the overall rate of economic grow th. 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 grow th, and may similarly raise overall rate of economic grow th. 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 w hich macroeconomic policies are transmitted to real economic activity. Thus, there is need for continuous attention to ensure the developmental aspects, as w ell as integrity, safety, stability and a w ell-functioning financial sector to support sustainable and inclusive economic grow th. 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 w ould mean policy action having the desired or intended outcome. In the examples given above, this w ould mean higher rates of economic grow th w ith respect to fiscal and monetary policies and a faster pace of industrialisation arising from the exchange rate policy. Going back in history, there w as a time w hen policymaking w as shrouded in secrecy, w ith policy framew ork and actions designed to surprise the market; the language of policy makers w as 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 1987, “ Since I have become a central banker, I have learned to mumble w ith great incoherence. If I seem unduly clear to you, you must have misunderstood w hat I said” . Indeed, in a Speech in 2014, the President of the European Central Bank, Mario Draghi, pointed out that there w as a time w hen the FED w ould not even publish its interest rate decisions. At the time the FED w ould let the outside w orld derive the interest decisions from the market reaction; it w as 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 now involves phrases such as “ forw ard guidance” 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 w ording of communication becomes crucial. Therefore, I w ill argue that communication is an instrument of macroeconomic policy, w ithout w hich the desired outcomes w ould not be realised or w ould be realised only sluggishly. There are tw o related dimensions to this. First is, economic and policy aw areness 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 know ledgeable media, w hile an economically aw are, 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 framew orks for policy need to have sufficient integrity. In turn, integrity is derived from clarity w ith respect to governance, policy setting, operational and accountability framew orks, as w ell as transparency and consistency. Regarding general aw areness 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 aw areness 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 grow th and credit demand, and an increase in inflation. In this instance, a w ellinformed market and public w ill anticipate that the next set of policies w ould be contractionary. The converse is true, w here 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 w ell-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 w hat it says it w ill do in given circumstances. I w ill now illustrate, and indeed reinforce, how communication is evolving w ith respect to tw o areas of macroeconomic policy formulation in Botsw ana. You w ill appreciate, that in the areas of monetary policy and exchange rate policy, there is ongoing improvements and clarity relating to institutional setting, policy framew ork 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 Botsw ana has now entrenched a price stability objective of 3 – 6 percent, w here 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 framew ork, policy analysis and guide for expectations on economic and policy outcomes. In this regard, aw areness of institutional arrangements for consistency, promote necessary the the policy framew ork, decision-making integrity and and transparency that foster efficacy of monetary policy. In essence, economic agents are able to anticipate, as w ell 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 contributing to sustained attainment strategies, of the as 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 craw ling band arrangement, pegged 55 percent to the SDR and 45 percent to the South African rand. It is also know n that the exchange rate is continuously adjusted using an annual rate of craw l based on the difference in the projected inflation of the trading partner countries and Botsw ana’ s inflation objective; this rate of craw l is public know ledge, 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 w ith 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 grow th 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 w ell as the w ording/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. How ever, 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 w hich 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, w hile the Minister responsible for finance or treasury, is the singular voice on fiscal policy. In concluding, I w ant 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 follow ing publication of the Annual report, as w ell as media briefings follow ing Monetary Policy Committee meetings, to be very important. These facilitate both information dissemination, exchange of ideas, as w ell as feedback and evaluation of their performance. Extensive use of the w ebsite also allow s for w ider and continuous access to information and external contributions and commentary. The Bank also finds that research and publications, as w ell as participation in w orkshops and seminars, help to project the quality and content of the Bank’ s w ork, w hich also engenders credibility and integrity of the sources of policy analysis and decisions. Ladies and gentlemen, allow me to end here and I w ould be happy to continue the dialogue as you make observations, comments and ask questions.