financial sector regulation. so far, efforts to stabilise the banking system have not resulted in a resumption of bank lending ; for this reason, it is feared that economic recovery may take longer, possibly way into 2010. there is also concern that countries will increasingly resort to protectionist trade policies, a trend that would be self - defeating since no economy can resolve its problems in isolation. fortunately, commercial banks in botswana are not yet impaired by the impact of the “ credit crunch ” that is afflicting other countries. bank deposits far exceed loans ; and banks have generally avoided accumulating unmanageable risk. in this connection, it is worth mentioning that batswana should learn from the mistakes of over - borrowing, the dire consequences of which have hit households elsewhere in the world very hard. nevertheless, the bank of botswana is monitoring possible situations of exposure to offshore parent financial institutions on an ongoing basis. while the domestic financial sector is, to some extent untroubled, international diamond markets have deteriorated rapidly and unexpectedly. as highlighted by the honourable minister of finance and development planning in this year ’ s budget speech, this development has adversely affected government revenue. as at the end of january 2009, which is three months after diamond exports were seriously curtailed, the foreign exchange reserves amounted to 69. 7 billion pula ( provisionally ), which is a 19 percent growth from the december 2007 level of 58. 5 billion pula. when the effect of the pula depreciation is excluded, the reserves fell by 6. 4 percent in terms of special drawing right ( sdr ) and by approximately 12 percent in us dollar terms. the decrease in reserves was due to the fall in equity market prices, a slowdown in diamond export receipts and payments for government and other transactions. the pressure on the reserves is expected to continue during 2009, although at the level equivalent to 27 months of import cover, they should remain relatively adequate. i believe it should take little persuasion to acknowledge that managing the country ’ s reserves prudently has served the country well, given the current severe financial and capital markets difficulties. i now turn to the core business of this evening ’ s event : the bank ’ s monetary policy framework and strategy for 2009. as i said earlier, last year ’ s modifications to the framework focused on the medium - term, a period considered appropriate for monetary policy to take effect and anchor the inflation objective, based on rigorous inflation forecasting that is now taking root

to 15 percent in december. correspondingly and as appropriate, commercial bank prime lending interest rates mirrored the bank rate adjustments ; in addition, the management of excess bank liquidity reinforced the policy stance. nevertheless, high inflation resulted in lower real interest rates, some of which, unfortunately, became negative in real terms. with respect to the bank ’ s outlook for inflation for this year and a reasonable period ahead, both domestic and global inflation is expected to abate, as a result of lower economic activity and subdued demand. commodity prices, including the cost of oil, are likely to be low, and world inflation is forecast to decrease from 6. 4 percent in 2008 to 3. 1 percent in 2009. in south africa, inflation is expected to decline to 5. 5 percent in 2009, and fall within the 3 - 6 percent target range. therefore, foreign prices will dampen domestic inflation. since the bank ’ s inflation objective is 3 - 6 percent and trading partner countries ’ inflation is forecast at 3 - 5 percent, the downward crawl of the pula should be marginal in 2009, and the real effective exchange rate should be stable. overall, economic performance is expected to slacken significantly, due to the depressed mining activity. it is also anticipated that despite the decline in government revenue, due to a fall in mining production, public spending will increase in support of economic growth. nevertheless, it is estimated that output will be below trend, particularly in the short term. this should put downward pressure on inflation. in this environment, it is unlikely that increased government spending will be inflationary, particularly in the absence of a public sector wage increase. however, it is worth mentioning that any large increase in administered prices, such as electricity tariffs and botswana housing corporation rentals, would be inflationary. be that as it may, the probability is that price increases will be subdued in 2009 compared to 2008. it is, therefore, anticipated that, by the end of the year, inflation will be closer to, if not within, the medium - term objective range of 3 - 6 percent. honoured guests : you may very well ask : what about the monetary policy stance in 2009 in the circumstances! well, we at the bank consider that monetary policy action this year will take into consideration the following scenarios : first, the increase in government spending is unlikely to be inflationary ; second, the exchange rate is expected to be stable ; and third, it is hoped the inflation trend will continue to be downward. these developments