5 December 2024
Own Correspondent
The Monetary Policy Committee (MPC) of the Bank of Botswana maintained the Monetary Policy Rate (MoPR) at 1.9 percent but reduced the Primary Reserve Requirement (PRR) from 2.5 percent to 0 percent.
The PRR is a monetary policy tool used to manage structural liquidity by way of requiring banks to hold a proportion of their deposits at the central bank.
“Therefore, the PRR can be reduced in instances where there is structural shortage in liquidity and vice versa, when there is structural excess liquidity,” said Cornelius K Dekop, Governor of the Bank of Botswana.
He said, “As reported at the last MPC meeting, real gross domestic product (GDP) declined by 0.5 percent in the second quarter of 2024, compared to a growth of 3.3 percent in the corresponding quarter in 2023.”
This decline follows a 5.3 percent contraction in the first quarter of 2024, indicating that the economy is in a recession. The contraction in economic activity was attributable to weaker performance of the non-mining sectors and the impact of lower external demand for mining sector output, especially diamonds. As a result, export earnings have declined, limiting government spending and impacting overall economic activity. Economic activity remained restrained in the second half of 2024.
According to the October 2024 World Economic Outlook, global output growth is forecast at 3.2 percent for both 2024 and 2025, compared to 3.3 percent in 2023.
For Botswana, indications are that the economy will contract in 2024 and moderately recover in 2025. The decline in 2024 is partly due to a downturn in the diamond industry, driven by weak global demand, which, however, is projected to recover in 2025.
As reported by Statistics Botswana, headline inflation increased slightly from 1.5 percent in September to 1.6 percent in October 2024, remaining below the lower bound of the medium-term objective range of 3 – 6 percent.
The marginal increase in inflation was mainly due to the broad-based increase in food prices. The MPC forecasts inflation to remain low into the medium term, averaging 2.9 percent in 2024, 3.3 percent in 2025 and 4.9 percent in 2026. The risks to the inflation outlook are assessed to be balanced.
The MPC observes inflation could be lower than projected due to subdued domestic and global economic activity, limited fiscal space and the potential fall in international oil prices beyond current forecasts.
However, inflation could be higher than projected if international commodity prices were to increase above current forecasts, and supply as well as logistical constraints in the global value chains persist.
Dekop also pointed out that inflation outcomes could also be affected by the possible changes in administered prices not factored in the current projection.
The economy is expected to operate below full capacity in the short term and recover marginally in the medium term. This should not generate demand-driven inflationary pressures. Thus, inflation is forecast to remain within the objective range in the medium term.
Similarly, businesses expect inflation to be within the medium-term objective range, suggesting that inflation expectations are well anchored.
“The MPC observes that market liquidity in the banking system has declined considerably, thereby constraining the desired impact of the current accommodative monetary policy stance,” said Cornelius K Dekop, Governor of the Bank of Botswana.
Given the current economic conditions and the outlook for both domestic and external economic activity, as well as the market liquidity condition, the MPC decided as follows:
(a) reduce the PRR from 2.5 percent to zero effective 11 December 2024;
(b) maintain the MoPR at 1.9 percent;
(c) the 7-day Bank of Botswana Certificates auctions, repos and reverse repos will be conducted at the MoPR of 1.9 percent;
(d) the Standing Deposit Facility (SDF) Rate is maintained at 0.9 percent, 100 basis points below the MoPR; and
(e) the Standing Credit Facility (SCF) Rate is maintained at 2.9 percent, 100 basis points above the MoPR.
