21st February 2024
Own Correspondent
The Bank of Botswana(BOB) Governor Cornelius K Dekop revealed that price stability is a public good and, therefore, a prudential national objective and reaffirmed the Finance Minister’s commitment to keeping within objective of inflation in the range of 3 – 6 percent.
“In the absence of destabilizing shocks, the inflation expectations should converge to the 3 – 6 percent objective range in the medium term,” said Cornelius K Dekop, Governor of the Bank of Botswana(BOB).
It is believed this augurs well for Botswana, in the sense that low and predictable inflation over the long term enables economic activity to thrive, as well as sustain improvements in welfare and living standards.
Dekop said, “What this means is this: in the context of the economy of Botswana, given its structure and level of development, and in order to achieve durable, sustainable, and inclusive economic growth, price increases should not persist below 3 percent or above 6 percent.”
He said, “And, for emphasis, it is not only sufficient for inflation to be within the objective range; but it should do so in a durable and sustainable manner. Monetary policy formulation also considers developments relating to stability of the financial system and prospects for economic growth. 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.”
The Bank of Botswana (Amendment) Act has established the MPC, which has a full complement of nine members, including four external members, who are appointed by the Minister.
The principal remit of the MPC is to formulate monetary policy. The Amendment Act also established a Financial Stability Council whose responsibilities are to preserve the stability of the financial system by scanning the environment and assessing systemic risks.
The Council comprises the Governor, the Permanent Secretary in the Ministry of Finance, the CEO of NBFIRA, Director General of the Financial Intelligence Agency and the Head of the Deposit Insurance Scheme. Both the MPC and the Council were in session during 2023.
The Statement is a tool for operations and accountability. It addresses including the articulation of the monetary policy framework, and how it relates to the price stability mandate; (ii) reporting on how monetary policy is conducted and, in turn, its impact on inflation, in the medium term; and, (iii) evaluating or validating the inflation outcome in comparison with the forecast.
As a policy tool or instrument, the MPS relays relevant information for decision making by firms and households, across the economy. The information disseminated include review of global and domestic economic and policy developments and the outlook.
The Statement puts into context prospective policy posture which influences how the market responds in relation to balance sheet management (including liquidity management) and the effect on short-term market interest rates. Ultimately, the information in the MPS helps transmit policy as well as influence economic decisions.
Dekop maintained that it is not only sufficient for inflation to be within the objective range; but it should do so in a durable and sustainable manner.
He asserted that price stability, as well as conducive monetary and financial conditions, foster effective mobilization of savings, productive investment, prudent allocation of credit, international competitiveness of domestic firms and, ultimately, sustained economic growth.
It is, therefore, paramount that the conduct of monetary policy and, indeed other aspects of the Bank’s operations are well aligned to the 6 Transitional National Development Plan theme of Towards a High-Income Economy: Transformation Now and Prosperity Tomorrow.
In 2023, the global economy continued to recover from the lingering effects of the COVID-19 pandemic and the Russia Ukraine war. In addition, global economic performance was adversely affected by impact of high inflation; the increase in the debt burden; reduction of COVID-19 related fiscal support; and extreme weather events. Thus, according to the World Economic Outlook, global economic growth is estimated to have expanded by 3.1 percent in 2023, lower than the 3.5 percent in 2022.
Regarding inflation, it moderated significantly, in response to aggressive monetary policy tightening and reduction in food and energy prices. Thus, global inflation is estimated to have decreased, from 8.7 percent in 2022 to 6.8 percent in 2023.
According to the Budget Speech, the domestic economy is estimated to have expanded by 3.2 percent in 2023, revised downwards from the earlier projection of 3.8 percent, due to low mining production and sales. Domestic inflation fell and averaged 5.2 percent in 2023, significantly lower than 12.1 percent in 2022. The low inflation profile in 2023 was against the background of subdued domestic demand and reduction in domestic fuel prices, amongst others.
Indeed, the recent labour force survey results by Statistics Botswana, which reports an unemployment rate of 25.9 8 percent in the third quarter of 2023, affirms the below-trend output growth.
The Financial Stability Report, shows that vulnerabilities and risks emanating from credit developments and monetary policy posture remain contained. The domestic financial system therefore remains very resilient, robust, safe, sound, and unconstrained in providing, innovating, and growing the range of financial services to support the economy.
Global economic growth is expected to remain subdued at 3.1 percent in 2024, unchanged from 2023, against the backdrop of continued challenging prospects faced by advanced economies.
“The domestic economy is forecast to grow by 4.2 percent in 2024, compared to an estimated expansion of 3.2 percent in 2023, as growth in the non-mining sector improves. It is anticipated that effective implementation of the economic transformation reforms and stimulative government expenditure indicated in the 2024/25 Budget, alongside the Transitional National Development Plan would be supportive of economic activity,” said Dekop.
He said, “Monetary policy also remains largely accommodative. However, given the downside risks to global economic activity, weaker global demand and adverse impact of the Russia Ukraine war, the growth trajectory remains uncertain.”
The recent and prospective developments for both domestic and external economic activity suggest that the economy will operate below capacity in the short term. If this situation persists, then it may allow for accommodative monetary policy in 2024.
