Regionally, neighbors brought knives to monetary policy meetings, cutting back on interest rates, but Botswana’s central bank chose to keep its cool, Staff Writer KITSO DICKSON reports.


Bank of Botswana governor Moses Pelaleo spoke with so much conviction about maintaining his stance when neighboring countries have brought knives to cut down interest rates, taking the edge off inflation, borrowers and perhaps boost economic activity. It’s not a decision that was arrived at lightly, he said on Tuesday noon before business scribes adding that there were many other options on the table. “If you take the totality of what is happening on our domestic economy, the current monetary policy is constant with the current decision.”

At the meeting held on Tuesday, the Monetary Policy Committee of the Bank of Botswana (BOB) decided to maintain the Bank Rate at 5.5 percent saying that the outlook for price stability remains positive as inflation is forecast to be low and close to the lower bound of the 3 – 6 percent objective range in the medium term.

But elsewhere, central banks have been busy. Zambia’s cut its policy rate for the third consecutive time from 12.50 percent to 11.0 percent, citing the continued decline in inflation. In, Mozambique, the central bank cutback rates by 25 basis points to 21.50 percent, pointing out that the continued decline in consumer prices reinforced its forecast that inflation would be lower by the end of the year 2017 amid higher food supply, moderate domestic demand, exchange rate stability and favorable commodity prices. Namibia, rates were lowered to 6.75 percent “to support domestic economic activity” amid declining inflation and an increase in international reserves that are sufficient to sustain the currency peg between the Namibian dollar and the South African rand.

The aforementioned have their own dynamics which are different to Botswana which is why rates are not even at the same levels or even close, Tshepahng Loeto points out adding however that with South Africa it might be of some importance to Botswana given we do a lot trade with her and could potentially import inflation. “The committee considers these and aims to keep a stable Real exchange rates stable with trading partners which also help in stabilizing/controlling inflation. This explains why we were cutting rates when they were increasing their rates. We did not see a very strong threat to local inflation therefore it made sense to stimulate credit extension by lowering rates.”

The hegemony, in technical recession, unexpectedly cut benchmark interest rates for the first time in five years to 6.75 in a desperate move earmarked at dial back a recession in Africa’s most industrialized economy from deepening.

Regionally Botswana still has one of the lowest rates in memories and the BOB says it wouldn’t ordinarily respond because neighbors are doing so given movement in policy rates have to be informed by economic condition in one’s country. “Our assessment for Botswana is that our interest rates are relatively lower and consistent with what we see with economic and inflation performance. Countries you have mentioned had higher levels of inflation therefore had to reduce interest rates to contain inflation possibly to respond to weaker growth to boost growth,” Dr Kealeboga Masalila, the Deputy Governor responded to media inquiry.

But of course keeping rates as low comes with other problems. Higher interest rates in other countries relative to ours could mean capital flight from Botswana to those countries as investors looks for high returns in those countries, Ishmael Radikoko, a Financial Lecture at The University of Botswana argues. “This could be detrimental as it could end up reducing loanable funds in our local financial markets because low interest rate discourages savings and investments and ultimately business activity in Botswana may go down.”

On the bright side, lower interest rates relative to other countries could mean more businesses now can afford to borrow and this can help in financing their operations and increase business and economic activity.

Dr Masalila says should they have reduced interest rates given the scenario of other countries it would be that “we are at more of a disadvantage in terms of capital outflow despite that it’s not the only thing we will be looking at.”

The committee does not only look at economic performance but also looks at inflation as an inflation targeting bank. But unless the bank reduces rates, how else can they boost economic activity which has been slow despite moderate change?

Radikoko says the first one is changing reserve requirement ratio. Reserve requirement is a certain percentage of deposit that the commercial banks are required to deposit with the central bank. So when the economic activity is low, Radikoko says the central bank can drop this ratio and release back to the commercial banks funds that can be used for lending to businesses that need the money to finance their operations including expansions which can come with increased business activity and employment. Further, he says the central bank can also use another tool called open market operation in which it can influence the amount of money in circulation. “To boost economic activity the central bank usually buys short and long term treasury securities in the hand of commercial banks thereby injecting liquidity in the market and increasing loanable funds and hence boosting economic activity.” In addition to the above quantitative tools the central bank can also use selective or qualitative tools. “These include credit rationing, fixing margin requirements, control through directive, direct action by the central bank, etc.”

BOB’s expectation of the growth of the economy are in line with that of the International Monetary Fund which revised 2017 and 2018 economic growth forecast to 4.5 and 4.8 percent respectively. The central bank says it is looking at various indicators: The improvement in diamond production, the agricultural sector boosted by good rainfall, and the supply of water and electricity which should support economic activity. “We also look at global economic activivity where we sell our diamonds that creates demand for our exports. Overall given those indicators, we expect better performance.”

Gross Domestic Product in Botswana grew by 3.9 percent in the twelve months to March 2017, compared to a contraction of 1.8 percent in the corresponding period ending in March 2016, according to figures. The improvement in growth reflects a 5.9 percent increase in non-mining activity, while mining sector output contracted by 10.3 percent in the twelve months to March 2017.

Loeto says part of the reason for the slow economic growth is the demand or the lack of. “Which then speaks to unemployment levels and rate at which wages are growing relative to inflation.”

Last week, Statistics Botswana released the much debatable unemployment figures which suggested that unemployment was down by to 17.7 percent from 19 percent. Assuming that they are credible, as the bank buttressed, The Business Weekly & Review asked if purported decline of unemployment suggest the economy is growing at a healthy rate and if they warrant any rate hikes. While giving a tepid statement for the organization with “integrity” deputy governor however said the number are still relatively high and not healthy though GDP is. “In terms of policy response, We respond to projected inflation such that a higher rate of inflation will suggest we increase policy rates, much lower will suggest we reduce consistent with stimulating growth and our on considerations we assess performance of the economy relating to issues like credit growth, incomes growth rate, but principally we focus on inflation. When we reduce inflation we are also supporting growth. With low inflation you are likely to generate savings, productive investments, you are able to compete with imports.”