In a move meant to support the fragile economic recovery, Botswana’s Central Bank has reduced the cost of borrowing to help businesses struggling from effects of global recession.
Bank of Botswana earlier this week said it has cut its Bank Rate by half a percentage point from 9.5 percent to 9 percent in a bid to stimulate the economy.
The bank, headed by Linah Mohohlo, noted that the current state of the economy, where output growth is below potential and characterised by high unemployment, could be reignited by a measured non-inflationary stimulus.
“Assumptions on both the domestic and external economic outlook and the inflation forecast suggest that a more accommodative monetary policy stance, at this time, is consistent with the achievement of the Bank’s 3 ÔÇô 6 percent inflation objective in the medium term,” the bank said.
“Hence, the Monetary Policy Committee decided to reduce the Bank Rate by half a percentage point to 9 percent.”
The domestic output grew by 3.7 percent in the twelve months to December 2012; with the nonmining sectors slowing to 5.8 percent from 7.8 percent in 2011. In addition, the mining sector contracted by 8.1 percent.
It is expected that non-mining output expansion will remain below potential in the medium term and will, therefore, exert minimal inflationary pressure. Furthermore, it is anticipated that the impact of demand on economic activity will be modest, partly reflecting trends in government expenditure and personal incomes.
“For now it seems the Bank of Botswana is more concerned about boosting the domestic economy, hence the decision to reduce the cost of capital by reducing the bank rate,” Garry Guma, an analyst with Motswedi Securities said.
The bank is also taking into cognisant the fact that inflation will be a major issue in the short term as the market think numbers will be above objective range of 3 ÔÇô6 percent objective range for the remainder of the year.
Inflation increased slightly from 7.5 percent in February 2013 to 7.6 percent in March 2013, with small offsetting price movements across a range of goods and services; inflation in March 2012 2 was 8 percent.
Weak domestic demand and the forecast low external inflationary pressures contribute to the positive inflation outlook in the medium term. However, in the short term, inflation is expected to remain above the Bank’s objective range due to the impact of transitory factors.
“Although inflation is expected to remain higher, above the Bank of Botswana objective range, expectations are that it will fall within the central bank towards the end the year,” said Guma.
“Our view is that the central bank might miss again its target range given that most of the factors that contribute to the country’s inflation are exogenous, and the bank does not have control,” he added.
Managing Director of IPRO BOTSWANA (PTY) LTD, Amit Bakhirta, wrote in his column this week that the MPC’s decision must have taken into account the weaker Pula and the threat of remaining pegged to a Rand that is supposedly expected to get weaker and weaker.
“Yes, gold is technically in a bear market and this, coupled with relatively weaker commodity prices, will presumably hit the Rand even more. By the year-end, do not be surprised to see the Rand at multi year lows,” Bakhirta said.
“So, if our Central bankers see little threat from imported inflation, they must be thinking that weak global growth will contain global/local commodity prices and so a weaker inflationary outlook could possibly allow them to focus on the even weaker economic growth of Botswana rather than pending inflationary threats,” he added.
Bakhirta doubts whether reducing cost of capital will ‘ignite’ private sector appetite to borrow. “The excess liquidity situation and the lack of a buoyant private sector are likely to keep yields abnormally low versus the inflation/bank rate. Even if they do borrow, the kick off of good projects is never dependent on the cost of investments (or borrowing). Private Equity firms around Sub Saharan Africa are not only hammering our economy with capital but also bringing in expertise and knowhow. Hence, to what extents can monetary compression fuel growth, in Botswana today is actually well debatable,” said Bakhirta .
Bank of Botswana has advised that in the circumstance, commercial banks are expected to ensure that savers generally earn positive real rates of return on their savings. Commercial Banks have been criticised for charging higher Lending Rates, but reluctant to share the same with depositors.