The Central Bank, Bank of Botswana (BoB) says the domestic economy is forecast to grow 4.2 percent this year, an improvement on last year’s one percent expansion.
The Business Expectations Survey points to a fragile local business confidence and although overall expenditure will be supported by government spending, severe revenue constraints explain a decrease of 2.7 percent in total government expenditures for the 2016/17 fiscal year, compared to the 2015/16 fiscal year.
Speaking on Thursday at the launch of 2016 monetary policy statement at BoB auditorium, BoB Governor Linah Mohohlo said a deficit of P6 billion, or 3.8 percent of GDP, is projected, leaving only limited room for further fiscal stimulus. She said economic activity will also continue to be vulnerable to power supply and water shortages, weak global demand and low commodity prices.
Mohohlo stated that for 2016, both external and internal pressures on inflation are likely to be limited, and it is projected that inflation will continue to be within the 3 ÔÇô 6 percent range in the medium term. She added that, the upside risk to the inflation forecast includes any upward adjustment in administered prices beyond current projections.
“Other risks are food prices, should the drought conditions persist in the region. Conversely, downside risks to inflation may arise from restrained global growth and possible further decline in commodity prices,” she said.
She emphasised that domestic inflationary pressures are expected to remain benign in the course of 2016. She however pointed out that in contrast to this positive outlook, the risks to economic growth that currently cloud the global and regional landscape are at more elevated levels, and this requires vigilance from policymakers.
“The Bank’s implementation of monetary policy will continue to focus on entrenching expectations of low and sustainable inflation, through a timely response to price developments,” she stated.
The Governor stressed that any policy actions will be supportive of durable economic growth and social inclusion; and are carefully weighed to avoid unintended consequences.
She recalled that, given the benign inflationary environment, the Bank rate was reduced twice last year by a total of 1.5 percent to 6 percent. Mohohlo said correspondingly, commercial banks reduced the prime lending rate by an equivalent amount to 7.5 percent. She added that, the Primary Reserve Requirement (PRR) on Pula-denominated deposits was reduced from 10 percent to 5 percent in April, a move that injected about P2.3 billion into the banking system.
“In South Africa, inflation eased from 5.3 percent to 5.2 percent; but the South African Reserve Bank tightened monetary policy with a view to counter the weakness of the Rand,” said Mohohlo.
Mohohlo stated that against this backdrop, the Bank conducted monetary operations with a view to limiting the level of Bank of Botswana Certificates (BoBCs) to P5 billion. She said nevertheless, by the end of 2015, outstanding BoBCs amounted to P8.2 billion. She believes that this was indicative of a renewed build up in excess liquidity, and also reflective of the banks maintenance of adequate buffers which include provision for short-term liquidity fluctuations.
“Monetary policy also took due regard of the need to safeguard financial stability. In this respect, the signs are generally encouraging, with household credit growth in line with modest growth in personal incomes, and mortgage lending slowing against the background of a weaker property market,” she stated.
Mohohlo pointed out that this year 2016, the global economy is projected to grow by 3.4 percent, which is a modest gain on last year’s outturn due to some improved growth prospects in advanced economies, with the US and the Eurozone taking the lead. She added that emerging market countries are also forecast to improve their performance moderately. She said India is expected to pick up some of the slack arising from China’s slower growth.
She said the Bank’s implementation of the exchange rate policy in 2016 will entail an upward crawl of 0.38 percent.