The Central Bank fiercely defended its current Monetary Policy stance amidst growing criticism that the tools that it uses are geared towards enriching commercial banks at the expense of the consumers and the development agenda of the country.
The Bank of Botswana (BoB) stated in its mid term review that was posted on its website on Friday evening that both the domestic and external economic outlook suggest that the “prevailing monetary stance is consistent with the achievement of the 3- 6 percent inflation objective”.
“Domestically, the reduction in fiscal stimulus, weak growth in incomes and above all, below trend economic performance should moderate demand pressure on prices,” the bank said.
Although the Central Bank defended the 3-6 percent inflation target evidence shows that most of the time this target has been illusive.
In the last few months inflation has been in the upper ends of seven percent.
Critics have pointed out that the current monetary stance was largely based on the government expenditure, Bank Rate and the Bank of Botswana certificates (BOBCs) as the main factors aimed at reigning in inflation at the expense of other issues.
They further pointed out that other issues, which include the size of non tradable goods, inflation mainly from the biggest trading partnerÔÇöwith an economic base that is 20 times that of Botswana and the source of 85 percent of goods imported into this country ÔÇô often took a back stage in the central bank calculations.
The critics said that the current system based on bank rate as the floor which banks can lend out money to customers limit the extent of competition in an oligopolistic market dominated by four banks.
“A more subtle approach to price setting is through the use of implicit collusion where, in the absence of market price, market signal such as change in price by agreed price leader or by regulator allows all market participants to adjust their own prices without resulting in unnecessary and, from the oligopolistic’s standpoint, undesirable price competition,” one critic said.
“…Botswana is a price taker as part of SACU and the only significant influence government has over the rate of inflation is the exchange rate and not the usual instrument of monetary policy such as the setting of the Bank Rate or the conduct of open market operation,” critics pointed out.
They said that has some serious implications to the bank customers who get almost nothing from the deposit rate which they are being changed exorbitant interest rates when they borrow from the commercial banks.
The depositors are even squeezed following the fall in the 88-day deposit interest rate if that is to be weight against the prime rate.
As the monetary policy stands, it tends to favour the commercial bank even in terms of auction of the BOBCs as they are the primary dealers. BOBCs were designed to mop up excess liquidity ÔÇô that could spark an upsurge in an inflation rate.
However, over time commercial banks have used it as a safe investment vehicle and have made billions of pula out of it. The BOBCs pays more interest to the local commercial banks than what the country gets in interest from foreign reserves.
In that line, critics pointed out that the local commercial banks are more risk averse and have played little role in propping up SMMEs hence the emergence of government agencies such as CEDA.