Botswana maintains rate and still sees inflation rising

December 5, 2019

By CentralBankNews.info
Botswana’s central bank left its Bank Rate steady at 4.75 percent and reiterated its forecast from October that inflation should remain below the lower bound of its target range in the near term but then bounce back to within its target range of 3-6 percent in the second quarter of 2020.
The Bank of Botswana (BOB), which cut its rate by 25 basis points in August after keeping rates unchanged for two years, noted inflation decelerated to 2.4 percent in October from 3.0 percent in September and is expected to remain below 3 percent for a few more months due to the comparison with an increase in domestic fuel prices in the fourth quarter of last year.
“Subdued domestic demand pressures and the modest increase in foreign prices contribute to the positive inflation outlook in the medium term,” BOB said.
Upside risks to this forecast stem from a potential rise in administered prices and government levies or taxes beyond the current forecast while downside risks stem from lower growth in the global economy along with productivity improvements and technological process.
Botswana’s economy has slowed this year due to a weak diamond market, severe drought and slower growth in neighboring countries but is expected to bounce back next year as the diamond market normalizes and copper production comes on stream.
In the second quarter annual economic growth slowed to 3.1 percent from 4.3 percent in the first quarter, with mining output up by only 1.4 percent in the year to June compared with an increase of 5.6 percent in the same 2018 period mainly due to a planned maintenance shutdown of the Orapa Mine in April.
Weak output from the diamond industries also affected Botswana’s non-mining output, which slowed to growth of 4.2 percent in the 12 month to June compared with 4.8 percent growth in the same period as the trade, hotels and restaurant sectors saw slower growth.
BOB said the government had lowered its forecast for economic growth this year to 3.6 percent from an earlier 4.3 percent, and to 4.4 percent for 2020 from 4.6 percent.
Last week the International Monetary Fund forecast Botswana’s economy would grow around 3.5 percent this year and 4.2 percent in 2020, with growth hovering around 4 percent thereafter, a rate it said was too low to achieve the country’s development objectives and create enough jobs to absorb new entrants to the labour market.

The Bank of Botswana issued the following press release:

“At the meeting held on December 5, 2019, the Monetary Policy Committee (MPC) of the Bank of Botswana decided to maintain the Bank Rate at 4.75 percent. Inflation fell from 3 percent in September to 2.4 percent in October 2019, breaching the lower bound of the Bank’s objective range of 3 – 6 percent. Inflation is forecast to remain below the bottom end of the objective range in the near term, but should revert to within the objective range in the second quarter of 2020 and into the medium term.

Subdued domestic demand pressures and the modest increase in foreign prices contribute to the positive inflation outlook in the medium term. This outlook is subject to upside risks emanating from the potential rise in administered prices and government levies and/or taxes, beyond current forecasts. However, lower growth in global economic activity, technological progress and productivity improvement present downside risks to the outlook.

Real Gross Domestic Product (GDP) grew by 3.9 percent in the twelve months to June 
2019, compared to a faster expansion of 4.9 percent in the corresponding period in 2018. The lower increase in output is mainly attributable to a deceleration in growth of the mining sector. Growth in non-mining GDP also slowed in the review period. Mining output grew by 1.4 percent in the year to June 2019, compared to an increase of 5.6 percent in the corresponding period in 2018. The lower increase is, in the main, due to the significant reduction in growth of diamond output from 11.8 percent to 1 percent in the review period, attributable to the decline in production by Orapa Mine, following a planned plant shutdown in April 2019. Non-mining GDP grew by 4.2 percent in the twelve months to June 2019, compared to 4.8 percent in the corresponding period ending in June 2018. The lower expansion in non-mining GDP was largely due to slower growth of the trade, hotels and restaurants sector, mainly reflecting weak performance in the downstream diamond industries.

Projections by Government indicate that domestic economic activity will expand by 3.6 percent and 4.4 percent in 2019 and 2020, respectively. The projections have been revised downwards by 0.7 and 0.2 percentage points for the two respective years. The weaker performance is mainly attributable to the expected decline in the rate of growth of the mining sector due to lower diamond production. However, it is anticipated that the increase in government spending, as well as ongoing structural reforms, such as improving the ease of doing business and concerted efforts channelled towards the transformation of the economy, should also be supportive of economic activity. Overall, the economy is projected to operate close to, but below full capacity in the short to medium term, thus not adding to inflationary pressures going forward.

Global output growth is projected to ease to 3 percent in 2019, the lowest since the global financial crisis of 2008-09, down from 3.6 percent in 2018. The slowdown is due to, among other factors, broad-based deceleration in growth of industrial output and trade, as well as low business confidence and weaker investment amid trade and geopolitical tensions. Furthermore, global economic performance is undermined by lack of traction of structural reforms in the advanced economies and China, while country idiosyncratic factors weigh down on growth in some emerging market economies. Overall, global output is expected to expand modestly by 3.4 percent in 2020. The projected recovery, mainly driven by emerging markets and developing economies, remains precarious with elevated downside risks in an environment of policy uncertainty and sustained negative impact of trade and geopolitical tensions on business confidence, investment and growth. Regionally, economic activity in South Africa remains subdued and the South African Reserve Bank projects GDP growth rates of 0.5 percent and 1.4 percent in 2019 and 2020, respectively, a 0.1 percentage points downward revision for both years.

The current state of the economy and the outlook for both domestic and external economic activity suggest that the prevailing monetary policy stance is consistent with inflation being within the objective range of 3 – 6 percent in the medium term. Consequently, the MPC decided to maintain the Bank Rate at 4.75 percent.

The next full update of the Bank’s outlook for the domestic economy and inflation will be published on February 25, 2020 in the Monetary Policy Statement. MPC meetings for 2020 are scheduled as follows:
February 26, 2020 
April 30, 2020 
June 18, 2020 
August 20, 2020 
October 8, 2020 
December 3, 2020″

    www.CentralBankNews.info

 


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