BoB in historic benchmark rate cut

Businesses, banks and household on Thursday midday received the much anticipated announcement from Bank of Botswana Governor, Moses Pelaelo, who said the central bank has decided to reduce the Bank Rate by 50 basis points from 4.25 percent to 3.75 percent.

This is the second 50 basis points cut this year after the April cut from 4.25 percent to 4.75 percent. This Thursday cut is the record lowest since 2006, two years before global recession. The two cuts this year were seen as intervention to cushion the economic impact of Covid-19.
Covid-19 and its new normal to most business activities shifted most macroeconomic dynamics and dimension; this recent cut according to the central bank is meant to support the domestic economy which is backed against the wall by inflationary pressures.

The headline inflation remained steady at 1 percent in August and well below the lower bound of the Bank’s objective range of 3-6 percent after waking from the lowest level since records began in January of 1997(June and July, 0.9 percent). For August, the upward pressure came from prices of food & non-alcoholic beverages (4.2 percent vs 3.9 percent in July); housing & utilities (6.1 percent vs 5.9 percent); alcoholic beverages & tobacco (6.6 percent, the same pace as in July) as the economy was rising from a gloomy lockdown. But the Bank has decided to improve spending.

Inflation has been at the bottom of BoB’s container of 3 percent to 6 percent for 11 months and it is expected to bounce back to the targeted range in the third quarter of 2021 according to Pelaelo.  “The COVID-19 pandemic and consequent containment measures have severely throttled economic activity globally and domestically as production, supply chains, project implementation and provision of goods and services are constrained. Similarly, consumption and spending are disrupted, hence domestic demand pressures and foreign prices remain subdued.

Consequently, overall risks to the inflation outlook are skewed to the downside. However, inflation may rise above current forecasts if international commodity prices increase beyond current projections and in the event of upward price pressures occasioned by supply constraints due to travel restrictions and lockdowns,” says Pelaelo on Thursday.

Pelaelo and his Central Bank Monetary Committee was on this recent decision making amid the work-on of the second quarter of 2020 GDP data. In the Thursday press conference, Pelaelo said already Real Gross Domestic Product (GDP) contracted by 4.2 percent in the 12 months to June 2020, compared to a growth of 3.9 percent in the year to June 2019.

“The decline in output is attributable to the contraction in output of both the mining and non-mining sectors, resulting from the associated COVID-19 pandemic containment measures. Mining output contracted by 18.6 percent compared to a growth of 1.5 percent in the corresponding period ending June 2019, mainly due to weaker performance of the diamond, copper, soda ash and other mining subsectors,” said the Governor on Thursday.

Furthermore, Pelaelo said Non-mining GDP contracted by 2.6 percent in the year to June 2020 compared to a growth of 4.2 percent in the corresponding period in 2019. The decline in non-mining GDP was mainly due to contractions in output of the trade, hotels and restaurants, construction, manufacturing and transport and communications sectors.

But the storm was felt recently in the release of the second quarter of 2020 economic data, a depiction of the heavy wave that invisibly came with Covid-19 inside Botswana borders in March. A mammoth decline in real value added of Mining & Quarrying and Trade, Hotels & Restaurants industries by 60.2 and 40.3 percent respectively made sure that the Real Gross Domestic Product for the second quarter of 2020 plunges by 24.0 percent.

“The nominal Gross Domestic Product (GDP) for the second quarter of 2020 was P36, 863.5 million compared to P50, 726.5 million registered during the previous quarter. This represents a quarterly decrease of 27.3 percent between the two periods. During the quarter under review, General Government became the major contributor to GDP for the first time in many years, by 19.7 percent, followed by Finance & Business Services, Trade, Hotels & Restaurants and Mining & Quarrying by 16.7, 16.5 and 8.1 percent respectively. The contribution of other sectors was below 7.0 percent, with Water & Electricity being the lowest at 1.6 percent,” said Statistics Botswana.

A tale of contractions in projections by economists this year, riddled in uncertainty and all spelling deterioration in economic Botswana’s growth this year. Ministry of Finance and Economic Development and the International estimates that the economy will decrease by 8.9 percent in 2020, from an earlier forecast of a 13.1 percent contraction, before rebounding to growth of 7.7 percent in 2021. Commercial bank with a locally focused and commissioned research, Rand Merchant Bank, maintains an expectation of 10.5 percent contraction in growth in 2020.

Projections by the International Monetary Fund (IMF) is for the domestic economy to contract by 9.6 percent in 2020 compared to 5.4 percent in the April 2020 World Economic Outlook, before rebounding to a growth of 8.6 percent in 2021 for Botswana in 2020.  According to the BoB Governor, with recovery in 2021, the contraction in 2020 equates, approximately, to a two-year loss of output. He further stated that the disparity in forecasts attests to the challenges of making forward projections when there is uncertainty about the duration of constrained economic activity, the resultant adverse impact on productive capacity, as well as the speed of resumption of production and pace of recovery in demand. Pelaelo however mentioned that there will be revisions on all the projections made.

Pelaelo explained that, something that was further echoed by his deputy Kealeboga Masalila, BoB’s monetary policy has recognized that the short-term adverse developments in the domestic economy occur against a potentially supportive environment including accommodative monetary conditions. The Governor was referring to, “reforms to further improve the business environment; concerted efforts by government to mitigate the impact of COVID-19; as well as the likely impact of the Economic Recovery and Transformation Plan.”

A lot of anticipation has been on the Economic Recovery and Transformation Plan (ERTP) and its expected take off. With economists curious on whether there will be any monetary policy coordination from the central bank to the ERTP, like an expansionary monetary stance in the form of cutting the benchmark rate, as a way of catalysing the implementation of economic recovery efforts.

According to Rand Merchant Bank Global Markets Research seen by this publication, the government is expected to publish ERTP in 4Q:2020. But the implementation of ERTP is expected to begin in 2021. “With its success relying heavily on prudent project management by government,” says the report.

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