BoB moves to reignite flagging economy

Brian Benza
Staff Writer | Friday May 3, 2013 00:00

 

The rate has remained constant since a reduction in December 2010. '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,' the bank said. Domestic output has been subdued, growing by a modest 3.7 percent in the 12 months to December 2012 with the non-mining sectors slowing to 5.8 percent growth from 7.8 percent in 2011. The mining sector contracted by 8.1 percent.

Economic growth may  be slow this year because of lower government spending, weak international markets as well as falling domestics demand. 'The motivation of the rate cut is presumably the bank's forecast of inflation over the next 12-18 months, which most likely suggests a fall in inflation to within the target range. This may encourage firms to borrow and invest marginally more, and is appropriate given the anticipated weak economic conditions over the next 12 months,' says economist Keith Jefferis.

The International Monetary Fund (IMF) forecast a 4.1 percent growth rate for Botswana in 2013 up from 3.8 percent in 2012. In the budget speech in February, Finance Minister, Kenneth Matambo talked of a 2012 growth rate of 6.1 percent but figures recently released by Statistics Botswana show that the economy only managed 3.7 percent acceleration last year.

The deceleration in real GDP growth was mainly due to the mining sector, which recorded a decrease in value added of 8.1 percent in the year. The decrease was largely due to a 14.7 percent drop in diamond production to 20 million carats last year. In 2011, diamond production increased by four percent to 23 million carats.The mining sector, whose total contribution to the GDP fell to 19.6 percent last year from 24.7 percent in 2011, has recorded negative growth in each of the last four years except in 2010.

'We've had a growing bullish bias for a further rate cut for some time following the last monetary easing cycle of 2009/10. Considering the benign medium term inflation outlook coupled with recent domestic economic data releases indicating below trend economic activity, high unemployment and relatively weak domestic demand pressures, it was becoming increasing likely that the central bank would concede with a rate cut.

This should provide a much needed stimulus for domestic economic activity especially with the cyclical outlook for inflation having become less worrying recently with the drop in commodity prices, particularly oil, and subdued global growth expectations,' said Chief Financial Officer at Afena Capital, Alphonse Ndzinge.Looking ahead, the central bank expects that non-mining expansion will remain below potential in the medium term and therefore exert minimal inflationary pressure. In addition, the impact of demand on economic activity is forecast to be modest, reflecting trends in government spending and personal income.

 Driven by declining inflation, consumer spending, which accounts for more than 60 per cent of Africa's GDP, remained strong in 2012. But in Botswana, domestic demand has been moderate as households income has stagnated while room for further credit expansion has been limited due to saturation. 'The rate cut will take some of the pressure off of borrowers, although household credit growth has been very high recently anyway,' said Jefferis.

Inflation in Botswana accelerated to 7.6 percent in March, above the bank's target range of three percent to six percent. The inflation rate will probably ease into the target band by the second half of the year, the central bank said.'A more accommodative monetary policy stance, at this time, is consistent with the achievement of the bank's three percent to 6 percent inflation objective in the medium term,' it said.