The new amendments passed without a single objection by bipartisan legislators, also include tighter restrictions on the conditions under which government can borrow from the BoB.
The changes also include improved corporate governance at the central bank, with the governor removed from his dual role as board chair and bank chief executive.
The governor will now be the bank’s head and chair of its Monetary Policy Committee (MPC), the body that makes decisions on interest rates.
Finance Minister Peggy Serame told a late afternoon session of Parliament on Monday that the amended law had been produced after extensive best practice consultations with the International Monetary Fund, the Southern African Development Community Central Bank Model Law and local stakeholders.
She said the Bank of Botswana Act was “outdated” and needed to be reviewed, having been first passed in 1975 and last reviewed in 1996.
“The operational independence we are talking about means that there is no political or industry interference when it comes to monetary policy, which will be the authority of the governor,” she told lawmakers.
“The independence has been there but we are strengthening it and I can give examples of countries where the minister can simply order the central bank to print more money. “However, the independence does not mean that the BoB operates as if they are not in Botswana. “There’s no way the monetary policy will be successful without looking at fiscal policy and that’s why the bank meets with the Finance Ministry to coordinate this from time to time.”
BoB governor, Moses Pelaelo told BusinessWeek that as part of the changes, the Finance ministry would now set the country’s objective range for inflation, instead of the central bank.
The central bank raised interest rates by 101 basis points in the last two meetings of its MPC, as inflation soared to 14-year highs, above the three to six percent range that has been set as the objective range since 2008.
“Under the new law, in the design of monetary policy, government will determine the inflation objective looking at what the level of inflation that can be consistent with achieving sustainable economic growth should be,” the governor said during a briefing on Wednesday.
He said the current system where the central bank sets the inflation objective was akin to “scoring in our own goal posts” adding that the new changes would allow the BoB to be judged on an externally set inflation objective. The governor and the Finance ministry are set to meet regularly on monetary policy management, Pelaelo said.
Economic commentators and opposition parties have accused the central bank of single-mindedly pursuing the inflation objective range by increasing rates and failing to consider the need to lift the economy out of its COVID-19 slump. Despite an 11.4% rebound in growth last year, by the end of the first quarter this year, just four of the 17 sectors measured by Statistics Botswana to calculate the Gross Domestic Product had expanded beyond pre-pandemic levels.
Other changes passed this week involve the MPC moving from consisting exclusively of BoB executives to include four appointments from outside the bank made by the minister.
Under the new law, if the minister disagrees with the bank’s monetary policy, the contested policy stands while an appeals process is directed to the President. The final decision and the bank’s objections are both required to be published to the public. Under the old law, the minister’s position would replace the bank’s policy while a final decision from the president was awaited. The President’s final decision was not required to be made public.
Monetary policy is increasingly dominating political and social discourse in the country after the central bank hiked interest rates in its two most recent meetings.
The new law also limits government borrowings from the central bank to an intra-day settlement basis while longer-term advances will be limited to a 92-day settlement as opposed to the previous 180 days.
In Parliament, Serame did not explain the reasons behind the new limitations on government borrowings, but in 2020 the central bank advised cabinet that greater ring-fencing of the foreign reserves was needed, following high withdrawals to fund the COVID-19 response.
Government’s reserves fell to a record P3.4 billion in December 2020, from P18.3 billion in April of that year when COVID-19 was first reported in the country. The reserves have since recovered to about P15.6 billion as at May, helped by a resurgence in diamond exports.
