Fostering growth whilekeeping inflation in check is the delicate balance that the central bank is aiming to maintain in these difficult times for the nation and the global economy
GAZETTE REPORTER
In a recent decision reflecting mounting concerns about the country’s economic prospects, the Monetary Policy Committee (MPC) of the Bank of Botswana has lowered the Monetary Policy Rate (MoPR) by 25 basis points, reducing it from 2.15 percent to 1.9 percent.
This adjustment is part of an effort to stimulate an economy struggling under the weight of weaker-than-expected growth and a downturn in the critical diamond sector.
Slowed economic growth
The MPC’s decision was informed by new data from Statistics Botswana that showed that the country’s economic growth has slowed significantly, with real GDP contracting by 5.3 percent in the first quarter of 2024.
This marks a stark reversal from the 5.3 percent growth recorded in the same quarter of 2023.
The slowdown is attributed to several factors, including reduced external demand for Botswana’s mining sector production, particularly diamonds, and a weaker performance across non-mining sectors.
Decline in export earnings
The MPC noted that this economic deceleration has led to a decline in export earnings, especially from diamond sales.
“The reduced export earnings are likely to constrain government spending, which in turn will have a negative impact on overall economic activity,” it said in a statement after its latest meeting.
The global economic context also weighed heavily on the MPC’s decision. The July 2024 World Economic Outlook Update from the International Monetary Fund (IMF) forecast global output growth at 3.2 percent for 2024, a slight dip from 3.3 percent in 2023.
Botswana’s economic prospects appear even dimmer, with the IMF revising its GDP growth forecast for the country downwards to 1 percent for 2024, a sharp decline from the earlier estimate of 3.6 percent.
This revision is largely due to the downturn in the diamond industry, driven by weak global demand and high inventory levels.
Inflationary pressures, however, remain subdued. According to Statistics Botswana, headline inflation stood at 3.7 percent in July 2024.
The MPC forecasts that inflation will remain low in the medium term, averaging 3 percent in 2024, 3.2 percent in 2025, and 4.7 percent in 2026.
Inflation trajectory
It assessed the risks to this inflation trajectory as balanced but acknowledged several potential upward pressures.
“Inflation could be higher than projected if international commodity prices increase beyond current forecasts, if supply and logistical constraints persist, and if geo-economic fragmentation escalates,” the MPC noted.
Further, the MPC pointed out that inflation might be further driven by potential upward adjustments in government-controlled prices and any increase in domestic food prices due to El Niño-induced drought conditions in Southern Africa.
Despite these risks, the MPC emphasised that the likelihood of continued weaker domestic and global economic activity, coupled with potential decreases in international commodity prices, should offset these upward pressures.
“The prospects for significant economic growth remain elusive, even with the government’s commitment to stimulate non-mining sectors through growth-enhancing economic transformation reforms and supportive macroeconomic policies,” it noted.
Operate below full capacity
Given this outlook, the MPC concluded that Botswana’s economy will continue to operate below full capacity in the medium-term, which should prevent the emergence of demand-driven inflationary pressures.
The Committee reiterated its forecast that inflation will remain low and within the objective range of 3-6%, with expectations among businesses also aligned to this forecast.
“As a result, the current economic conditions and the outlook for both domestic and external economic activity provide scope to ease monetary policy,” said the MPC, justifying its decision to cut the MoPR by 25 basis points.
This move reflects a broader effort by the central bank to navigate the challenging economic landscape, aiming to foster growth while keeping inflation in check.