11 Oct 2020

Bank of Botswana has reduced interest rates by 50 basis points, from 4.25 per cent to 3.75 per cent as inflation remains below the lower bound of the central bank’s objective range at 1 per cent in August.

A press release from the bank states that inflation is forecast to revert within the objective range of 3-6 per cent in the third quarter of 2021.  The low inflation rate is a reflection of the subdued domestic demand and a sluggish economic activity due to the effects of the Covid-19 pandemic.

Economic experts at ABSA Group had predicted a reduction in interest rates, saying this should help resuscitate economic growth as it meant low cost of borrowing.

According to the central bank, the pandemic and subsequent containment measures have throttled economic activity globally and domestically as production, supply chains, project implementation and provision of goods and services are constrained.

“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,” the press release reads.
On economic performance, the economy as measured through Gross Domestic Product (GDP) contracted by 4.2 per cent in the 12 months to June 2020, compared to a growth of 3.9 per cent in the year to June last year.
The poor economic performance has been attributed to a decline in mining and non-mining sectors.
The bank states that mining output contracted by 18.6 per cent compared with a growth of 1.5 per cent in the same period in 2019 mainly due to weaker performance of the diamond, copper, soda ash and other mining subsectors.
The decline in non-mining GDP by 2.6 per cent has been attributed to contractions in trade, hotels and restaurants, construction, manufacturing and transport and communications sectors.
According to Bank of Botswana, projections by the Ministry of Finance and Economic Development and the International Monetary Fund (IMF) suggest deterioration in economic growth for Botswana in 2020.
The ministry estimates a decline of 8.9 per cent, revised from 13.1 per cent, before rebounding to a growth of 7.7 per cent in 2021.

The IMF has revised its economic outlook to a contraction of 9.6 per cent in 2020, compared to 5.4 per cent in the April 2020 World Economic Outlook, before rebounding to a growth of 8.6 percent in 2021.

“The disparity in forecasts attest 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,” Bank of Botswana states.

Contraction in GDP reflects the substantial curtailment of economic activity due to the necessary measures implemented to contain the spread of COVID-19 and safeguard human life.

This has resulted with decrease in global demand and disruption in supply chains, as well as curtailment in economic activity locally and this has affected several sources of economic growth for Botswana. “Notably, these include exports, such as minerals and tourism as well as non-food retail economic activity,” the Bank states.

The Bank’s Monetary Policy Committee (MPC) however remains optimistic as these challenges occur against a potentially supportive environment including accommodative monetary conditions, business reforms, government’s efforts to contain the impact of COVID-19 and the likely impact of the Economic Recovery and Transformation Plan. 

Bank of Botswana however states that the economy is projected to operate below full capacity in both the short term and long term and therefore, not creating any inflation pressures going forward.  ENDS