- “We need to grow the economy”
- Says fiscal policy and monetary policy in congruence
- Revises inflation forecast down
- Maintains Bank rate
A more expansionary fiscal policy is “not necessarily a bad thing” according to the central bank governor as he aligns himself with the stimulus budget presented by the government.
Governor Cornelius Dekop said that inflation risks associated with the 2024/2025 budget can be mitigated provided projects are implemented with no constraints.
In her budget speech, Finance Minister Peggy Serame emphasised her intention to stimulate economic activity. Dekop argued that this approach, particularly on the fiscal policy side, is beneficial. He noted that fiscal policy and monetary policy typically work in tandem in managing the economy. The stimulus aims to generate more employment opportunities and stimulate demand.
In acknowledging this possibility, Dekop recognised that increased economic activity could lead to inflation. In such a scenario, he explained that monetary policy would come into play to manage inflationary pressures.
“We want to see a growing economy, our duty as monetary policy is to ensure that the growth of inflation does not outpace the growth of the economy. “
Serame anticipates the domestic economy to rebound to 4.2 percent and 5.4 percent in 2024 and 2025, respectively, as the global economy recovers. Meanwhile, the Central Bank, maintaining a policy rate at 2.4 percent, forecasting that inflation will remain within the objective range in the medium term, averaging 4 percent in 2024 and 5 percent in 2025. Additionally, the bank revealed that businesses expect inflation to stay within the medium-term objective range, indicating well-anchored inflation expectations.
With Bank of Botswana expecting inflation to trend below growth of the economy, Dekop said “We already are in congruence as fiscal policy and monetary policy”. BoB revised its forecast for inflation from 4.9 percent in December to now 4 percent, with the expansionary budget “already factored in the projections”.
The Central Bank explains that effective execution and implementation would ensure that capacity and supply merely meet the demand without necessarily causing inflation. Economist Jonah Tlhalefang raised a crucial question during the UB Budget review seminar: Does Botswana have the absorptive capacity to spend this large amount of money? He emphasised that sustaining such a high growth rate in the budget requires Botswana to possess the capacity to spend effectively. Tlhalefang highlighted the need for trained manpower, efficient processes, and a robust legal framework to facilitate the expenditure of such significant funds.
“If you spend beyond absorptive capacity, additional increase in government spending leads to lower rates of social return. So you are spending a lot but outcomes are not consummate with spending.”
However, the Monetary Policy Committee (MPC) cautions that inflation might surpass projections if international commodity prices rise beyond current forecasts, supply and logistical constraints persist, and global economic integration reverses (geo-economic fragmentation). Additionally, inflation could escalate due to potential upward adjustments in government-controlled prices (administered prices) not considered in the current projection and any spike in domestic food prices resulting from projected El Niño conditions in Southern Africa. Conversely, inflation might be lower than anticipated due to the potential for weaker domestic and global economic activity, as well as a decline in international commodity prices.
Similar to the Central Bank’s perspective, FNBB economist Gomolemo Basele acknowledges that an expansionary budget could indeed fuel inflation. However, he takes solace in the expectation of some relief due to the halt in tariff increases, a significant component of Botswana’s Consumer Price Index (CPI) basket.
“Oil prices have come down substantially with expectations that they will remain low over the course of this year,” Basele said adding that it is also a significant component within Botswana’s CPI basket. These elements, he argued, will likely keep inflation from breaching the 6 percent objective range.
During the recent FNBB budget review seminar, economist and Econsult Managing Director, Dr. Keith Jefferis, characterised this year’s budget as inflationary and high-risk, posing a challenge for the Monetary Policy Committee at the central bank. He emphasised that the allocated funds primarily target social infrastructure rather than economic initiatives. While intended to be transformative, Jefferis questioned the substantial spending amidst a highly uncertain economic outlook.
“There are some sustainability risks,” warned Jefferis.
“There is a worry that we may be creating special interest groups with vested interests.”
Furthermore, Jefferis cautioned that there could be funding risks associated with the projected increase in spending. He emphasised that this surge in expenditure is likely to push inflation towards the upper limit of the domestic medium-term objective range of 3 to 6 percent.
Basele emphasised that the stimulus budget is expected to result in salary increases for government workers, which will exert upward pressure on demand. He also noted that demand-pull inflation will be fueled by heightened spending stemming from increased business activity, particularly in the construction sector, as major projects and programs are initiated. These projects will encompass water and road infrastructure developments.
Basele pointed out that a heightened inflation profile might only occur if international oil prices surpass current expectations due to supply constraints, coupled with increased disruptions to supply chains caused by heightened geopolitical tensions.
