Healthy cocktail

SHARE   |   Sunday, 31 May 2015   |   By Kabelo Adamson

Robust and steady growth; low and stable inflation; sound financial system and resilience to adverse economic shocks – BoB points to these for the country’s healthy macroeconomic situation.

While the overall local economic situation remains relatively healthy, there are fears of prospective vulnerabilities that could threaten the macroeconomic stability in future, Bank of Botswana (BoB) states in its 2014 Annual Report.
The bank warns that the recent period of low inflation should not lead to complacency regarding the primacy of the price stability objective in the central bank’s mandate, adding that the monetary policy framework must continue to evolve taking into account relevant economic, financial and market developments.
Domestic inflation in 2014 was within the bank’s medium-term objective of 3-6 percent, having fallen from 4.1 percent in December 2013 to 3.8 in December 2014 against the background of modest wage growth and weak demand pressures, as well as limited impact of increase in administered prices and government levies.
External pressures on domestic prices are reported to have been kind in the context of low and declining inflation in trading partner countries and a stable exchange between the Pula and the South African Rand. With regard to the macroeconomic stability, the bank says though the financial sector development is important including greater financial inclusion and a wider range of services to both businesses and households, it can be accompanied by risks of stability that can disrupt the economy more extensively.
As such, the central bank notes that macroeconomic policies also need to address developments in the financial system and their impact on economic performance. According to BoB, macroeconomic stability is characterised by a cocktail of robust and steady growth together with low and stable inflation, a sound financial system and resilience to adverse economic shocks. By contrast, instability, in the form of large swings in economic activity, high inflation, weak financial institutions, external imbalances and the build-up of debt towards unsustainable levels, can damage long-term growth.
The results of the above, it is said, could end in rising unemployment, poverty and inequality.
Monetary and Financial Stability Deputy Director at the central bank, Matthew Wright, says the nature of shocks has changed over time due to evolution of the structure of the economy and demographic characteristics of the population.
He said threats are now in the areas of slow progress towards economic diversification, prospects for adequate employment creation and deficiencies in the supply of key inputs.
In the case of Botswana, the bank sates that in the last four decades consistent application of comprehensive policies has resulted in a high degree of macroeconomic stability. While the bank acknowledges that is not sufficient, it is a necessary prerequisite for sustained development, the creation of productive employment opportunities and a rising standard of living.
These factors, the bank says, are necessary for the country to make a transition from middle to upper income status, a key objective of the national long-term vision. Wright says most countries that succeeded in upgrading from low income status to middle income category in the 1960s have found themselves trapped in the latter category even years after attaining such status.
He observes that in order to avoid staying in middle-income trap, the economic agenda must be inclusive but remain tightly focused, this includes financial inclusion which he says it is a key element of inclusive growth.
Also with regard to macroeconomic in terms of external stability, as supported by a sustainable path for the balance of payments which is P11.4 billion surplus in 2014 and exchange rate, must be viewed in the context of unlocking the potential for Botswana to maximise opportunities arising from external linkages, both regionally and internationally in terms of trade, investment and associated benefits from skills and technology transfer.
Similarly, the central bank cautions that the heavy reliance on minerals as well as customs and excise revenues poses a significant risk. This is because not only are minerals a non-renewable source that will ultimately be depleted; revenue from this source is vulnerable to large external shocks.
Still in the same vein, the bank warns that the future of receipts from the Southern African Customs Union (SACU) is uncertain while at the same time growth of other sources of government revenues is likely to be modest, given the moderate expansion that is projected for the economy in the medium term together with the need to keep tax rates relatively low as part of maintaining the business friendly investment climate.

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