Expansionary budget, repatriation of funds expected to increase liquidity
Says “We don’t see a need to action”
Argues that liquidity will be sucked by projects implementation
Notes appetite for government securities
Expects government to increase bond note program cap
BoB expects Cost of funds to remain moderate
The Bank of Botswana (BoB) said it doesn’t see a need to adjust the primary reserve requirements, citing a favourable policy posture and anticipated economic expansion.
BoB Deputy Governor Dr. Kealeboga Masalila said: “We don’t see a need to action with respect to reserve requirements”. Dr Masalila said this as the Monetary Policy Committee (MPC) maintained the Policy Rate at 2.4%, anticipating that inflation will moderate and the economy to operate below capacity. The reserve requirements were reduced from 5% to 2.5% along with other measures to improve liquidity in the banking sector and support economic activity during the fight against the COVID-19 virus.
The BoB’s perspective aligns with the anticipated economic growth, as projected by the Ministry of Finance at 4.2%. Dr. Masalila expects this growth trajectory to naturally absorb liquidity through increased economic activity and service provision. Finance Minister Peggy Serame’s recent stimulus budget, primarily directed towards infrastructure projects, further reinforces BoB’s narrative.
Dr. Masalila emphasised that while government spending initially injects liquidity, the evolving dynamics of a growing economy ensure continuous absorption of liquidity. In the first instance, he said government spending immediately means that money is being allocated to those providing government services or executing government projects. But he was quick to emphasise “That’s not a static situation, there is always dynamism because in a growing economy that we are expecting – given what the government has alluded to in terms of the economy transformation reforms – economic activity is always sucking liquidity or using it.”
He argued that it does not necessarily mean that government spending means on a long-term basis there will be excess liquidity. “If the economy is growing, that gets used continuously.”
Open market operations continued to be the main liquidity management tool in the domestic market, as well as in implementing decisions of the Monetary Policy Committee (MPC). This entailed the use of Bank of Botswana Certificates (BoBCs) to mop-up excess liquidity in order to maintain interest rates that are consistent with the monetary policy stance. Bank of Botswana’s MPC statement showed that open market operations, in 2023, were conducted in an environment of increased market liquidity, supported mainly by government spending and repatriation of pension funds to align with the new pension fund rules. BoB showed that outstanding BoBCs amounted to P6 billion in December 2023, an increase from P3.275 billion in December 2022, due to an increase in liquidity resulting mainly from government spending.
The pension fund industry is expected to inject P3.7 billion this year as it repatriates assets to align with a 50/50 onshore/offshore limit. With an illiquid capital market in terms of equities not really moving because of the buy-and-hold posture, economists argue that the only other avenue is to purchase government bonds which have also been issued at a limited level. But there hasn’t been a revision of the current cap of P30 billion with current utilisation of about P27 billion. Market players expect this to be taken to parliament given that Serame in her budget speech revealed that the government wants to issue P13 billion.
Asked about this, Governor Conerlius Dekop acknowledged the likelihood of an increase in the bond program cap, reflecting the growing appetite for government securities. “But we have not yet received official notification,” he responded to a question.
With limited avenues to inject cash, asset managers may resort to fixed deposits with commercial banks, potentially driving down deposit rates and lowering the cost of funding. Dr. Masalila noted that the current surplus liquidity tends to suppress interest rates, thus mitigating any immediate increase in the cost of funds, especially with the central bank maintaining an accommodative monetary policy stance.
The central bank can increase the policy rate which is intended to reduce liquidity. The question now will be, does the central bank keep hiking policy rates as Botswana keeps bringing these funds back? Experts argue that this will defeat the purpose of the funds coming back. The intention is to promote infrastructure development but then those funds would end up sitting at the central bank. BoB said it stands ready to throw its open market operations.
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