Question 1

Introduction

The Botswana Monetary Policy Statement is an important document released by the Central
bank of Botswana, Bank of Botswana. It outlines the bank's strategies and decisions
regarding Monetary policy in the country. The statement provides insights into the bank's
assessment of the current economic conditions, inflation targets, interest rate decisions as
well as other measures taken to maintain price stability and promote economic growth. It is
published at the beginning of the year to inform stakeholders about the framework for the
formulation and implementation of the Monetary Policy by the Bank of Botswana.
Therefore, the 2024 Monetary Policy Statement reports the prior year's economic and policy
developments ,and examines the determinants of changes in the level of prices and their
impact on inflation in Botswana. It promotes an understanding of prospective conduct of
Monetary Policy zo anchor and align public expectations to the objective of a low,
predictable and sustainable level of inflation.

Objectives of the MPS

The primary objective of the Monetary Policy Statement is to achieve price stability, defined
as a sustainable level of inflation within the medium-term objective range of 3 - 6 percent. In
the context of Botswana economy, given its structure and level of development, and inorder
to achieve durable, sustainable, and inclusive economic growth, prices should not persit
below 3 percent or above 6 percent, therefore making price stabilitya prudential objective.
Low and predictable inflation over the long term enables economic activity to thrive, and
sustain improvements in welfare and living standards.

The Monetary Policy formulation take into consideration developments relating to stability
of the financial system and prospects for economic growth. That is, a sound and stable
financial system is crucial for effective transmission of Monetary Policy signals, facilitating
the flow of funds and liquidity, and risk mitigation in support of economic growth.

The Monetary Policy Statement stance

The recent and prospective prevailing accommodative Monetary policy stance is consistent
with inflation remaining within the bank's 3-6 percent objective range in the short-to-
medium term. Which means, the recent and prospective developments for both and
external economic activity suggests that the economy will operates below the capacity in the
short term. A measured depreciation of the Pula against the trading partners is consistent
with maintenance of domestic industry competitiveness and positive for growth prospects,
hence implementation of the exchange rate policy will entail 1.51percent downward rate of
crawl in 2024.

The MPS Exchange rate regimes

Botswana adopted and implemented crawling peg exchange policy framework since 2005.
This framework has three attributes: first, the Pula is fixed to a basket of foreign currencies,
the SDR, second, is the weight of these currencies in the Pula basket, and third, is the annual
rate of crawl, which is the amount (rate) at which the exchange rate is allowed to gradually
depreciate or appreciate. And this amount reflects the inflation differential between
Botswana and its trading partner countries.

In the context of Botswana's crawling band exchange rate arrangement for the Pula, the
Ministry of Finance together with the Bank of Botswana, reviews the parameters for the
Pula exchange rate semi-annually: being the currencies in the Pula basket and their weights,
and the rate of crawl. This is done to gauge the alignment of the Pula exchange rate with the
policy objective of maintaining a stable and competitive REER of the Pula.

And currently, it was determined that the inflation in Botswana would be an average
1.2percent higher than the trading partner countries, suggesting maintenance of a
downward rate of crawl of 1.51 percent for 2024.

The MPS tools implemented

Open Markets Operations continue to be the main liquidity management tool as well as
implementing decisions of the Monetary Policy Committee. It entails the use of BoBCs to
mop-up excess liquidity in order to maintain interest rates that are consistent with the
Monetary Policy. In 2023, open markets Operations were conducted in environments of
increased market liquidity. Outstanding BoBCs amounted to P6 billion in December 2023, an
increase from P3.275 billion I December 2022 due to an increase in liquidity resulting mainly
from government spending.

Monetary Policy Rate, the yield on the 7-day Bank of Botswana Certificate (BoBC), was
reduced by basis points to 2.4 percent in December 2023, following a cumulative 151 basis
points Policy rate increase in 2022. The MoPR is used to conduct Monetary Operations.

Primary Reserve Requirement, the use of the primary reserve requirement averaging for
management of liquidity by commercial banks is not universal. As there are banks that
actively use the averaging tool, others prefer to maintain full adherence throughout.
Financial indicators

In 2023, the global economy continued to recover from the lingering effects of the COVID 19
pandemic and the Russian-Ukraine war. According to the International Monetary Fund
January 2024 World Economic Outlook Update, global economic growth is estimated to
have expanded by 3.1percent in 2023, lower than the 3.5percent in 2022, and it is
anticipated that it will remain subdued at 3.1 percent in 2024.

The global inflation is estimated to have decreased from 8.7 percent in 2022 to 6.8 percent
in 2023, consistent with the slowdown in the economic activity. It is expected to ease from
6.8 percent in 2023 to 5.8 percent in 2024.

In Botswana, the Ministry of Finance estimated the economy to have expanded by 3.2
percent in 2023, a slowdown from 5.5 percent in 2022, and expected to expand by 4.2
percent in 2024. Inflation has generally been on the downward trajectory since September
2022 and was mostly within the objective range from May 2023, averaging 5.2 percent in
2023. It is to remain within the Bank's 3-6 percent objective range into the medium-term.

Strengths of the 2024 Botswana Monetary Policy Statement

1. Transparency and Accountability: The MPS fulfills the public's expectation of a

transparent and accountable central bank by providing a comprehensive overview of the
monetary policy framework, inflation trends, policy performance, and policy choices for the
ensuing year.

2. Focus on Price Stability: The MPS emphasizes the importance of low and predictable
inflation to enable economic activity to thrive and sustain improvements in welfare and
living standards. This focus on price stability is crucial for economic growth and stability.

3. Global Economic Analysis: The MPS provides insights into global economic
developments, such as the impact of the COVID-19 pandemic and the Russia-Ukraine war,
allowing stakeholders to understand the external factors influencing Botswana's economy.

4. Inflation Outlook: The MPS forecasts that inflation will remain within the Bank's 3 – 6
percent objective range into the medium term, with balanced risks to the inflation outlook.
This forward-looking analysis helps in setting appropriate policy responses.

Weaknesses of the 2024 Botswana Monetary Policy Statement:

1. Limited Discussion on Economic Growth: While the MPS focuses on inflation trends
and policy responses, there is limited discussion on strategies to promote economic growth,
enhance productivity, and address unemployment rates, which are crucial for overall
economic development.

2. Lack of Detailed Policy Measures: The MPS could benefit from providing more
specific details on the policy measures and initiatives that will be implemented to achieve
the stated objectives. Clear action plans could enhance the credibility and effectiveness of
the monetary policy framework.

3. External Factors Impact: The MPS acknowledges the impact of global economic
developments on Botswana's economy, but there could be more in-depth analysis of how
these external factors may affect domestic policies and strategies.

4. Limited Discussion on Financial Stability: While the MPS mentions the importance of
a sound and stable financial system, there could be more detailed insights into measures
taken to ensure financial stability, especially in the context of evolving global financial
conditions.

Conclusions

The MPS presents the Bank's monetary policy framework, objectives, and instruments,
emphasizing the importance of price stability and a sound financial system. However, the
document lacks specific financial performance indicators, assessments of goal fulfillment,
and discussions of advantages, disadvantages, and resource mobilization.

The conclusion that can be gathered from the 2024 Botswana Monetary Policy Statement is
that the Bank of Botswana has maintained a forward-looking monetary policy framework
that responds to projected deviations of inflation from the Bank's medium-term objective
range of 3-6 percent. The MPS also assesses economic and financial developments that are
likely to influence the inflation path in the medium term and the Bank's policy choices in
2024.

In Botswana, the economy is estimated to have expanded by 3.2 percent in 2023, a

slowdown from 5.5 percent in 2022. Inflation has generally been on a downward trajectory
since September 2022 and was mostly within the objective range from May 2023, averaging
5.2 percent in 2023. Contributing to lower inflation were the dissipating impact of the
increase in prices controlled by government (administered prices) in 2022 (base effects);
downward adjustment of domestic fuel prices in 2023; the decrease in foreign prices,
particularly food and fuel, thus a decline in trading partner countries' inflation.

The MPS promotes an understanding of prospective conduct of monetary policy to anchor

and align public expectations to the objective of a low, predictable and sustainable level of
inflation. The MPS also highlights the importance of a sound and stable financial system for
effective transmission of monetary policy signals, facilitating the flow of funds and liquidity,
and risk mitigation in support of economic activity.
Suggested Actions

Based on the analysis of the 2024 Botswana Monetary Policy Statement, the following
suggested actions could help improve the document:

1. Clarify the Impact of Global Economic Developments: The MPS should provide a
clearer analysis of how global economic developments, such as high inflation, the debt
burden, and extreme weather events, have affected Botswana's economy. This would help
stakeholders understand the external factors influencing domestic policies and strategies.

2. Enhance Discussion on Economic Growth: The MPS should include a more detailed
discussion on strategies to promote economic growth, enhance productivity, and address
unemployment rates. This would provide a more comprehensive view of the Bank's
approach to economic development.

3. Provide Specific Policy Measures: The MPS could benefit from providing more
specific details on the policy measures and initiatives that will be implemented to achieve
the stated objectives. Clear action plans would enhance the credibility and effectiveness of
the monetary policy framework.

4. Review the Effectiveness of Monetary Policy Instruments: The MPS should evaluate
the effectiveness of monetary policy instruments, such as the Monetary Policy Rate (MoPR),
Open Market Operations (OMO), and the Bank of Botswana's standing facilities, in achieving
the Bank's objectives. This would help stakeholders understand the impact of these
instruments on the economy.

5. Strengthen Communication and Transparency: The MPS should aim to strengthen

communication and transparency by providing clear and concise explanations of the Bank's
monetary policy decisions and the rationale behind them. This would help stakeholders
better understand the Bank's approach and expectations.

Question 2

1. *Banking Act of 1995*: This legislation provides the regulatory framework for the
establishment, operation, and supervision of banks in Botswana. It sets out requirements for
licensing, capital adequacy, corporate governance, risk management, and disclosure
standards for banks operating in the country. The Banking Act aims to promote the stability,
integrity, and efficiency of the banking sector while safeguarding the interests of depositors
and other stakeholders.
2. *Bank of Botswana Act of 1996*: This law establishes the Bank of Botswana as the central
bank of the country and outlines its functions, powers, and responsibilities. The Bank of
Botswana Act grants the central bank autonomy in conducting monetary policy, regulating
the financial system, issuing currency, managing reserves, and promoting financial stability.
The legislation also establishes the Monetary Policy Committee (MPC), responsible for
formulating and implementing monetary policy decisions to achieve price stability and
support sustainable economic growth.

1. *Banking Act of 1995*:

- *Regulatory Framework*: The Banking Act establishes the regulatory framework that
governs the operations of banks in Botswana. It sets out the rules and standards that banks
must comply with to ensure the safety, soundness, and integrity of the banking system.

- *Licensing Requirements*: The legislation stipulates the requirements for obtaining a

banking license in Botswana, including minimum capital requirements, fit and proper criteria
for directors and key personnel, and prudential standards for risk management and
corporate governance.

- *Supervision and Oversight*: The Banking Act authorizes the Bank of Botswana to
supervise and regulate banks to ensure compliance with the law and maintain financial
stability. The central bank conducts on-site examinations, off-site monitoring, and
enforcement actions to address any violations or weaknesses identified in banks' operations.

- *Consumer Protection*: The legislation includes provisions aimed at protecting the

interests of depositors and consumers of banking services. It requires banks to disclose
information about their products and services, fees and charges, terms and conditions, and
complaint resolution procedures to enhance transparency and accountability.

2. *Bank of Botswana Act of 1996*:

- *Central Bank Functions*: The Bank of Botswana Act establishes the Bank of Botswana as
the central bank responsible for formulating and implementing monetary policy, regulating
the financial system, and promoting financial stability in Botswana.

- *Monetary Policy Autonomy*: The legislation grants the central bank autonomy in
conducting monetary policy to achieve its primary objective of price stability. The Bank of
Botswana Act empowers the Monetary Policy Committee (MPC) to set interest rates and
other monetary policy instruments to control inflation and support sustainable economic
growth.
 - *Financial System Oversight*: The central bank is tasked with regulating and supervising
banks, non-bank financial institutions, and other financial intermediaries to maintain the
stability and integrity of the financial system. The Bank of Botswana Act gives the central
bank powers to issue prudential regulations, conduct inspections, and impose sanctions to
address risks and vulnerabilities in the financial sector.

- *Currency Issuance and Management*: The legislation provides the central bank with the
authority to issue and manage the national currency, including the issuance of banknotes
and coins, currency reserves management, and currency exchange operations to maintain
confidence and stability in the monetary system.

Question 3

1. Fixed Exchange Rate Regime

- Advantages: Provides stability for international trade and investment, reduces exchange
rate uncertainty, and helps control inflation by anchoring expectations.

- *Disadvantages*: Requires significant reserves to defend the peg, limits monetary policy
autonomy, and can lead to speculative attacks if the peg is perceived as unsustainable.

2. Floating Exchange Rate Regime:

- Advantages: Allows the exchange rate to adjust to market fundamentals, provides

monetary policy flexibility, and can serve as a shock absorber for external economic shocks.

- Disadvantages: May lead to excessive volatility and uncertainty in the short term,
potentially affecting trade and investment decisions, and can result in currency over- or
undervaluation if market sentiment overshoots.

3. Managed Float Exchange Rate Regime:

- Advantages: Combines the benefits of both fixed and floating regimes, allowing some
degree of exchange rate flexibility while still providing central bank intervention to prevent
excessive volatility.

- Disadvantages: Requires effective communication and credibility from the central bank to
avoid market confusion and may be challenging to implement consistently over the long
term.
4. Crawling Peg Exchange Rate Regime:

- Advantages: Provides a degree of exchange rate stability while allowing for gradual
adjustments to changing economic conditions, reducing the risk of abrupt currency
fluctuations.

- Disadvantages: Requires periodic adjustments to the crawling peg, which may be subject
to political considerations or administrative delays, and may not be suitable for economies
with high inflation or significant external imbalances.

5. Currency Board:

- Advantages: Ensures a credible commitment to maintaining the fixed exchange rate,

eliminates discretion in monetary policy, and can in still confidence in the stability of the
currency.

- Disadvantages: Limits the central bank's ability to respond to domestic economic

conditions, requires strict adherence to the currency board rules, and may lead to a pro-
cyclical monetary policy.

6. Dollarization:

- Advantages: Eliminates exchange rate risk and uncertainty, enhances credibility and
stability, and facilitates international trade and investment.

- Disadvantages: Results in loss of monetary policy autonomy, exposes the economy to the
monetary policy of the country whose currency is adopted, and may exacerbate
asymmetrical shocks if the adopted currency does not align with the country's economic
conditions.