THE RESEARCH BULLETIN December 2003 RESEARCH DEPARTMENT BANK OF BOTSWANA Volume 21 No. 2 The Research Bulletin, December 2003, Volume 21, No 2 Published by The Research Department, Bank of Botswana P/Bag 154, Gaborone, Botswana. ISSN 1027-5932 This publication is also available at the Bank of Botswana website: www.bankofbotswana.bw Copyright © Individual contributors, 2003 Typeset and designed by Lentswe La Lesedi (Pty) Ltd Tel: 3903994, Fax: 3914017, e-mail: [email protected] www.lightbooks.net Printed and bound by Printing and Publishing Company Botswana (Pty) Ltd ii CONTENTS Bank of Botswana 2003 Monetary Policy Statement: Mid-Year Review ..................................................................................... 1 Bank of Botswana Using the GDDS Framework to Improve Standards of Statistics Production and Dissemination: The Experience of the Bank of Botswana .......................................................... 5 Sabata Legwaila, Pontsho Mochipisi and Matthew Wright The Process of Monetary Integration in the SADC Region ...... 13 Keith Jefferis An Approach to Estimating the Demand for Narrow Money in Botswana ........................................................................... 29 Walter Mosweu iii The purpose of The Research Bulletin is to provide a forum where research relevant to the Botswana economy can be disseminated. Although produced by the Bank of Botswana, the Bank claims no copyright on the content of the papers. If the material is used elsewhere, an appropriate acknowledgement is expected. In all cases, the views expressed in the papers are those of the individual authors and are not necessarily associated with the official policies of the Bank of Botswana. Comments: The Bank would welcome any comments/suggestions on papers published on the bulletin. Such communications should be ad- dressed to: The Secretary Research Bulletin Editorial Board Bank of Botswana Private Bag 154 Gaborone Or, e-mail to [email protected] Additional copies of the Research Bulletin are available from The Librarian of the Research Department at the above address. A list of the Bank’s other publications, and their prices, are given below. BANK OF BOTSWANA PUBLICATIONS SADC Rest of Domestic Members the World 1. Research Bulletin (per copy) P11.00 US$5.00 US$10.00 2. Annual Report (per copy) P22.00 US$10.00 US$15.00 3. Botswana Financial Statistics Free US$25.00 US$40.00 (annual: 12 issues) 4. Aspects of the Botswana Economy: P82.50 US$29.00 US$42.00 Selected Papers Please note that all domestic prices cover surface mail postage and are inclusive of VAT. Other prices include airmail postage and are free of VAT. Cheques, drafts, etc., should be drawn in favour of Bank of Botswana and forwarded to the Librarian, Bank of Botswana, Private Bag 154, Gaborone, Botswana. iv BANK OF BOTSWANA MONETARY POLICY STATEMENT 2003 percent of the second half of 2002. Growth in gov- Bank of Botswana 2003 ernment spending also continued to slow; it aver- Monetary Policy Statement: aged 11 percent in the first quarter of 2003, com- pared to 22.2 percent registered in the same pe- Mid-Year Review riod last year. 2.2 World economic growth was slower than ex- 1. INTRODUCTION pected in the first half of 2003, due mainly to weak business and consumer confidence resulting from 1.1 The mid-year review of the 2003 Monetary tension in the Middle East and uncertainty about Policy Statement (MPS) has three main objectives. world economic growth prospects. World output is First, it presents a progress report on the extent to estimated to have grown by a lacklustre 1.7 per- which the objectives of monetary policy, outlined cent in the second quarter of 2003, down from 2.3 in February 2003, have been achieved half way percent in the first quarter. Expectations are for a through the year; second, based on the assessment recovery in global economic activity in the second of progress, it examines the prospects for the fi- half of the year. Meanwhile, and consistent with nancial and economic outturn for the remainder of expectations, global inflation slowed in the first half the year and, depending on the prognosis, it evalu- of 2003, reflecting, in part, low international en- ates whether or not there is need for a change in ergy prices and sluggish world economic perform- the policy stance in the remaining period of the ance. Global inflation is expected to remain low and year; and third, it informs stakeholders at mid-year stable during the remainder of the year. of key considerations on policy formulation. (a) International Inflation 1.2 In setting its inflation objective for 2003, one of the Bank’s primary considerations was inflation 2.3 Average inflation in trading partner countries1 in trading partner countries, which was forecast at declined to 3.8 percent in June 2003 from a re- 5.7 percent for 2003. In light of this forecast, the vised 7.1 percent in December 2002 (Chart 1). Bank maintained the range of 4 – 6 percent for the South African core inflation declined from a revised desired level of inflation in 2003. The inflation range 9.8 percent at the end of 2002 to 5.8 percent in was intended to assist in regaining some of the June 2003, while headline inflation fell from a re- competitiveness lost in 2002, and to maintain low vised 12.4 percent to 6.7 percent in the same pe- inflation in light of concerns about the risks of a riod. The fall in South African inflation was due further VAT-induced increase in inflationary expec- mainly to the recovery of the rand, lower oil prices tations. Furthermore, it was felt that underlying following the end of the war in Iraq and an im- inflation (excluding the impact of VAT), remained provement in inflation expectations2. Meanwhile, close to the upper end of the desired range, thereby SDR inflation remained stable at around 2 percent making the 4 – 6 percent range a feasible objective in the same period. for underlying inflation. (b) Domestic Inflation 1.3 Since the main objective of monetary policy is to control demand-induced inflation, the Bank 2.4 The rise in inflation from 11.2 percent in De- focuses on the rate of growth of commercial bank cember 2002 to 12.8 percent in June 2003 was credit, which contributes to domestic demand pres- due to a combination of domestic factors that off- sures and is subject to the influence of monetary set the favourable external trends. Besides the in- policy. The Bank also focuses on the level of gov- crease in the cost of some food items, prices of motor ernment spending that is considered non-inflation- vehicles rose sharply in January and April 2003. ary given that the Government accounts for a large There was also an increase in Botswana Housing component of consumption expenditure and invest- Corporation (BHC) rentals in June. Inflation then ment. fell to 9.2 percent in July as the impact of the in- troduction of VAT in July 2002 dropped out of the calculation. 2. OUTTURN FOR THE FIRST HALF OF 2.5 The increase in inflation in the first half of 2003 the year was also reflected in the cost of both 2.1 In the first half of the year, annual inflation tradeables and non-tradeables. Prices of imports, varied between 11.3 percent and 12.8 percent which rose by 8.2 percent in January, increased (Chart 1), and fell to 9.2 percent in July. After ex- year-on-year by 11.3 percent in June. A similar cluding the impact of VAT, inflation was close to the expected range stated in the 2003 MPS. Do- 1 South Africa and SDR countries (Japan, USA, UK and mestic credit maintained a downward trend over the euro zone). the period, falling within the desired range in June 2 South African inflation was revised downwards from (13.9 percent) and averaging 15.3 percent for the January 2002 to March 2003 to correct an error de- first half of the year, down from an average of 20.8 tected in the CPI. 1 BANK OF BOTSWANA CHART 1: INTERNATIONAL INFLATION CHART 3: GROWTH RATES OF CREDIT AND GOVERNMENT 14 SPENDING (YEAR ON YEAR) 12 60 Total Credit (adjusted) Total Credit 10 50 Govt. Spending (annual) 8 40 6 Percent 30 4 Percent 20 2 0 10 2000 Apr Jul Oct 2001 Apr Jul Oct 2002 Apr Jul Oct 2003 Apr July 0 Botswana Trading Partner Countries Apr Jul Oct 2000 Apr Jul Oct 2001 Apr Jul Oct 2002 Apr Jul Oct 2003 Apr SA(Core) SDR Countries trend was evident with respect to prices of domes- consistent with its inflation objective. The growth tic tradeables and non-tradeables. The cost of do- rate of adjusted credit in June was the lowest since mestic tradeables was largely influenced by the rise March 1998. in food prices (mainly cereals), whereas the increase in BHC rentals explained most of the rise in the (d) Government Spending cost of non-tradeables, especially between May and 2.7 In the first quarter of 2003, government ex- June 2003, when non-tradeables inflation rose penditure was 9.7 percent higher than in the com- substantially from 10.6 percent to 14.6 percent. parable period of 2002 (Chart 3). For the 2002/03 fiscal year, government spending rose by 12.4 per- CHART 2: BOTSWANA INFLATION cent year-on-year (a lower rate than the 18.7 per- cent of the 2001/02 fiscal year), thereby giving a 14 more desirable balance between monetary and fis- cal policies in restraining aggregate demand pres- 12 sures for the remainder of 2003. 10 (e) Nominal Exchange Rates 8 2.8 The Pula appreciated against major interna- tional currencies in the first half of 2003 (Chart 4) 6 as the external value of the rand continued to re- Percent cover, thus reflecting the policy link between the 4 Pula and the rand through the multi-currency bas- ket.