Mohohlo: Asleep at the wheel

When Linah Mohohlo and her motley crew of monetarists meet next week, they will despondently confront an economy yet again falling short. Yet again, headline inflation and unemployment rate remain stubbornly high. There are major challenges to V-shaped recovery and the economy is geared to follow a less impressive trajectory. Economic forecasts point to a less ambitious growth trajectory - maybe at 4.6 percent in 2012 against the estimated 6.1 percent. Clouds from Europe, Asia and US’s own “fiscal cliff” darken the first half of 2013.

Even Bank of Botswana (BoB) Monetary Policy Committee (MPC) chaired by governor Mohohlo is widely expected this coming week to confirm significant contraction in mining output. So what will the MPC do? Fortunately we do not have to speculate. Macroeconomists strongly believe that upside risks to inflation outlook – think transport costs and electricity bills - will be mitigated by downswings associated with a global economy on the edges of recovery. Even the IMF paints a gloomy picture. In 2013, American economy will grow by around 2 percent.

Britain, Japan by 1 percent or so and the eurozone will be lucky to grow at all. This will pull down sales of polished diamonds to major consumers. As Motswedi Securities, a local brokerage firm puts it the central bank has tried its best to absorb excess liquidity. The challenge, says Motswedi Securities senior analyst, is that most of the factors that contribute to inflation are exogenous. Garry Juma is optimistic that the MPC will maintain the current interest rate in an effort to lower the cost of capital for businesses and consumers.

What critics say the MPC needs is a wholesale makeover of its goals and methods. Some want the highly secretive committee to raise its inflation target “to realistic and appropriate levels.” Others wish it would adopt a more “Afro-centric” approach to economic policy. Both approaches are intended to induce easier monetary policy that would foster growth and employment.

At the opposite end of the spectrum, more critical economists such as Michael Chibba, researcher at the Canadian International Development who has worked extensively on Botswana monetary policy believes the country’s monetary policy responses are “deeply flawed” and laced up with an Eurocentric spin to it. Amit Bakhirta, General Manager at IPRO, a leading Mauritian portfolio and investment management outfit, takes a more conservative approach to the MPC policy decision next week. “I expect them to hold,” he says simply and pauses. “I expect them to maintain the rate at 9.5 percent,” he says ornately. Well, this is most likely to be the case.

While the bank may not be vindicated by exogenous events such as cost-push inflation, policy framework is forward looking and will not react to short-term changes at the retail pump price or recent increases in Botswana Power Corporation and Water Utilities Corporation’s tariffs. “They do not react to what tends to happen in the short run, unless if it has a second round effect,” an economist with understanding of the MPC adds frankly. Bakhirta may have misgivings over the practicality of reducing interest rate and keeping inflation low at the same time, but is a strong advocate of striking equilibrium to achieve full employment. “It’s quite complicated to get all things equal.

The most important thing is to grow the economy,” he admits wryly and believes the central bank is justified in holding the rate at 9.5 percent for the 14th time in 28 months. “They will try to monitor the situation, if the Pula stands up to P9 to the dollar that is when they will increase with 25 to 50 basis points.” Currently the Pula is weakening against the major currencies and Bakhirta is concerned that further weakening will necessitate a reaction by the central bank. Botswana has one of the highest inflation rates in the SACU region.

Inflation fell from 9.2 percent in December 2011 to 6.6 percent in August 2012 before quickening to 7.6 percent in March 2013. BoB attributes increases in headline inflation to domestic price volatility. MPC’s flawed policy However, Chibba has his own version of interpreting Botswana’s monetary policy and holds no bars at Mohohlo and her mystery team. In his view, Botswana has often displayed an erratic monetary policy response with amazing obsession on the level of interest rate, which sadly continues to prove unsuccessful in yielding a low, stable and predictable rate of inflation. To a certain extent, Chibba has a point. Judged by its record of curbing a decade of stubborn inflation, the usual yardstick of central bank, the MPC has been disturbingly flawed. In 2003, it declared that henceforth its medium-run target for inflation was in the range of 3 - 6 percent. Quickly the target was adjusted to 4 – 7 percent to accommodate the effects of February 2004 7.5 percent devaluation of the Pula and the subsequent 12 percent devaluation in May the following year. Chibba describes in detail that the central bank does not currently have a clear nominal anchor and contends that adherence to failed monetary policies is arguably not an enlightened option. “It is this indecisive approach (that) weakens monetary policy,” he said in his research document. Unmasking the MPC At the time, investors developed goose bumps.

Wisdom kicked in and in 2006, the MPC readjusted the medium term inflationary objective to 3 – 6 percent. Mohohlo defended her flip-flop in shifting inflation goals saying it was an attempt to make the monetary policy more transparent, predictable and more effective. However real transparency in the monetary policy remains as elusive as achieving a medium term inflation objective. In developed economies, transparency has become one of the features of monetary policy making. At BoB and Ministry of Finance, questions as to who constitute Mohohlo’s MPC stirs up outright rejection. “The central bank does not discuss those who constitute the MPC,” the bank has previously rebuked. For the IMF, central banks have since begun pricing clarity in explaining their objectives and decisions to the public. This is highly critical, but the argument should have gone further to emphasise the importance of disclosing those who constitute the all-important MPC.

In developed economies, this is a basic tenet of accountability and good governance. And the members are … Perhaps in a matter of time, Mohohlo will find the courage to disclose individuals who make up the MPC, but that is almost too late as Sheila Sealetsa - Acting Director, Financial Markets; Dr. Kealeboga Masalila, Director Research; Richard Nlebesi, General Manager are known members of the MPC. Others include two mysterious senior economists appointed by Finance Minister on the recommendation of the governor and two independent members of the business community and a secretary to the MPC. But this secrecy continues to baffle many economists including those who have worked with Mohohlo. “I can’t really understand why,” mutters a former BoB employee when asked about the veil of secrecy on the MPC. “I think it is a tradition. I think the reasons are personal, nothing will be violated by revealing these names.” Bakhirta agrees firmly. “Everything is about transparency,” he says and adds: “The more it is transparent, the more I want to invest my money.”