Sterilization in Botswana: Cost, Sustainability and Efficiency
Date
2020-12-10
Authors
Mannathoko, Ita
Journal Title
Journal ISSN
Volume Title
Publisher
African Economic Research consortium
Abstract
While Botswana has had a good governance record, it has also had its fair share of
challenges. This paper investigates why monetary policy in the country failed to
contain inflation in the 2000s decade, and explores corresponding concerns over the
fiscal cost of monetary sterilization, low monetary policy autonomy and real exchange
rate appreciation. The findings provide an explanation for Botswana’s sub-optimal
monetary policy outcomes that challenges the popular storyline. Accounting equations
are used to estimate the net cost and sustainability of sterilization interventions
and to compile a monetary policy autonomy index, while simultaneous equation
estimation using two-stage least square regressions for a monetary policy reaction
function and a capital flow equation provide measures of the extent of sterilization
and of offsetting inflows prior to and after the great recession. The results show how
a series of policy decisions from 1999 led (in the absence of appropriate countermeasures) to substantial loss of monetary policy autonomy, large offsetting inflows,
unsustainable sterilization costs, high inflation and real exchange rate appreciation.
In the wake of the great recession, excess liquidity pressures have now abated and
offsetting inflows have tapered off, thus reducing the need for sterilization. Recent
diamond import-linked (customs union) inward transfers to the current account have
enabled reserve accumulation and recovery of monetary policy autonomy. However,
these current conditions for enhancing monetary policy autonomy remain overly
reliant on the diamond industry and may not be sustainable. A long-term solution is
still needed as inflows from large trade surpluses may resume in the future