Botswana

Botswana had been using the South Africa rand for many years, but chose to issue its own currency, fixed for most of the period to the rand or a basket containing the rand and the SDR, but with frequent adjustments, for many years ad hoc but later in a formalised crawl re-set each year. Over time, although the banking system grew, secondary financial markets remained absent, but monetary policy moved towards indirect instruments in pursuit of an inflation objective range.

Years	Targets and attainment	Classification
1974-6	currency for many years has been South African rand, with Botswana, Lesotho and Eswatini jointly trying to change arrangements to facilitate own development, but Botswana chooses not to join Rand Monetary Area agreed late 1974; small open economy with long and close links to South Africa including customs union, workers in South African mines; strong, growing diamond mining sector provides large revenues to government, but implies exposure to fluctuations in output and world price; banking and financial system limited and concentrated; 1975 central bank established in preparation for issue of new currency, with powers to set reserve and liquid assets ratios	use of another sovereign’s currency UASC
1977-2017	issue of new currency late 1976, fixed to USD with small revaluations 1977 and 1979, then from mid-1980 fixed to basket of SDR and rand (equally weighted) with small revaluation late 1980, revaluations tending to stabilise rate against rand (currency of most import payments); central bank sets interest rates, becomes banker to government, whose fiscal policies are conservative; monetary growth typically dominated by imperfectly and variably sterilised external and budget surpluses; recurring problem of excess liquidity at banks, partly due to government lending to SOEs, while interest rate cuts fail to increase borrowing; 1982 devaluation to counter appreciation vs rand; 1982-3 more active variation of interest rates and liquid asset ratio, temporary use of credit controls; devaluations 1984 and 1985, plus changes in basket (increase in weight of rand, partly reversed 1986, after which weights no longer disclosed); 1986 smaller and more frequent adjustments to exchange rate, with exchange rate policy now concerned with risk of imported inflation from South Africa as well as competitiveness; late 1986 bank interest rates no longer set by central bank; 1988 liberalisation of (already quite open) trade and payments system; 1989 revaluation; 1991 central bank certificates of deposit issued by auction to absorb liquidity and to enable more market-determined interest rates, in growing banking system; late 1991 devaluation, and Zimbabwe dollar added to basket until 1994; policy emphasis shifts towards competitiveness for export diversification (in context of Dutch disease effects); government remains major lender (to SOEs), while excess liquidity persists and central bank is ‘deposit-taker of last resort’; gradual rises make interest rates positive in real terms, call account facility at central bank ended 1991; by 1994 OMOs in primary market for central bank certificates enable some absorption of excess liquidity and return of bank rate as effective reference rate for banks, but excess liquidity persists; reserve and liquid assets ratios revised 1994; exchange rate now moving closely with rand; 1995 further, 1999 full, exchange control liberalisation; 1999 introduction of secured lending facility at central bank and repo agreements; peg to rand limits scope for independent monetary policy, but lack of depth and development of Botswana financial markets means significant interest differentials can exist; from 1999 growth of international financial services centre; 2000 exchange rate policy puts less weight on more volatile rand and has rate determined by basket; 2003 government bonds of various terms issued, but secondary trading still limited; devaluation 2004 to offset preceding real effective appreciation; 2000s high incidence of HIV/AIDS and privatisation of public pension system pose problems for welfare and monetary policy; mid-2000s more focus on inflation with medium-term objective range (mostly exceeded) based on average inflation in trading partners; central bank trying to improve its own forecasting ability and monetary transmission mechanism; 2005 devaluation and adoption of crawling peg to basket of SDR and rand (rate of crawl not disclosed, but designed to offset forecast inflation differential), as step towards greater exchange rate flexibility in longer run, but risk of conflict in short run between objectives for nominal exchange rate, real exchange rate and inflation; from mid-2007 rate of crawl reduced, real effective rate relatively stable; persisting excess liquidity weakens transmission mechanism; central bank communications improved; 2012 reforms to liquidity management; 2013 currency basket weights and rate of crawl disclosed (also for small adjustments in later years); 2013 temporary floor on interest rate on bank time deposits and moratorium on rises in bank fees; inflation finally comes within long exceeded official objective range during 2013; statistical database poor for most but improved by end of period	loosely structured discretion LSD

Selected IMF references: RED 1974 pp40-1, 59-60; SR 1974 pp9-10; RED 1976 pp33-6; RED 1978 pp31, 32, 34, 38-40, 49; RED 1979 pp38-9, 54; RED 1981 pp54-6; SR 1981 pp5, 8-9; RED 1982 pp46; RED 1984 pp32-3; RED 1985 p43; RED 1987 pp55-6, 70-3; SR 1987 pp4, 7, 9-10; RED 1988 pp41-4, 55; SR 1988 pp16-19; RED 1990 pp36-7, 41-2, 54; SR 1991 p7; RED 1993 pp33-4, 35-7, 47; BPSA 1994 pp5, 36-47; REDSI 1996 pp42-3; SR 1997 pp8, 14; SISA 1998 pp4-6; SR 1998 p7; SISA 1999 pp15-16, 24; SR 1999 p12; SR 2001 pp12-14, 19; SISA 2002 pp22-32; SR 2002 pp8-9; SISA 2004 pp39, 43-7; SR 2004 pp4-5, 15-17; SR 2005 pp18-19; SR 2005 Supplement 1 pp1-4; SR 2006 pp8, 11-12; SR 2007 pp12-16; SR 2010 pp10-11; SR 2011 p8; SR 2012 pp6, 16, 19; SR 2013 pp6, 7, 18; SR 2014 pp5, 8-9; SR 2016 pp6-8; SR 2018 pp11-12, 22.

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