New BoB Act: Inside the Ts and Cs
Mbongeni Mguni | Monday August 1, 2022 12:06
In its economic briefing on Wednesday, Mmegi was able to put several questions to Bank of Botswana (BoB)’s senior management on the impact of the sweeping amendments to the Bank of Botswana Act made by Parliament earlier in the week.
The amendments comprise nearly 40 clauses that substantially change, delete and or revamp sections of the old Act. Despite the exhaustive changes required, the updated law sailed through Parliament unchanged, without a single objection from the both sides of the legislature.
Mmegi: What is the bank’s initial reaction to these changes, particularly greater autonomy and limits on government lending, since the BoB has brought these issues up before?
Kealeboga Masalila (Deputy Governor): Our initial reaction, because we were involved as advisers and were consulted as well, is that we welcome and are happy that the revision of the Act was supported by members of parliament.
On independence, the context is that it is not autonomy for its own sake but that government and the nation agree on the role of the bank and the objectives it should follow aligned to what the nation wants. We are dealing with public goods which include price monitoring and stability, integrity of the pula, foreign reserves and payment systems, which are necessary for economic activity to thrive. Once government and the nation agree on that, the government is saying as BoB use your autonomy, knowledge and expertise to achieve that. This includes the autonomy to set rates, manage currency and others. Autonomy also involves having enough capital to do these functions and the Act has allowed for that increase.
Alongside the autonomy is accountability, which is included in the revised Act. This means how have you done in stabilising inflation, making sure banks are sound and viable and that they accommodate depositors’ needs, among others. Accountability also means justifying your policy actions.
Issues on government borrowing have been there in the law and the revision intends to make sure that this does not detract from the bank achieving its policy objectives.
Mmegi: With particular reference to monetary policy, what is the Bank’s take on the new clauses that allow more ministerial appointments to the Monetary Policy Committee (MPC), assuming, if correct, that the current MPC is made up of internal Bank staff?
Masalila: The MPC is indeed currently all internal. The question of the appointments by the minister, we do not believe it will impact negatively because the law states who can qualify to be a member of the MPC. The law also says while qualified, there are no individual interests and that this is a public good. The MPC follows a disciplined approach in its discussions. There is also a set of instruments that are levers used so that you do not grasp at things that are not within the purview of the MPC and are focussed only on the MPC levers. This guides the MPC to only thinking about inflation and there are operating rules around that.
Moses Pelaelo (Governor): The changes are very important milestones in institution building towards Vision 2036. In terms of governance, it’s important to look at the clarity of the bank’s mandate. There is now clarity in the law about the priorities and their ranking. The law says the priorities are price and financial stability.
There is also the issue of distribution of decision-making powers between the board, the MPC, the bank and the governor with respect to price and financial stability. There are detailed functions of the board in the Act, clear powers of the governor and now also the Act separates the role of the governor from that of board chairman. The board now has to be chaired by an independent director and it was important to say how does the board deal with monetary policy.
The law now says the monetary and exchange rate policy have been taken away from the board to the new MPC and that is very important. It is important to insulate monetary policy from any political or sectoral matter.
The MPC will be strengthened by non-BoB people and the committee is now a statutory body which is important for independence. In the design of monetary policy, government will determine the inflation objective and we will agree as a country to say what will be the level of inflation that can be consistent with achieving sustainable economic growth.
That target will be given by government to us and it will no longer be us setting it anymore. The goal posts will be set by government, then the governor and the MPC do what is necessary to make sure we achieve that. Now we can be judged on an externally set objective and when we score, it will not be us scoring through goals that we set for ourselves.
The law also details how to handle policy conflicts, saying in the event that the bank is following a policy and for some reason, the government believes the policy is not consistent with the policy objective, the minister can come and we try and resolve. If the difference cannot be resolved, we go to the President but the law says he only has three months to resolve this and it he does not take a decision, the bank position remains or prevails. If government changes the policy posture, it must publish its decision and say this is the policy direction, so that government must become accountable for that position.
Mmegi: The Finance Minister this week hinted that the revision of the Banking Act would include the introduction of a two-tier banking licence system to enable smaller, citizen owned banks to enter the market. Does the Bank at this point have any pending banking licence applications?
Pelaelo: I have to underscore that since 1995, the Banking Act has had this two-tier or actually four-tier banking system. Section 8 of the Banking Act says that the BoB in consultation with the minister can determine different requirements for different classes of banks and impose restrictions depending on the class of banks. That is there but the improvement that is being proposed is to introduce a microfinance licence.
The proposals for the Banking Act we have made are very expensive and subject to government accepting them because it will require a re-enactment of the Banking Act to make sure it’s aligned to international best practice and to ensure we have proper legal arrangements for financial safety nets, among others. The deposit insurance provided for by the new BoB Act must also cover these proposed provisions.
This broad range of issues would require that the Banking Act must be re-enacted.
Godfrey Ngidi (Head of Banking Supervision: At the moment we have a women’s finance institution that operating in the market, but we do not have an indigenous bank. We are hopeful that BBS Ltd will be the first one if it fulfils all the conditions. The proposed changes to the Banking Act will be a step in the right direction.
We continue to receive nibbles of enquiries that translate to nothing really. We receive these and give the guidance and provide them with the licensing package but at the moment we do not have any pending licensing application. Only BBS Ltd is waiting to fulfil all the licensing conditions that have been set forth.