Pelaelo: End of an era for a reformist
Mbongeni Mguni | Monday October 30, 2023 06:00
As he left the top office on October 21, Pelaelo could be reasonably pleased that his seven-year tenure opened and closed with benign inflation levels. And if inflation control was the only item on the former governor’s job description, Pelaelo could depart satisfied that his administration wrestled against price increases and their numerous causes, to the point where he could pass on the baton to his successor with pride.
But inflation control was not the only target for Pelaelo and his administration. Coming into an office that had become synonymous with the 17-year long governorship of the late Linah Mohohlo, Pelaelo quickly put out signs that his tenure would be marked by change or reforms. As much as the course would stay the same, the ship’s captain had changed.
Pelaelo had spent a decade, from 2006 to 2016, as one of two deputy governors under Mohohlo. Ascending to the top office, he had a few ideas of his own.
In his first Monetary Policy Statement in February, 2017, Pelaelo introduced what is now a staple: the pre-announcement of the dates for the Monetary Policy Committee (MPC) meetings and media briefings for each meeting. The MPC is the key grouping within the BoB that decides the direction of interest rates.
The idea, Pelaelo said, was that greater transparency and information sharing with the market was essential to achieving price control.
“As the bank continues to focus on refining and making improvements, it has been the intention to enhance transparency and interaction with the market, as circumstances would be propitious, with a view to further buttressing policy transmission and credibility,” he said.
Pre-announcing the MPC dates and introducing post-MPC media briefings represented a clean break from the central bank’s traditional closed door approach to monetary policy, a soft but highly significant policy change that told the market that a new era had begun.
“These initiatives are premised on availability, and should be a catalyst for development, of an appropriate market infrastructure and expertise, such as informed and robust market analysis and strong financial journalism, as well as organised debt and credit markets,” Pelaelo said.
As a career central banker, Pelaelo clearly had strong ideas about how to reform the institution. He was aided in this regard by the generally fair skies that greeted the first few years of his tenure, with the absence of monetary policy crises allowing the governor and his lieutenants to finetune their plans for a new operational architecture within and around the central bank.
COVID-19 appears to have interrupted Pelaelo’s reform agenda, forcing the former governor and his administration to focus on the raft of interventions they provided to stabilise the financial sector and support borrowers during the pandemic crunch.
However, by January 2022, one of Pelaelo signature reforms was ready to be unveiled. The former governor replaced the traditional bank rate with a Monetary Policy Rate based on the seven-day Bank of Botswana Certificate yield, as part of wide-ranging measures to enhance the transmission of monetary policy and reduce costs.
The move came as analysts noted that monetary policy measures, such as the lowering of the bank rate, had not always resulted in the expected higher credit uptake required to lift demand in the economy. While lower interest rates generally boost consumers’ appetites for credit, local banks tended to channel their liquidity into the BoBCs, which are risk-free compared to riskier consumer debt, thus blunting monetary policy transmission.
By August last year, the reforms at the central bank had moved from operations to structure. One of the most significant changes pushed through during Pelaelo’s term involved the long-awaited and demanded legislative changes that provided protection for the BoB from influence (especially political). The changes also tightened borrowing to government, clarified the BoB’s priorities and improved its governance structures.
The changes, passed by Parliament last July, were the most comprehensive amendments to the Bank of Botswana Act in 27 years and were designed to align the central bank with global best practice.
At the time, Pelaelo explained the significance of the changes to Mmegi.
“The changes are very important milestones in institution building towards Vision 2036,” he said. “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.”
He added: “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 the board deals 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.”
This year, the focus of the changes shifted towards the BoB’s regulated entities. From April 1, the central bank gave commercial banks the freedom to set their prime lending rates, saying this would “facilitate market competition and fair pricing of credit and other lending products.” The BoB would monitor implementation and “enforce good business conduct”.
Although his reformist agenda would suggest he was a ‘liberal’ in his outlook, analysts say Pelaelo kept a ‘conservative’, orthodox approach to monetary policy, indicative of the austerity-leaning approach taught, practiced and popularly associated with the late Mohohlo.
During his seven years at the helm of the central bank, Pelaelo presided over just four reductions of the interest rates, and three increases. The four reductions all totalled 1.75 percentage points while the increases totalled 1.51 percentage points. Analysts say while the former governor appears to have balanced his scales, some patterns are evident on closer scrutiny of the matter.
Two of the four reductions were spread far apart in 2017, then 2019. This long-drawing out of the reductions was despite annual inflation averaging 3.3%, 3.2% and 2.8% in 2017, 2018 and 2019. The two reductions effected in 2020 were influenced by the collapse of demand and economic conditions as COVID-19 took effect, analysts said.
“The bank has been slow to ease interest rates despite long periods of benign inflation and the prolonged weak demand from households,” an analyst said. “Even when inflation has been in their control, the bank has opted to maintain interest rates, rather than loosen the noose around consumers’ necks. “By comparison, before inflation even reached 14-year highs last year, the bank did not hesitate to increase rates three times in a row.”
Speaking to Mmegi earlier this year, Pelaelo explained the bank’s position.
“Inflation at its highest had hit households very hard and the fact that we are beginning to see headline inflation numbers receding somewhat is a positive thing that we need to continue to support,” he said in June. “It’s very important that you always look at the balance of the risks, whether they are up or down, and ensure that you are doing the proper thing. “We must also stress that these projections are based on what we know now and what we can forecast, but the world changes and can change very quickly.”
Since his comments, inflation dropped from 4.6% in June to 1.2% in August, before ticking up again to 3.2% in September. October inflation is expected to print at 3.4%, vindicating Pelaelo’s comments on the world changing quickly.
The former governor walks out of the top office having spent 33 years at the central bank.
A reformist but also a pragmatist; changing the central bank’s structure, operations and approach to industry, but also staying true to the textbook on monetary policy.