The monetary policy operational framework of the Bank of Botswana is undertaken in the form of open market operations (OMOs). The aim of OMOs is to maintain liquidity and short-term interest rates at levels that are consistent with the monetary policy stance as determined by the Monetary Policy Committee of the Bank of Botswana.
The banking sector in Botswana has maintained a net positive position in its balances held at the Bank of Botswana over many years; consequently, the main instrument used in OMOs is weekly auctions of Bank of Botswana Certificates (BoBCs) in order to drain balances in excess of demand (excess liquidity). Through the sale of BoBCs, the Bank can influence liquidity conditions in the domestic money market which, in turn, maintains short-term market interest rates in line with the monetary policy stance as dictated by the Monetary Policy Rate (MoPR).
OMOs are centred around sales through auctions of the 7-day and 1-month BoBCs. BoBCs are instruments used to absorb liquidity in the banking system and are not intended for general investment purposes: since March 2006 only commercial banks are allowed to hold BoBCs.
To facilitate the day-to-day liquidity management, the Bank may also conduct repos and reverse repos (i.e., lending and borrowing of short duration using securities as collateral). These fine-tuning OMOs are available both during and at the end of the day. When issued, the fine-tuning operations are conducted at the policy rate (MoPR). The Bank also offers two credit facilities (the Credit Facility - CF, and the Standing Credit Facility - SCF) to local banks, where the borrowing rates are linked directly to the MoPR. The CF and SCF are examples of a standing facility, offered to facilitate squaring of negative closing positions of local commercial banks.
Effective conduct of these various instruments that constitute the Bank’s OMOs requires forecasts of market liquidity to determine liquidity conditions. In addition, a variety of money market data are published, including the BoBC auction results summary (published weekly on the Bank’s website under latest news). These are also included in the Bank’s various statistical publications, including the Annual Report and Botswana Financial Statistics, as well as on this website.
Primary Reserve Requirements
The Bank is empowered under the Bank of Botswana (Amendment) Act Section 40 to impose a Primary Reserve Requirement (PRR) on commercial banks. A bank’s PRR is based on its reservable liabilities in the month prior to the start of the current Reserves Maintenance Period (RMP). Currently, reservable liabilities consist of Pula-denominated customer deposits, and exclude interbank deposits and securities issued by commercial banks. PRR balances are not remunerated. Vault cash is not taken into consideration in meeting the PRR.
The level of the PRR is currently set at 2.5% since May 2020 (Monetary Policy Committee Statement, April 2020).
The PRR balance is to be maintained on an average basis over the RMP, which runs from the second Wednesday of a month to the second Tuesday of the following month (see Operational Guidelines for Primary Reserves Requirement Averaging, September 2019). Banks may freely transfer balances between their PRR account and their Settlement (current) Account at any time during Botswana Interbank Settlement System (BISS) operating hours.
The penalty for any shortfall in the PRR account is determined by law as a maximum of 0.2% per day of the amount of the deficiency.
Open Market Operations (OMO)
The Bank currently conducts two regular OMOs:
- 7-day BoBCs are auctioned every Tuesday, on a Fixed Rate Full Allotment (FRFA) basis at the MoPR, with T+1 settlement;
- 1-month BoBCs are auctioned on the third Tuesday of each month, for a fixed volume and on a multiple price basis, with T+1 settlement;
- Fine-Tuning OMOs (FTOs) may be conducted on an ad hoc, on a need basis, at the discretion of the Bank. These are normally conducted with an overnight maturity, at the MoPR, for T+0 settlement, and on a repo/reverse repo basis; and
- Results of these OMOs are published on Bloomberg, and Refinitiv, as well as the “Latest News” section of the Bank of Botswana’s website.
Standing Facilities (SF)
- Standing Deposit Facility (SDF): overnight, at MoPR – 100 basis points; for T+0 settlement.
- Standing Credit Facility (SCF): overnight, at MoPR +100 basis points; for T+0 settlement; on a repo basis.
- The SCF is available to banks during BISS operating hours (until 16.15pm), while the SDF is available until 17:00pm.
- Credit Facility: if a bank would otherwise go overdrawn on its Settlement Account, the Bank will provide credit against the pool of collateral pre-pledged to the Bank, as Settlement Accounts are not allowed to go into deficit. The Credit Facility provides overnight funds, at MoPR + 800 basis points, with T+0 settlement.
Intraday credit or daylight exposure is provided to banks to meet liquidity shortages during the course of a working day, at their request and against the collateral of eligible securities, in order to facilitate the smooth flow of payments in the system. Intraday credit is not subject to any interest charge, but if not repaid at close of business is automatically converted into the overnight CF.
All commercial banks authorised and operating in Botswana are eligible to participate in the OMOs, and to make use of the SF, subject to the appropriate legal agreements.
Lender of Last Resort
Section 38 of the Bank of Botswana (Amendment) Act 2022, provides that the Bank may in exceptional circumstances and on such terms and conditions as it may determine, act as lender of last resort by providing credit to a bank for up to 92 days.
Eligible collateral pool
The eligible collateral pool consists of:
- Government of Botswana Treasury Bills and bonds; and
- Corporate bonds listed and traded on the Botswana Stock Exchange (Monetary Policy Committee Statement, December 2022, Annex 2, section 2.3).
Of the eligible collateral, Government securities and corporate bonds are subject to a haircut - based on residual maturity – on the current market valuation. A haircut refers to the lower-than-market value placed on an asset being used as collateral for a loan.
Commercial banks are allowed to pre-pledge collateral to the Bank, up to 150% of their core capital, so that it is available in case of need.
Repo transactions (Finetuning operations and SCF) between the Bank and commercial banks are subject to a Master Repurchase Agreement, while intraday credit and CF borrowings fall under a pledged collateral agreement.