An analyst with Investec Asset Management Botswana has implored government to intensify its efforts to identify and explore alternative sources of energy, like coal, in order to cushion the country’s economy from external shocks.
The analyst, Carol Jean-Harward, said this following the recent petroleum products price increase – the third in a space of eight months.
She said Botswana faced a high oil import bill that transmitted into adverse inflation (by raising production and transportation costs) in addition to deteriorating negative trade balance as well as reduced production and employment levels.
“Botswana needs to continue identifying and exploring alternative sources of energy like coal so that we may be cushioned from the impact of external oil shock,” she said in an interview with The Telegraph. She noted that the political protests that have been taking place in North Africa since the beginning of the year have had dire consequences for the majority of oil importing countries like Botswana, adding that the current political turmoil in Libya is contributing to the ongoing volatility in oil prices.“The negative effect of rising oil prices is thus potentially large for oil-importing countries like Botswana as we have witnessed petrol price increases for the third time in the last eight months. The rising oil prices could lead to decrease in output and consumption, worsening the net foreign asset position because they affect businesses, consumers and the government budget, among others,” said Harward.
She said because petrol, diesel and paraffin are used on a daily basis, such increases could further drive up the cost of living, which could trigger social unrests as policymakers are forced to work out policies that sustain the economy.
“Increases in oil prices tend to exert strong inflationary pressures, contracting real output, slowing down economic growth and exacerbating unemployment in oil importing countries like Botswana. Economic sectors that use oil intensively suffer the greatest impact of changing fuel prices with the most vulnerable sectors being transport, retail, tourism and agriculture,” said the analyst.
She explained that the transport sector suffers most because the bulk of oil imports are used by the transportation sector, which depends highly on liquid fuels, adding that in Botswana there is a heavy reliance on road freight and if there are increases in fuel prices, the retail sector will be affected because a wide range of goods’ prices are affected by the changes.
The tourism industry also stands to be affected by increases in transport costs.
Secretary for Economic and Financial Affairs in the Ministry of Finance and Development Planning, Dr Taufila Nyamadzabo, shares similar sentiments, explaining that oil products are essential inputs into daily production of goods and services as well as in facilitating their┬átransportation from the production units to retailing and consumption units.
He observed that Botswana is a landlocked country and depends heavily on transportation of goods and services through rail, air and road, which in turn depend on oil products.
The rail and road mode of transport is generally found to be more expensive than transportation through water (sea and oceans). On the other hand, Botswana does not have oil fields hence it imports all oil products from external countries.
“If international oil prices continue rising, Botswana, which is a price taker, will continue to experience increases in commodity prices. This means high oil prices will be transmitted to higher prices of goods and services produced locally as well as those imported from other countries. This may lead to a general rise in prices of goods and services in the economy,” said Nyamadzabo.
He concurred with Jean-Harward that a rise in inflation may lead to the Bank of Botswana responding through monetary policy interventions such as by increasing the bank rate. Consequently, commercial banks would have to increase the prime lending rate. High interest rates would act as a disincentive to investment and production as it discourages borrowing for both production and consumption in the economy.
“With low aggregate demand for goods and services and low production of goods and services for exports, Botswana economy is likely to be constrained in terms of low revenue to government. Low revenue would mean the government has to continue to finance some of the development programmes through drawing down Government’s cash balances and borrowing. This would deplete Government cash balances and push the debt levels up. In short, high oil prices and high inflation in the economy are likely to have a negative impact on the growth of the economy which would affect the overall development of the country,” said Nyamadzabo.