Consumers will have to endure another assault on their disposable incomes as fuel prices are hiked, accelerating the cost of goods and services which is at its highest rate in more than 8 years.
On Friday, the Botswana Energy Regulatory Authority (BERA) stoked inflationary pressures as it announced another upward price adjustment for petrol, diesel and paraffin, with new prices to be implemented on July 10.
Consumer prices have increased the most this year, tearing through the Bank of Botswana’s medium objective range of 3 – 6 percent after the inflation rate in May soared to 6.2 percent, up from the previous 5.6 percent rate.
Much of the growth in inflation rate has been through government actions, especially BERA which has been tweaking fuel prices up frequently, resulting in domestic prices jumping from an average of 4.2 percent in the first quarter of 2020 to an average of 4.8 percent in the first quarter of 2021, reflecting the increase in food prices.
The recent surge in inflation this year has put an end to the low inflationary environment that has been running for nine years, as prices fell from the highs of 7.5 percent in 2012, to record lows of 1.9 percent last year. The easing of the inflation started with 2012’s average rate of 7.5 percent dropping to 5.9 percent in 2013, and continued to 4.4 percent the following year, and by 2015 it was at 3 percent. The inflation rate’s descent went below Bank of Botswana’s threshold in 2016, with the rate recorded at 2.8 percent, before increasing slightly to 3.3 percent in 2017 and retreated to 3.2 percent in 2018.
By 2019, the inflation rate went below the objective range again, registering 2.8 percent, and plunged to the lowest levels in more than two decades as the average annual inflation rate hit new lows of 1.9 percent in 2020.
Earlier this year, the central bank projected that the inflation rate will increase in the near term, and likely to rise above the 6 percent tolerated level in the second quarter of 2021, as they took in account government’s decision to increase value added tax (VAT) from 12 percent to 14 percent; an additional P1 per litre fuel levy; upward adjustment in electricity tariffs by 3 percent in 2021 and 4 percent in 2022; the increase in Botswana Housing Corporation (BHC) rentals; the introduction of sugar tax; the announced increase in water tariffs; and most recently the introduction of the plastic levy.
While prices are on the rise, Bank of Botswana says it will stick to the accommodative monetary policy, maintaining the bank rate at 3.75 percent at the previous monetary policy meeting (MPC) in June. The bank rate was last adjusted in October.
The bank governor central Moses Pelaelo said prices will continue to rise in the short term, with upside risks emanating from the potential increase in international commodity prices beyond current forecasts, persistence of supply constraints due to possible maintenance of travel restrictions and lockdowns, and domestically based risk factors relating to second-round effects of the recent increases in administered prices that could lead to generalised higher prices.
“However, these risks are moderated by the possibility of weak domestic and global economic activity, with a likely further dampening due to periodic lockdowns and other forms of restrictions in response to emergence of new COVID-19 variants,” the governor said on Thursday.
“A slow rollout of vaccines, resulting in the continuance of weak economic activity and the possible decline in international commodity prices could also result in lower inflation, as would any capacity constraints in implementing the ERTP initiatives.”
According to the central bank, the economy is projected to operate below full capacity in the short to medium term, and with the subdued aggregate demand, this will lessen inflationary pressures.
“The projected increase in inflation in the short term is primarily due to transitory supply-side factors that, except for second-round effects, would not normally attract monetary policy response,” Pelaelo said.
Inflation is expected to revert to within the 3 – 6 percent objective range in the first quarter of 2022.