Bank of Botswana (BoB) said its efforts of containing inflation within the set target range are likely to be frustrated by a possible international crude oil spike as the global economy emerges from the worst recession since the great depression.
Writing in the latest Research Bulletin published by the Central Bank, staffers said inflation is expected to be reining in within the target range of three-to ÔÇô six percent next year, but warned of risk associated with crude oil and commodity prices.
“.. .There are risks to inflation outlook emanating from uncertain international oil prices and the potential rise in commodity prices that would accompany global recovery,” the Bank said in the report.
The Central Bank has managed to bring the inflation rate within the target range only on three occasionsÔÇô within four months — since the targets were adopted some five years ago. The last time was in December 2009.
The Bank is using interest rates and other open market operations such as Bank of Botswana Certificates (Bobcs), to control inflation but critics have pointed out the measures are not enough and have stopped short of calling for macro prudential measures in a bid to win the war.
However, the Bank said that inflationary pressures are likely to improve for the better during the course of this year and 2011 aided by global economic crunch that has wiped out disposable cash from people.
“The economic activity in Botswana is expected to recover and grow at faster rate in 2010 than was in 2009. Overall, it is forecast that output in the medium term will remain below trend, partly due to lagged effect of the hitherto relatively restrictive monetary policy and the impact of the global economic recession,” it added.
It further pointed out that the pace of the output will be affected by subdued demand sparked by the impact of recession, which has forced government to slush spending and, in turn, affecting the level of disposable income.
“This will further be compounded by the impact of two percent increase in VAT and anticipated upwards adjustment of levies for government services and some utility tariffs. The anticipated below trend growth is, therefore, against the background of the slower rate of monetary expansion, including budgeted 3.7 percent annual reduction in government spending,” the report said.
Although the global economy is recovering, diamond sales are not expected to hit the pre-crisis level and that will affect government spending going forward. So far revenues from diamonds are only 60 percent of the pre-crisis level.