Botswana’s central bank has said that the local economy will will operate below full capacity in the short to medium term and, therefore, not creating any demand-driven inflationary pressures, going forward.
While the central bank policy makers expect domestic inflation to continue on the upside trajectory, they noted that the projected increase in the short term is primarily due to transitory supply-side factors.
On Thursday the central Bank stuck to its monetary policy as consumer prices continue to rise, with the central bank executives reasoning that economic recovery is still low and the latest spike in prices have been due to government actions.
The Monetary Policy Committee then decided to maintain the Bank Rate at 3.75 percent, which has prevailed since the last cut in October 2020.
The central bank governor, Moses Pelaelo, said the economy is expected to underperform in the short to medium term and, therefore, not creating any inflationary pressures going forward.
The latest decision by the central bank comes at time Botswana’s inflation rate recently hit the highest level in more than a decade as consumer prices continue to soar, mostly driven by government actions as it fights back against the repercussions of the COVID-19 pandemic.
The inflation rate soared to 8.9 percent in July, reaching its highest level since 2009. The Consumer prices have however been on the rise since last year June and breached the central bank’s medium objective range of 3 – 6 percent in May 2021, as the inflation rate ticked to 6.2 percent. In the first six months of 2021, prices rose the most for the transport sector by 13.9 percent, followed by the alcoholic beverages and tobacco segment, which has been facing numerous challenges such as ban on sales and change in legislation , but still managed to see prices jumping by 7.2 percent. According to Statistics Botswana, headline inflation declined from 8.8 percent in August to 8.4 percent in September 2021, remaining above the upper bound of the Bank’s medium-term objective range of 3 – 6 percent, and significantly higher than the 1.8 percent in September 2020.
Much of the growth in inflation rate can be traced to government actions as it increased administered prices. The value added tax (VAT) was hiked 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.
Despite increases in prices, the central bank expects consumer prices to revert within the 3 – 6 percent objective range in the first quarter of 2022. At the moment, central bank governor Moses Pelaelo said the risks to the inflation outlook are assessed to be skewed to the upside.
“These risks are, however, moderated by the possibility of weak domestic and global economic activity, with a likely further dampening effect on productivity due to periodic lockdowns and other forms of restrictions in response to the emergence of new COVID-19 variants”, Pelaelo told financial journalist via a virtual address on Thursday.
Meanwhile the International Monetary Fund recently raised Botswana’s economic projections following a strong quarterly growth and resurgence in commodity prices, but warned that economic recovery remains uncertain if the pandemic persists.
Botswana’s economic growth rate projection was raised as part of countries that will benefit from rising commodity prices. The country, whose economy is reliant on diamond exports, is now expected to grow by 9.2 percent, up from earlier projections of 8.5 percent. The IMF further predicts the economic growth will drop to 4.7 percent in 2022.
Botswana’s ministry of Finance and Economic Development is however expecting a larger growth than IMF projections, pegging economic growth to 9.7 percent in 2021, according to the finance Minister Peggy Serame in an interview with Reuters in September.