If key economic indicators are anything to go by, then Botswana is in a state of stagflation, defined as a period of rising prices, slow economic growth, and high unemployment.
The country’s annual inflation rate was unchanged at 10.6 percent in February, the highest rate in more than 13 years. Consumer prices spiked last year due to combination of the COVID-19 pandemic strangle on supply chains and the government’s decision to tinker with administered prices, while also raising taxes and levies.
Prior to 2021’s rapid rise in prices, Botswana was in a low inflationary environment that dragged for nine years, as prices fell from the highs of 7.5 percent in 2012, to record lows of 1.9 percent in 2020. 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 was 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.
However, things took a dramatic turn in 2021 as prices soared, ending the year with an average annual inflation rate of 6.7 percent, reflecting upward changes in administered prices and taxes, as well as higher foreign inflation.
Central banks usually react to rising prices by increasing the bank rate in a bid to maintain price stability. However, Bank of Botswana bucked the trend as it kept the bank rate unchanged at 3.75 percent , which has been prevailing since 2020 when it was reduced by 100 basis points from 4.75 percent. The central bank economists forecast that the inflation rate will fall between 3 to 6 percent in the third quarter of 2022. But that forecast is likely to be off the mark as recent developments point to prolonged rise in prices.
As prices continue to rise globally, countries are responding by cutting the key interest rates. South Africa, the continent’s most advanced economy and Botswana’s biggest trading partner, this week raised the repo rate by 25 basis points to 4.25 percent as the country’s annual inflation rate climbed to 5.7 percent, nearing South Africa’s Reserve Bank’s upper limit of its 3 – 6 percent target range.
Elsewhere, the United States of America (USA) Federal Reserve last week increased the bank rate for the first time in three years to fight off inflation that is nearing a 40 year high. The Fed reserve has indicated that it will be rising interest rates this year.
Botswana’s response to the soaring consumer prices will be constrained as the policymakers will be torn between price stability and economic growth. To starve off inflation, Bank of Botswana can raise the bank rate in efforts to dampen consumption by making access to money expensive. However, that is unlikely as the policymakers are already grappling on how to stimulate demand on the back of slow economic growth amid record low interest rates.
Since 2009, Bank of Botswana has been pursuing an accommodative monetary policy, reducing the key interest rate from the highs of 16.5 percent in 2009 to the historic low of 3.75 percent in 2020. The loose monetary policy stance was geared towards increasing aggregate demand by making access to capital cheaper, thus stimulation consumption and investments.
However, the monetary transmission mechanism as espoused by the central bank has not been that effective. In fact, last month the central bank decided to amend its monetary policy stance in order to enhance monetary policy transmission. Among the key reforms is to maintain an anchor rate which will have an interest rate corridor of 200 basis points margin, allowing for banks to determine their prime lending rates against the set anchor rate.
While the inflation rate only started to surge last year, Botswana’s economic wheels were already grinding slowly. Botswana’s real GDP, which tracks economic growth, has dropped from an average of 7.1 percent during 2005 – 2007 to an average of 6.4 percent during 2010 – 2012. This was followed by an average of 4.6 percent, and 3.9 percent during 2013 – 2015 and 2016 – 2018, respectively. Annual GDP growth dropped further to 3 percent in 2019 and contracted by 8.7 percent in 2020, the lowest level since the country gained independence.
With the GDP data for the last quarter of 2021 is yet to be published, the Finance and Economic Development officials are seeing a recovery in sight, estimating that the country’s economic growth will rebound to 9.7 percent, while the International Monetary Fund (IMF) has forecasted a growth of 9.2 percent. For this year, the ministry officials are forecasting GDP growth of 4.7 percent before slowing down to 4.4 percent in 2023.
As prices soar amid slow economic growth, unemployment rate has been surging. In the past six years, unemployment rate climbed from 17.5 percent to 26 percent in the last quarter of 2021. Even more worryingly, youth unemployment rose to 34.4 percent from 32.4 percent last year. The Botswana government remains the single largest employer, accounting for 22.9 percent of formal sector employment.
The high consumer prices alongside the weak economic growth and high unemployment have effectively put Botswana in a state of stagflation. What makes stagflation bad is that it is a difficult hole to get out of. This is because slow economic growth leads to an increase in unemployment, of which ordinarily should keep consumer prices low due to lack of demand. But when prices are actually rising amid slow economic growth, it creates a strain on consumer spending power, further weakening economic growth.
