The raging inflation rate is only expected to subside in the first half of 2022 as consumers continue to feel the effects of government decisions to fiddle with administered prices.
In 2021, the monetary policy is being implemented in the context of projections for higher inflation in the near term due to upward adjustment of taxes and levies, increase in administered prices, a modest recovery in domestic demand resulting from the easing of containment measures due to deployment of effective COVID-19 vaccines, and projected increase in external prices, said Bank of Botswana in the latest Monetary Policy Report for August released on Thursday.
The central bank which last week maintained the bank rate at record lows of 3.75 percent says the current state of the economy and the outlook for both domestic and external economic activity provide scope for maintenance of an accommodative monetary policy to support durable recovery and economic activity.
For Botswana, price stability is defined as a sustainable level of annual inflation, as measured by the consumer price index (CPI), that is within the central bank’s medium-term objective range of 3 – 6 percent.
The country has experienced a spike in consumer prices since the year began, with inflation averaging 6.7 percent in the second quarter of 2021, higher than the 1.9 percent in the second quarter of 2020, largely caused by increases in levies and taxes, the upward adjustment in administered prices and associated second-round effects.
There are currently 51 administered items out of the 400 items in the Botswana CPI basket, representing a significant weight of 32.3 percent in the basket which is supposed to mirror commonly used goods and services by consumers. Given its large portion in the CPI, changes in administered prices have had a significant influence on inflation and inflation expectations as shown by the recent surge in prices, which reflects the recent upward adjustments in value added tax (VAT) and other administered prices.
These are estimated to have added approximately 4.61 percentage points to inflation in the first half of 2021, with most of the effect expected to dissipate from the first half of 2022, consequently contributing to lower inflation in the medium term.
“However, second-round effects of the recently announced increases in administered prices pose upside risks to the inflation outlook. It is, therefore, critical for the internal consistency of macroeconomic policy design that administered prices and tax adjustments be set in view of their possible effects on inflation,” said economists at the central bank.
According to new data from Statistics Botswana, inflation rose from 8.2 percent in June to 8.9 percent in July 2021, the highest level since 2012. This was mainly on account of the upward adjustment in domestic fuel prices in July 2021, which added approximately 0.62 percent to the overall change. Inflation for domestic tradeables increased from an average of 4.5 percent in the second quarter of 2020 to an average of 6.7 percent in the second quarter of 2021, reflecting an increase in food prices.
