Tuesday, May 17, 2022

Economic 2022 Outlook: Is Botswana staring at Stagflation?

The local economy has a looming bogeyman —-and that is stagflation. In the discipline of Economics, when an economy experiences a collusion of elevated inflation, high unemployment and lower economic growth, it is said to be on ‘Stagflation’.

Despite the silence by leading economists in the country, official economic indicators figures show that the domestic economy now has some of the telltale signs of stagflation.

On Friday, for instance, Statistics Botswana released a set of data that highlights the cost of living as measured through the Consumer Price Index (CPI). The December 2021 CPI went up by 0.1 percent from 113.3 registered in November 2021 to 113.5. A breakdown by the state owned statistics agency shows that the Cities & Towns Index moved from 113.3 to 113.4 registering an increase of 0.2 percent while the Rural Villages index recorded a growth of 0.2 percent, from 112.4 in November to 112.7 in December. The Urban Villages index on the other end advanced from 113.8 in November to 113.9 in December 2021, a rise of 0.1 percent.

This means that the country’s annual inflation rate was 8.7 percent in December 2021, registering an increase of 0.1 of a percentage point from the November 2021 rate of 8.6 percent.

On the other hand, the country’s Real Gross Domestic Product for the third quarter of 2021 increased by 8.4 percent as opposed to a contraction of 4.5 percent in the same quarter of 2020. Statistics Botswana says the recovery in the domestic economy was observed across the majority of industries.

“The improvement in the third quarter of 2021 GDP, reflected continued efforts to reopen businesses and relaxation of COVID-19 regulations, amidst the continued roll-out of vaccination”, says Dr. Burton Mguni Statistician General of Botswana.

With positive GDP figures and no word coming out yet from local economists the general thinking could be that stagflation is an outside possibility for Botswana. A majority, if not all economists would agree that when it finally settles in, Stagflation would be a difficult problem to overcome. To date, on global stage, there are few tools available to combat the toxic blend of weak growth, strong inflation and high unemployment. Elsewhere in the world the strongest fix for an economic slump has been to lower interest rates, but in Botswana those have been at near bottom for almost two years now. In December, at its last meeting, the Monetary Policy Committee of the Bank of Botswana decided to maintain the Bank Rate at 3.75 percent. The central bankers said the economy will operate below full capacity in the short to medium term and, therefore, not creating any demand-driven inflationary pressures, going forward. They also reasoned that the latest spike in prices have been due to government actions.

Botswana’s inflation rate soared to 8.9 percent in July 2021, reaching its highest level since 2009. The Consumer prices have however been on the rise since June 2020 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 2021 to 8.4 percent in September of the same year remaining above the upper bound of the Bank’s medium-term objective range 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 fourth quarter of 2022. Bank Governor – Moses Pelaelo said in December 2021 that the risks to the inflation outlook are assessed to be skewed to the upside.

Gov’t, Businesses optimistic…..

While there is fear that Botswana could slide into stagflation, the Bank of Botswana’s quarterly Business Expectations Survey (BES) for the third quarter of 2021 showed that businesses operating in the country are optimistic about economic activities though they expect prices to rise in the medium term.

The report collects information on the domestic business community’s perceptions about the prevailing state of the economy and expectations during the survey period.

The BES samples 100 businesses from thirteen economic sectors, namely: Agriculture, Forestry and Fishing; Mining and Quarrying; Manufacturing; Water and Electricity; Construction; Wholesale and Retail; Transport and Storage; Accommodation and Food Services; Information and Communications Technology; Finance, Insurance and Pension Funding; Real Estate Activities; Professional Scientific and Technical Activities; and Administrative and Support Activities.

According to the survey’s findings, companies in Botswana expect the country’s gross domestic product (GDP) to expand by 3.2 percent and 3.9 percent in the third and fourth quarters of 2021, respectively, and 4 percent, on an annual basis, in 2021.

In the last quarter of 2021 the International Monetary Fund (IMF) raised Botswana’s economic projections following a strong quarterly growth and resurgence in commodity prices, but warned that economic recovery remains uncertain if the Covid 19 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.

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