Keith Jefferies, chairman of the Botswana Insurance Fund Management’s investment committee said the country should brace itself for a double digit inflation rate as a result of the power crisis and the high crude oil prices.
Writing in Bifm’s economic review ahead of the budget speech delivered on Monday and the upcoming Bank of Botswana’s annual Monetary Policy Statement, Jefferies said Botswana is “much more exposed” to power outages and possible hike in administrative prices, a move which will put strain on the central bank’s inflationary target.
“A new supply contract between South Africa’s Eskom and Botswana’s Power Corporation (BPC) came into effect on January 1, 2008 and its much less favourable to Botswana than the previous contract, both in terms of prices and stability of supplyÔÇöthe result of which is that Botswana is now much more exposed to both tariff increases and supply disruptions from South Africa than it had been previously,” he said.
“Substantive electricity price increases are likely in 2008, and although electricity costs only have a weight of 1.5 percent in the CPI basket, they feed through widely to other prices and will push up inflation further,” he added.
Botswana, DRC, Namibia, South Africa, Zambia and Zimbabwe are facing a huge problem of power supply due to high consumption rate and the aged power plants in the region. The problem is expected to persist for the next four years until new supply sources come on stream.
At the moment, Botswana is embarking on frantic moves to expand Morupule power station which accounts for 25 percent power supply in the country. At its completion, it is expected to account for 80 percent of the national demand.
Jefferies said a combination of factors, such as high crude oil and food prices, rentals and BPC tariffs means that inflation will continue to rise and could easily hit double digits by mid-this year. He said the Bank of Botswana is likely to adopt a hawkish stance to contain the spiraling inflation as it is also faced with issues of high credit growth and rising inflation.
“The changed electricity supply situation is not just a price threat, but could hinder investment and growth as well.
“With virtual certainty that Botswana will increasingly experience interruptions in supplies from South Africa over the next five years, and with no new domestic supply capacity due online before 2011, the problem is serious, especially for the energy intensive mining sector that is the bedrock of the economy,” he said.