Tuesday, December 6, 2022

Inflation: Botswana told to tighten Monetary Policy

An International Monetary Fund (IMF) team, led by Papa N’Diaye, Assistant Director in the African Department has told Botswana government officials that the tightening of the country’s monetary policy will be required to reduce inflation pressures.

Botswana’s inflation rate is forecast to remain above the Bank’s 3 – 6 percent objective range in the near term but is expected to fall from the second quarter of 2022 and to revert to within the objective range in the first quarter of 2023.

 “Overall, risks to the inflation outlook are assessed to be skewed to the upside. These risks include the potential increase in international commodity prices beyond current forecasts; persistence of supply and logistical constraints due to lags in production; the economic and price effects of the ongoing Russia-Ukraine conflict; uncertain COVID-19 profile; domestic risk factors relating to regular annual price adjustments, short-term unintended consequences of import restrictions (shortages leading to price increases); as well as second-round effects of the recent increases in administered prices and inflation expectations that could lead to generalised higher price adjustments,” reads part of the Bank of Botswana’s most recent monetary policy report.

While the May 2022 official data shows a slowdown in the pace of increase in prices, it is coming from historic highs of 10.6 percent in February, the highest rate in 13 years.  Headline inflation averaged 10.4 percent in the first quarter of 2022, higher than the 2.6 percent in the first quarter of 2021, mostly accounted for by the increases in domestic fuel prices and associated second-round effects.

The IMF team that visited Botswana says with inflation rate at around 10 percent, real rates in negative territory and inflation expectations rising, additional tightening will be required. The country’s financial sector was assessed to be safe and sound, but the impact of higher rates, declining liquidity and the recent monetary policy reform will have to be monitored.

Economists at the central bank say the likelihood of further increases in domestic fuel prices in response to persistent high international oil prices, and the possible increase in public service salaries could add upward pressure to inflation. Barely a week after their assessment, BERA announced another fresh round of increases in the fuel prices in May.

With recent increase in fuel prices by the government, efforts by the central bank to thwart the raging cost of living might prove futile, with the rise in prices forced by government actions. In fact, Bank of Botswana has reiterated that upward trends in non-tradeables and domestic tradeables inflation are not a result of domestic demand pressures, as the output gap is estimated to be negative.

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