Sunday, May 22, 2022

Inflation Paradox: Is there a quick fix for Botswana?

Any Motswana who has bought cooking oil, electricity or visited a petroleum gas station recently could tell you, inflation has settled in. But economists are now voicing an even more discouraging message: As long as oil prices keep growing, higher prices will probably last well into next several months, if not beyond.


However, in the most “optimistic” scenario, the two economists – Naledi Madala of Absa Bank Botswana and Gomolemo Basele of First National Bank Botswana (FNBB) expect inflation to return to the Bank of Botswana’s (BoB) 3-6% target band in the third quarter of 2022. (Q3:2022).


Portfolio Manager at Kgori Capital – Kwabena Antwi also shares the sentiments of the two bankers.


“We expect inflation to steadily decline in 2022 due to base effects. The main upside risk to our forecast is Transport inflation as global oil prices have continued to rise. Oil prices have risen by 22% year-to-date this year”, says Antwi.


The recent surge in inflation in Botswana has put an end to the low inflationary environment that has been running for close to a decade. Official data shows that 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. In 2019 and 2020 Consumer prices continued to fall, registering average growth rate of 2.8 and 1.9 percent respectively.


But what is pushing inflation up again?
The three analysts that Sunday Standard spoke to all point to one thing: fuel prices, a component of administered prices. There are currently 51 administered items out of the 400 items in the Consumer Price Index (CPI) basket of the national statistics agency – Statistics Botswana. The administered prices represent 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, FNBB’s Basele says changes in administered prices in 2021 have had a significant influence on inflation and inflation expectations as shown by the recent surge in prices.


“There are several causes for the surge in inflation that we have experienced since last year. We had the fuel levy, VAT, utility prices all being increased last year – most of these changes took effect at the start of second quarter of 2021. This set-in motion a “transition” to higher prices being recorded on y-o-y basis for the following 12-months”, says Basele.


In addition, Basele says oil prices kept increasing as global economic activity started to pick up pace following the 2020 movement restrictions. As a result, local fuel prices were increased several times to accommodate higher oil prices globally. Over 2021, and at the start of this year, the transport index has been the single largest contributor to the inflation figures recorded.


During 2021, Botswana Energy Regulatory Authority (BERA) stoked inflationary pressures as it announced upward price adjustment for petrol, diesel and paraffin, with the latest hike implemented in late December.


Absa Bank’s Madala says the transport index (the largest component in the CPI basket, with a 23.43% weight) rose materially by 8 percent on a month-to-month basis, taking transport inflation to 26.7 percent year-on-year from 18.3 percent in December.


“A breakdown of the transport subcomponent shows that ‘operation of personal transport’ rose 12.3% m/m and the ‘transport services’ sub-index rose 6.8%. While the education and ‘other’ indices rose 1.1% m/m and 0.8%, respectively, in January, increases in other components were comparatively modest, with the food index increasing 0.3% and communication 0.1%.”, says Madala.


So what is the likely trajectory in the short – medium term?
The new inflation focus caps an era since the 2008 global financial crisis that saw inflation in Botswana reaching 12.7 percent. There are fears that once again such level could be reached, should the global oil prices stay on the red. FNBB’s Basele says due to the timing of last year’s revisions in taxes, tariffs and levies, inflation is likely to remain at current levels over the short term. With the possibility of oil prices edging higher than initially expected this year and supply-chain bottlenecks taking longer to clear up, Basele says inflation will continue to outpace recent historical levels.


“As base effects start to wear away over the second quarter of 2022, with activity continuing to normalise, we expect inflation to start moderating. Despite our expectation that price growth will ease this year, we expect it to return to the central bank’s 3-6 percent objective range in the third quarter of this year”, says Basele.


Absa Bank’s Madala on the other hand says despite January 2022’s sharp jump, inflation in Botswana is close to a peak. “We expect inflation to decline markedly from April, supported by strong base effects. Given January’s significantly higher inflation we expect a return to the Bank of Botswana’s (BoB) 3-6% target band in the third quarter Q322, instead of our previous expectation of Q2”, says Madala.


Kgori Capital’s Kitwe says while asset Management Company expects domestic inflation to steadily decline in 2022 due to base effects, the main upside risk to this forecast is Transport inflation. “Global oil prices have continued to rise. Oil prices have risen by 22% year-to-date this year”, says Kitwe.


What can consumers do in the meantime to minimize the effect of rising cost of living?
While inflation surge is not a Botswana paradox only, local consumers seems to see more rapid inflation than elsewhere as a consequence of the structure of the domestic economy. Consumers are already feeling the pressure — particularly those with limited means to absorb higher prices for essentials but it appears there is no immediate solution. In the meantime, Kitwe says consumers should adjust the standard of living. He maintains that the inflation experienced over the recent past has been fuelled by increases in prices for non-discretionary expenditure such as fuel, water and electricity.


Basele on the other end says due to the nature of the major drivers of inflation, being supply-side driven and not as a result of any substantial uptick in consumer activity, there remains very little room for consumers to minimise the effect being observed.
“We do, however, expect that as economic activity continues to improve, so too will employment prospects and the opportunity for real wages to increase, easing the burden on households.” says Basele.


How about policymakers, what should they do?
Around the world, soaring prices are emerging as a feature of the Covid 19 pandemic-era recovery, prompting some central banks to pivot to inflation fighting. This then bring the question: what can Botswana’s own central bank do? As inflation tightens its grip on the local economy, the three analysts tell Sunday Standard that the policymakers at the central bank are much better-equipped to respond to inflation.


Madala says the Bank of Botswana’s Monetary Policy Committee has so far resisted hiking the policy rate given the need to support the economic recovery and despite inflation being above the target band since May 2021.


“The committee has, during several meetings, reiterated that the projected increases in inflation in the short term are primarily due to ‘transitory supply-side factors’ that ‘do not normally attract monetary policy response’. However, with further fuel price increases likely, coupled with the threat of second-round effects of these fuel price increases and rising inflation expectations, we believe there is an elevated risk of a rate hike in 2022”, says Madala. Madala pins her projection for bank rate hike on the month of April 2022. “We believe policymakers may wait to see how prevailing global risks unfold, which include Fed policy, geopolitical risks and commodity prices”.


Her counterpart at FNBB – Basele agrees that the primary tool at the central bank’s disposal to control the level of inflation is the Bank Rate. Basele says given that inflation has persistently breached the upper objective since May 2021, coupled with tighter monetary policy expected globally, FNBB anticipate that the bank rate will be increased this year. FNBB believe that hiking the Bank Rate will also limit the level of capital outflows, by keeping in-line with policy normalisation efforts being instituted globally.


Kgori Capital’s Antwi also expects the BoB to increase the Bank Rate by at least 25bps over the next 12 months to rein in inflation.


In the meantime, the pressure is on Bank of Botswana governor – Moses Pelaelo and his team at the central bank. The reserve bank is charged, amongst other things with keeping a lid on inflation, to control prices. At the moment, it appears the central bankers are weighing a complex blend of global and domestic factors as they prepare to tackle the stubborn inflation. The central bank’s policymaking committee is expected to meet on Thursday, February 24, 2022 where they would give clue on whether it is walking back on previous assurances that inflation surge will be a temporary, post-pandemic blip.

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