Saturday, June 19, 2021

Inflation rate drastically jumps to an 8-year high

The inflation rate is nearing the upper end of Bank of Botswana’s tolerance level, in a development that has been predicted by the central bank, following series of price increases. 

On Friday, Statistics Botswana reported that consumer prices rose the most in April, jumping to 5.8 percent, the highest rate since 2013, and close to the upper rung of Bank of Botswana’s inflation target rate of 3 – 6 percent. The major contributors to the April annual inflation rate were influenced by the 1.8 percent increase in transport costs after being hiked by P1, while  housing, water, electricity, gas and other fuels advanced by 1.1 percent. Food and non-alcoholic beverages prices moved by 0.9 percent. 

The lower rung of the objective range was finally breached in March after years of declining inflation rate, with the consumer prices rising from 2.4 percent in February to 3.2 percent in March.

The increase in prices was largely due to numerous upward adjustments in domestic fuel prices by the government owned Botswana Energy Regulatory Authority (BERA). This led to domestic prices increasing from an average of 4.2 percent in the first quarter of 2020 to an average of 4.8 percent in the first quarter of 2021, reflecting the increase in food prices. 

The recent surge in inflation puts an end to a 9-year period of falling consumer prices as measured by the consumer price index (CPI). 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. The inflation rate’s descent went below Bank of Botswana’s threshold in 2016, with the rate recorded at 2.8 percent, before increasing slightly to 3.3 percent in 2017 and retreated to 3.2 percent in 2018.

By 2019, the inflation rate went below the objective range again, registering 2.8 percent, and plunged to the lowest levels in more than two decades as the average annual inflation rate hit new lows of 1.9 percent last year.

The central bank economists say the recent rise in domestic tradeables inflation has little to do with domestic demand pressures but more of government actions. Earlier this year, Bank of Botswana projected that the inflation rate will increase in the near term, and likely to rise in above the 6 percent tolerated level in the second quarter of 2021. 

The projection takes into account the anticipated increase in domestic demand in response to the overall accommodative monetary conditions; the increase in VAT 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 rise in subscription fees by Multichoice Botswana; the announced increase in water tariffs; the likely increase in international commodity prices; the upward revision of inflation forecasts for trading partner countries; the anticipated depreciation of the Pula against the South African rand; and the base effects associated with the decrease in fuel prices in 2020.

Nonetheless, inflation is expected to revert to within the 3 – 6 percent objective range in the first quarter of 2022.

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