Wednesday, May 25, 2022

Inflation: the calm before the storm

Botswana’s inflation rate was stable in the first two months of the year but still at its highest rate in over a decade, with fears that consumer prices may continue to soar in the wake of Russia’s invasion of Ukraine.

According to Statistics Botswana’s latest inflation report, the annual inflation rate remained unchanged at 10.6 percent from the same rate in January, which had jumped from the 8.7 percent rate in December 2021.

While the change in prices was stable in February, there was a slight increase in the transport group index, with prices increasing by 0.6 percent, followed by the food and non-alcoholic beverages group which registered a 0.5 percent growth.

Prices in the country rose the most last year, tearing through the Bank of Botswana’s objective range of 3 – 6 percent, and the central bank expects the inflation rate to revert within the objective range only in the third quarter of 2022.

“This would be mainly on account of the dissipating impact of the upward adjustment in value added tax (VAT) and administered prices during 2021, from the inflation calculation, which altogether contributed 5.9 percentage points to headline inflation in 2021,” the central bank said in its monetary policy statement released last month.

Inflationary pressures were stoked in 2021 when the government increased levies and taxes, together with the upward adjustment in administered prices and associated second-round effects.

There are currently 51 administered items out of the 400 items in the Botswana consumer price index (CPI) basket, representing a significant weight of 32.3 percent in the basket which is supposed to mirror commonly used goods and services by consumers. Given its sizeable portion in the CPI, changes in administered prices had a considerable influence on inflation trajectory and inflation expectations as evidenced by the accelerated pace in consumer prices.

The actions by the government last year put an end to the low inflationary environment that has been running for nine years, as 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.

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 was 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 in 2020. However, things took a dramatic turn in 2021 as prices soared, ending the year with an average annual inflation rate of 6.7 percent.

While the central bank last month stuck to its accommodative monetary policy by keeping the bank rate unchanged at 3.75 percent, their forecast that the inflation rate will fall between 3 to 6 percent in the third quarter of 2022 remains shaky as global developments are likely to push prices up.

Already the conflict between Russia and Ukraine has led to disruptions in the supply chain, with oil and wheat prices rising significantly, and the after-effects expected to be felt in the coming months. Besides that, further inflationary pressures are expected in April when the government’s fiscal year 2022/2023 commences, after the Finance and Economic Development ministry instructed other ministries to increase levies and fees.

“In recognition of the unfavourable fiscal situation that we are facing as a nation, the ministry has embarked on a revenue maximisation and cost saving drive. The main aim is to broaden the base from which government could collect revenue, while at the same time identifying areas of apparent wastage in the public sector,” said Finance minister Peggy Serame earlier this month in parliament. “To this end, a number of user fees and service charges in nine ministries have been revised and are being implemented Mr Chairperson, and the full benefits of these endeavours will be realised as the economy continues to recover.”

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