Friday, December 3, 2021

Inflation will soon become the biggest economic story of our time

Botswana is fast sailing into a big economic storm.

At the heart of it all and threatening to put paid all efforts of economic recovery is inflation.

Inflation is headed for extreme levels.

The effects and impacts will be felt all the stronger because following covid the economy will contract. And any growth will take much longer and be much more painful.

This is not unique to Botswana.

In fact the global economy is currently entering what some observers have termed a “dangerous phase.”

The Bank of Botswana should not hesitate to act, should it, as its tone implies, see the hazards manifesting themselves.

But more importantly, Government should bite the bullet and prepare the ground for long-term market determined derivatives that will ensure growth while also giving the monetary policy authorities a helping hand.

This will require boldness that could do away with subsidies that have now become not only unbearable but also obsolete, old fashioned and economically indefensible.

Economists and forecasters are predicting a long and difficult journey to recovery, made even bumpier by what so far promises to be an inflation-laden road.

Inflation remains by far the biggest risk. It has the real risk of spiraling out of control and sucking all that has been achieved into a vortex of no return.

Elsewhere other countries are already worried that their inflation could by year end reach 4 or 5 percent.

At 8.8 percent, Botswana’s is already way  too high and there are red-flags flashing indicating that having gone off the target bracket set by Bank of Botswana, by year end it might have increased even higher.

This is when the recent fuel increases is finally taken to account.

The situation is made all the worse by a combination of factors, some of them self-inflicted but many of them way beyond Botswana government control.

Botswana government should make changes where it can while it still has a leverage to do so.

This is important because with time it will lose control. That is inevitable.

For Botswana the price pressures are likely to be longer lasting than temporary or transient. 

It is only a matter of time before Bank of Botswana starts deploying its instruments, chief of which will be to raise Bank Rates, thus putting into further peril those people with mortgages to pay.

Batswana are heavily indebted, especially households. And covid has made a situation that was already getting untenable even worse.

The tragedy is that attempts to tame inflation and rein it in are often self-reinforcing.

Efforts to fight inflation will most likely also get the fiscal and monetary authorities on a collision course.

For example such efforts might include administering painful medicine with the hope that in the long term the patient might recover.

Already that is what Botswana government has been doing.

There are just too many emerging threats to the monetary policy that Bank of Botswana cannot continue to ignore.

The Bank should start looking at its armoury to assess which weapons to deploy at the earliest instance, or else there are too many players, especially mortgage payers who stand to lose out.

Thankfully the tone of the Bank’s latest monetary policy committee statement seems to be shifting towards a realization  of the dangers posed by government actions. That statement barely hid its frustration.

And also that unless action is taken as early as now, it might with time prove not only late but also harder.

This cocktail of measures that includes increasing VAT is already conspiring to undermine any efforts by the monetary policy authority.

Fuel and electricity – each of which has increased at least twice over the last twelve months will play a big role on the outlook in the near to medium terms.

Additionally, Government has introduced a slew of levies and new costs while also raising prices of power, fuel, housing water and others.

Under the circumstances there is little doubt that in thew next few months, Bank of Botswana will be forced to play catchup.

That would as a necessity mean having to deploy steeper base rates over short periods of time.

At another level there are disturbing signals that government is now struggling to honour some of its obligations like paying fuel companies what is essentially a fuel subsidy.

Last year these companies became cranky when government owed them over a billion pula.

Government ended up taking money from the road levy to settle fuel companies.

The economic environment is such that going forward there will come a time when this subsidy will have to be stopped. When such a time comes, the decision will literally be forced on government.

And when it is taken it might involve drastic political flareups that might as has happened elsewhere lead to a collapse of a government.

It is prudent to end the subsidy now before such a move is forced on a government that will when the inevitable arrives have neither say nor room on the consequences would be.

RELATED STORIES

Read this week's paper