Thursday, April 22, 2021

Low inflation in Botswana linked to rising unemployment

The rising level of unemployment in the country could be one of the contributors to the low inflation recorded by the domestic economy over the past several months, a quarterly economic review published by Stanbic Bank Botswana has suggested.

The review, authored by lecturers in the Department of Economics at the University of Botswana draw attention to the conventional wisdom that point to a trade off between inflation and unemployment.

“Available data shows that disinflation in advanced economies was accompanied by high unemployment. If the trade off between inflation and unemployment holds for Botswana, then low inflation does not bode well for the country as it suggests that unemployment has been rising,” reads part of Stanbic Bank’s economic review.

Latest Consumer Price Index (CPI) figures from the national statistics agency, Statistics Botswana shows that last month’s year-on-year headline consumer price inflation (CPI) slightly rose to 3.1 percent from 2.9 percent recorded in September. The domestic inflation is now forecast to close the year averaging the current levels. The UB economics think tanks are of the view that the slight increase in inflation could be due to an increase in administered prices such as the hike in electricity tariffs and water.

“After holding steady at 2.8 percent for two consecutive months, February and March, the April headline inflation slightly increased to 3.1 percent whilst the core inflation, at 4.8 percent, held steady. This clearly shows that increases in administered prices of electricity and water on 1st April were responsible for the rise in the April inflation.”

Another interesting observation made by the UB economists is that despite the six percent salary adjustments for public sector employees implemented in April, the May inflation slightly slowed to 3.1 percent. It is said that the slight decline in May inflation may be a reflection that producers respond with a lag to increases in administered prices and wages of public sector employees or of weaker conditions in the labour market. On the other hand, unemployment figures keeps growing every month. Although the official figures are perked at around 20 percent, a leading economic firm, e-Consult Botswana believes that the current figures may be underestimated and could in fact be close to the 30 percent mark. At the same time, UB economics experts note that lack of up to date unemployment figures preclude the assessment of whether the low inflation is directly linked to the high unemployment in the domestic labour market.

“It is indicative of prevalence of excess capacity, that is the economy is producing levels of output that are below the potential. The fact that inflation declined in the environment of accommodative monetary policy stances reinforces this argument. On the other hand, a low inflation relative that of other trading partners, other things held constant, spurs international competitiveness of domestic firms,” states the economic review report.

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