Prices rise as Govt plans VAT hike

Consumer prices rose faster in the third straight month, with inflation expected to rise in the coming months following years of low inflationary environment. Government has indicated that it will hike the value added tax, hitting every consumer’s pocket when prices go up.

Statistics Botswana’s monthly inflation report for October 2020 shows that overall prices rose by 2.2 percent, registering an increase of 0.4 percent from the September rate of 1.8 percent, which had doubled from August’s 1 percent rate after it increased from the record low 0.9 percent registered in June and July – the lowest recorded rate since 1975. The three months increase in inflation has been attributed to increased costs in goods frequently used by households.

The main contributors to the October annual inflation rate were; Housing, Water, Electricity, Gas and Other Fuels, Transport, and Food & Non-Alcoholic Beverages. The biggest increase in prices was recorded in the  transport group index, which at 23.43 percent has the biggest weight in the consumer price index (CPI),  tracks the price of a basket of goods and services that is intended to represent average consumer patterns. The index was up by 1.5 percent, extending the previous month’s increase of 3.2 percent rise in prices in the transport sector was due to increase in public transport fares which were implemented beginning of September.

The food and non-alcoholic beverages group index which has a weighting of 13.55 in the consumer basket, making it the third largest, rose by 0.7 percent due to increase in alcoholic beverages. The Communication group index, the fifth biggest component of the CPI, rose by 0.4 percent, between September and October. This was due to an increase  in the Botswana Post tariffs with effect from 1st October 2020.

Prices of the housing, water, electricity, gas and other fuels group index, which has the second largest weight of 17.45 percent in the CPI increased by 0.3 percent. This has been attributed to the rise in prices of building materials. There has been shortage of cement in the country due to hiccups in logistics, with goods delayed for weeks at borders as cross border drivers await test results for Covid-19.

While overall prices might have risen by only 2.2 percent and have been at record lows for much of the year, way below the Bank of Botswana’s objective range of 3 – 6 percent, the numbers do not truly reflect the reality of rising prices amid a pandemic, where costs have increased for basic needs and commonly used services faster than what the inflation rate reflects.

In the past six months, prices of food have risen by 2 percent and 4.3 percent in a twelve-month period. Alcoholic beverages and tobacco prices have shot up 5.9 percent in the past six months and on a yearly basis, they have edged up by 6.6 percent. Costs have also gone up housing, water, electricity, gas and other fuels, registering 1.3 percent in the past six months and 6.6 percent on a yearly comparison. Much of the rise in prices in this sector was due to the government’s decision to increase electricity tariffs by 22 percent in April 2020.

The distortion to the inflation rate has largely been due to the transport sector, whose constituent prices are largely administered by the government. This is also the sector that has the largest weighting, which means when there is a change in transport prices, it affects the overall inflation rate by a bigger margin. The inflation rate has been kept low mostly by reduction in fuel prices, while public transport fares have been unchanged for a while until recently.

Meanwhile, the Finance and Economic Development ministry has revealed that it will be seeking approval from parliament to raise the value added tax (VAT) from 12 percent to 14 percent. This is the tax that is charged on most goods and services consumed, meaning it will affect the large section of society, including the country’s lowly paid employees. Almost 70 percent of Botswana’s working population earns below P10,000.