Our inflation rate surged from 10.6 per cent in April 2022 to 11.9 % in May, 2022. In response, the relevant authorities increased the monetary policy rate by approximately half a percent. This comes on the back of another rate increase in April where the amount was 0.51 percent.
The purpose of these rate increases by the Bank of Botswana is to reduce the soaring cost of living. At all times the costs of living has to be low, stable and affordable, if you like. Low income households in particular suffer the most from a high cost of living. A stable cost of living is also good for savings. And when it is stable, it is predictable and therefore good for investment. Investors, after all, thrive in an environment that gives them the confidence to plan for the future without major fears or anxiety about disruptions to their decisions.
We also have to remember that apart from fuel as the main driving force behind the spike in inflation, food and alcoholic beverages too came up as another notable cost-of-living driver. The prohibition of imported vegetables that was introduced early this year without an assessment of its ramifications on the economy especially consumer welfare, exacerbated inflation. The monetary statement also alludes to this albeit in a long winded manner couched of course in central bank speak.
There is reference to the “short-term unintended consequences of import restrictions (for example, shortages in supplies leading to price increases)”. This obviously is about the ban on imported vegetables which has led to shortages, poor quality and price increases. So that is the closest you will ever get a central bank to criticise a flawed public policy. I still wonder what the basis for them labelling the consequences as “short term” is. Does that mean that there are no unintended consequences in the medium to short term? Is it going to be all hunky dory?
It is also interesting that in terms of geographic spread, the May inflation number was slightly higher in rural villages than in urban centres and that on its own is a worrisome situation. We already know that the incidence of poverty is higher in rural than urban settings and to have rural based communities contend with higher inflation is a double whammy they simply cannot afford.
As a tax on everyone, inflation is also an enemy of small business owners because they are not spared. As costs for inputs such as electricity and fuel increase, small business find it difficult to keep up. It does not help that most of them have to contend with regular increases in minimum wages. In a somewhat perverse way, inflation is also harmful to those who are looking for jobs as small businesses find it expensive to hire additional people. The government also contributes to the inflationary pressures by continuing to award civil service salaries increase which are not linked to productivity.
Inflation is also dramatically affecting farming and it does not matter whether we are referring to crop or livestock farmers because either way the cost of filling up to water livestock or plant is unbearable. Farmers cannot grow food at P 15.43 per litre. It is apparent therefore that we cannot rely on monetary policy alone to save Batswana from the debilitating effect of inflation. This task cannot be left to Bank of Botswana alone just because they are the custodians of monetary policy. If monetary policy rate adjustment is the only tool in the kit, it runs the risk of blunting the appetite of those who borrow for productive purposes or investment. It is important therefore to thread the needle and ensure that fiscal policy is also kicked into gear to run in tandem with monetary policy. This calls for a fiscal framework that reduces public spending, lowers taxes and eliminates budget deficits to promote growth. We have to do so to avoid a situation whereby monetary policy rate increases tame inflation but also bring down the economy. Our experience with COVID lockdowns whereby we shut down the economy and destroyed livelihoods in the process to save lives was bad enough.
