The impact of an aggressive monetary policy in the Bank of Botswana’s history, together with the effects of the Russian/Ukraine, will be felt by hundreds of households and consumers in the months to come the Ministry of Finance has warned. This is according to a quarterly report released recently by the Ministry of Finance and Development Planning. Warning that “Monetary Policy gets tighter,” the Ministry noted in the brief that rising inflation “has led to a tight monetary policy stance.”
“The MoPR (Monetary Police Rate) increased from 1.65% in June 2022 to 2.15% in 2022, representing a 50 basis point hike, as a measure to control inflation,” the brief states. According to the Ministry, this could result in among others, rising public and private debt, reduced capital outflows, downward pressure on inflation. The Bank of Botswana’s Monetary Policy Committee (MPC) last week announced its decision to once again hike MoPR by 50 basis points from 2.15 to 2.65 percent.
This is the third hike since the beginning of the year as the bank continues to fight run-away inflation. The Ministry of Finance report, warns that there is also a possibility of high borrowing costs (by consumers), increase in interest payments on government borrowing and constrained domestic demand. It observed that inflation has accelerated reflecting, among others, surging commodity prices (i.e. food and energy), and persistent supply disruptions. The report says annual inflation rate registered an increase of 0.8 percentage points to 12.7% in June 2022, from 11.9% in May 2022. It says the increased annual inflation rate in June 2022 was driven by various components, notably, Transport (8.1%), Food & Non-Alcoholic Beverages (1.4%), Housing, Water, Electricity, Gas & Other Fuels (1.1%). As a result, the Ministry warned consumers to brace themselves for possible, “Reduced disposable income, high cost of living and possible increase in interest rates.”
The Ministry said the invasion of Ukraine by Russia has disrupted production and trade. It says “During the period under review, price increases were particularly pronounced for commodities where Russia and Ukraine are large exporters (i.e. Energy and wheat).” “These developments have implications for the local economy which continued to experience increased fuel prices,” the report says. The report says: “For an example an upward adjustment of petroleum products (Petrol, Diesel and Illuminating Paraffin) was increased in June2. Retail Pump price of un-leaded petrol 93 increased by P1.93 per litre, price for unleaded petrol 95 increased by P2.04.”
It added that, “Retail pump price for diesel 50 ppm increased by P1.28 per litre and for illuminating paraffin increased by P3.67 per litre.” Therefore the report says consumers and households should brace themselves for, “Rising costs of production leading to an increase in local food prices (e.g. Bokomo to increase flour prices by 10%, beginning of August 2022). ii. Higher inflation. iii. Overall increase in the cost of living.” The report says the war in Ukraine has increased the probability of negative tail risks, many of which are interlinked. It says the increase in energy and food prices raises concerns about the global economy entering a period of stagflation reminiscent of the 1970s. “Intensifying geopolitical turmoil, particularly in Europe, could further increase energy prices and destabilize global economic activity and, in the longer term, cause global trade, investment, and financial networks to fragment. Rising price pressures could also require faster U.S. monetary tightening, resulting in widespread macroeconomic imbalances,” says the report.
It added that risks that a slowing of growth, or recession, in the USA could dramatically impact on the retail diamond jewellery market. But the report notes that all is not doom and gloom. It says increased demand for rough diamonds, and improved prices, at least in the short term. “During the period under review, diamond jewellery demand continued to perform well in the key US market. This was reinforced by positive sentiment following the influential JCK Las Vegas jewellery exhibition held in mid-June,” the report says. It says the continued strength of US demand for diamond jewellery and the gradual reopening of retail outlets in China following Covid-19-related lockdowns have supported the sales momentum of De Beers Group’s rough diamonds, which in the fifth sales cycle, registered US$650 Million.