Friday, May 20, 2022

Why Putin’s ‘bullets’ could land directly into your pockets

The global price of oil has already been at elevated levels for a while and so, on a year on year comparison, the headline rate of inflation has already shown signs of stubbornness.

While in developed economies and markets inflation had started to come off the boil – what economists refer to as ‘base effects’ in the jargon, in developing countries like Botswana consumers have already started digging deep into their pockets to buy essentials. The country’s central bank this week cautioned that risks to the domestic inflation outlook are assessed to be skewed to the upside.

Bank of Botswana governor Moses Pelaelo told reporters in the capital Gaborone on Thursday that inflation risks in Botswana include the potential increase in international commodity prices beyond current forecasts, persistence of supply and logistical constraints due to lags in production and geo-political tensions.

By geo-political tensions, Pelaelo was referring to amongst other things the ongoing war in Ukraine which was launched by the Russian President Vladimir Putin on Thursday ignoring global condemnation. Putin also ignored threats of new sanctions as he unleashed what could be the largest ground war in Europe in decades. In a pre-dawn televised address, he threatened any country trying to interfere with “consequences you have never seen”. But this threat by Putin is not just verbal or for media attention, they threaten billions of livelihoods including those in Botswana which are likely to be affected by a surge in global fuel prices.

Local economic experts have already warned that the main upside risk to their inflation forecast is Transport index as global oil prices have continued to rise.

“Oil prices have risen by 22% year-to-date this year”, said Portfolio Manager at Kgori Capital – Kwabena Antwi recently. Antwi’s comment was made when the cost of oil was still below the US$100 per barrel mark. However Russia’s invasion of Ukraine on Thursday caused the prices to surge above that mark for the first time since 2014, with Brent touching $105.

In Botswana, for the past several months the energy regulator – Botswana Energy Regulation Authority (BERA) stoked inflationary pressures as it increased prices for petrol, diesel, and paraffin, citing the increase in global oil prices.

This means consumer prices have increased the most in the past several months, tearing through the Bank of Botswana’s medium objective range of 3 – 6 percent. The Consumer Price Index (CPI) figures published by Statistics Botswana mid this month shows that by January 2022 the country’s headline inflation reached 10.6 percent.

The recent surge in inflation in Botswana has put an end to the low inflationary environment that has been running for close to a decade. Official data shows that prices fell from the highs of 7.5 percent in 2012, to record lows of 1.9 percent in 2020. The easing of the inflation started with 2012’s average rate of 7.5 percent dropping to 5.9 percent in 2013, and continued to 4.4 percent the following year, and by 2015 it was at 3 percent. In 2019 and 2020 Consumer prices continued to fall, registering average growth rate of 2.8 and 1.9 percent respectively.

Despite this historic level, the central bankers say they do not expect inflation to be persistently above the medium term of objective range as it is projected to fall from the second quarter of 2022 and revert to within the objective range from the third quarter of 2022.

“This would be mainly on account of the dissipating impact of the upward adjustment in value added tax (VAT) and administered prices during 2021, from the inflation calculation; which altogether contributed 5.9 percentage points to headline inflation in 2021”, Pelaelo said on Thursday.

While the central bank expect inflation to bounce back to the 3 – 6 percent later during the year, some analysts warn that surging commodity prices, supply chain disruptions and the current inflationary crunch are likely to strain local consumers in the region and affect daily lives.

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