Experts flag fiscal stance as inflationary

Government has for the upcoming financial year ramped up its expenditure and net lending to a total of P102 billion, a fiscal stance that has rattled experts with fears of the budget sparking inflation above the Bank of Botswana’s (BoB) medium term range.

Renowned economist, Keith Jeffries, labelled the proposed budget as “inflationary” citing the risk that expansionary fiscal policy poses to raising inflation beyond manageable levels.

“The guys at Bank of Botswana must be scratching their heads wondering what to do because this is certainly an inflationary budget,” he told an FNB budget review.

The decision to increase government spending for the next financial year is part of an economic policy known as fiscal expansionary policy. Under expansionary periods, government increases spending on infrastructure projects, social programmes, and other initiatives to boost demand and stimulate economic growth.

Government may also enact tax cuts to reduce taxes, which puts more money in consumers’ pockets and stimulates spending. Minister of Finance Peggy Serame, has chosen the former as policy of choice for the upcoming financial year, which is pumping more cash into the economy.

“I have, for the 2024-2025 financial year, proposed a stimulus budget that will create opportunities for all to play a meaningful role and contribute towards transforming our economy to be more inclusive, innovative and knowledge based,” she said.

The risk is that pumping more money into the economy increases aggregate demand for goods and services which in turn drives up inflation or the general prices of goods and services in the economy. Inflation cooled to 3.5 percent at the dusk of 2023 following a three- year struggle against the dreaded monster.

Statistics Botswana figures show that annual food inflation dropped from 6.7 percent in November to 6.1 percent in December, while inflation associated with transport fell to 1.5 percent from 2.2 percent. Annual inflation associated with personal care fell from 8.9 percent to 7.7 percent. Inflation levels have this year stayed well within the three to six percent objective range set by the BoB and seen as supportive of stable price growth.

For the year, inflation averaged 5.2 percent, with the increases in average prices in the economy representing a tale of two halves.

The forces driving inflation throughout last year have largely been food and fuel prices, mainly the result of Russia’s invasion of Ukraine in February.

However, residual supply bottlenecks from the pandemic period also added momentum to inflation this year, while for Batswana, the pain actually began in April 2021 when government unleashed a wave of tax, levy, and tariff increases. Economists at Absa last week revealed that they do not expect the BoB to cut interest rates, as risks remained elevated to the upside with potential spillovers into the local economy from global uncertainties.

Serame’s efforts to kick start the economy may have to endure inflation as an opportunity cost due to government’s pressure to have the economy operating optimally in an election year. The BoB’s Monetary Policy Committee (MPC) hinted in its final meeting last year that it was unlikely to lean towards more rate cuts despite inflation cooling and falling to within the central bank’s target range.

The MPC, which sets interest rates, said while inflation was stable, upward risks possible adjustment in prices controlled by government such as electricity and water tariffs as well as any increases in domestic food prices due to the projected El Niño conditions in Southern Africa.

If inflation tracks above the central bank’s medium term range the Bank will have to hike interest rates, which would be counter intuitive to government’s efforts to kick start the economy posing further risks to worsen the projected budget deficit.

Inflation cooled to 3.5 percent at the dusk of 2023 following a three-year struggle against the dreaded monster