Cost of living rises to new highs

● Food, fuel prices drive inflation ● Edible oil prices up 40% in 12 months ● Inflation nears all-time high

The rate of increase in the prices of goods and services reached 14.3% in July from 12.7% in June, the highest level since November 2008, as fuel and food prices continued to escalate. At its latest level, inflation is under a percentage point shy of the all-time high of 15.1% recorded in November 2008. Inflation for the first seven months of the year has averaged 11.39%, compared to 11.41% in the same period in 2008, the year in which consumers suffered the highest average inflation ever.

According to Statistics Botswana’s figures released recently, annual inflation in July was driven by the increase of retail pump prices for both petrol and diesel by an average of P1.66. Although the increase was effected on June 28, it was only factored into the inflation calculation the next month, raising the July inflation.

Experts have explained that Russia’s invasion of Ukraine on February 24 has been the underlying factor behind the galloping fuel prices. Russian crude oil accounts for about five percent of the world’s demand while the country is also a major supplier of refined oils such as diesel and jet fuel. As sanctions landed on Moscow, there was an almost immediate impact on the global supply chain, with a disruption of supplies to major refineries and consumer end markets in Africa. As the supply and transportation disruptions began, refineries and crude oil producers shifted their supply to markets that could pay the most. Most of the African market has regulated fuel prices and the continent’s pump prices could not keep up with the increases. The continent found itself paying increasingly more, with costs also driven up by the alternative routes suppliers had to take to adhere to the sanctions against Moscow.

Botswana, meanwhile, is especially exposed to the challenges, as its buffer, the National Petroleum Fund, has been running on fumes for months, while the pula’s general weakening against the dollar has meant higher costs for local oil companies. Food prices, meanwhile, have been rising due to global supply crunches, partly associated with the war in Ukraine and also stretching back to the height of the pandemic.

In the 12 months to July, Statistics Botswana figures indicate that the average prices of oils and fats had risen by 40.8%, vegetables by 15.7%, and breads and cereals were up by 13% over the period. Cereals refer to starches such as sorghum, wheat, maize, and rice.

The latest inflation levels have sparked speculation that the Bank of Botswana (BoB) could further raise interest rates, in order to tame inflation expectations. The central bank has already raised interest rates by 101 basis points this year, citing the threat of inflation expectations becoming entrenched in the economy and becoming manifest in firms pricing their views of future inflation into their products and services, property owners doing the same with their rental reviews, workers with their wage demands and so on.

The BoB’s latest survey of local firms showed that inflation expectations have risen, despite the increases in interest rates.

“These readings will be key for the BoB as its rate-setting committee meets towards the end of this month,” analysts at asset management firm, IPRO Botswana stated in a report this week.

“Having anticipated the headline inflation rate to come back down into the three to six percent target range in 2023, the bank will most likely raise its reference rate again.”

Government recently unveiled inflation relief interventions such as zero-rating Value Added Tax (VAT) on cooking oil and liquefied petroleum gas, as well as reducing overall VAT to 12% from 14%. Consumers report that while the zero-rated items have come down in price, retailers appear to be mostly not passing on the lower VAT across other items.

Retailers, in turn, say the benefits of the lower VAT for consumers have been wiped away by pressures on the base costs of commodities and services due to rising costs of fuel and other inputs.