BoB! Stop raising rates and focus on fuel costs
MPHOENG MPHOENG
In the Mmegi edition of June 24, 2022, I wrote about how the Bank of Botswana (BoB) and the Ministry of Finance and Economic Development (MoF) needed to think outside the box about how to fight rampant inflation.
At that time, we had seen the BoB raise its Monetary Policy Rate by 50 basis points (bps) (0.5 percent) to try to slow down inflation in the economy. In that article, I had written about how following textbook economics, this move could be argued as correct but if you looked at the type of inflation being experienced and the current poor economic situation where the average Motswana is struggling, this might not have been the best move. I argued that BoB and MoF needed to think about unconventional fiscal policy alternatives that could combat inflation and ease the burden on the pockets of Batswana.
Since that article, we have seen inflation (technically known as Consumer Price Index) rise from 11.9% which fed into the June Monetary Policy Meeting, to 14.3% in July 2022. Essentially the problem got worse and BoB in turn responded by raising the Monetary Policy rate again in August 2022 by another 50bps (0.5 percent).
This means the majority of new and existing loans got more expensive to consumers and companies by 0.5 percent. This is done to try to reduce the amount of money in the local economy, which in theory would reduce demand for goods which would in turn reduce prices and hence reduce inflation.
While this is textbook economics, this ignores the fact that our inflation is not being caused by demand. Our current inflation is mainly a function of oil and food prices and all of these are because of international factors beyond our control such as the Ukraine-Russia War and how it has disrupted energy and food markets.
What this implies is no amount of raising our rates will bring inflation down. In fact, all you are achieving is strangling the little green shoots of hope that the economy was starting to see as a result of a post-COVID-19 recovery. You’re making our lives worse; not better.
Let me make an illustration of the above to make it clearer. Let us assume we have a Motswana who is earning P10,000 and has a
mortgage of P500,000 which he is paying an interest rate of nine percent for over 25 years. This would mean the monthly instalment he was paying at the beginning of the year would have been P4,196. The MPC rate increased by 0.51 percent, 0.50 percent, and another 0.50 percent in May, June, and August 2022 respectively.
This, therefore, raised the mortgage payment by 1.51% and the monthly instalment to P4,721 (an increase of P525). Considering that Batswana are heavily indebted, especially on shorter-term loans such as personal and car loans, this starts to look worse in terms of how much the decisions are eroding the purchasing power of Batswana.
Now consider this same Motswana who has to buy groceries and supplies for their house. Let us assume they were spending P3,000 in
July last year. With 14% inflation, it means their groceries increased by P420. Add that on top of the (arguably ineffective) interest rate changes and it means they went from having a disposable income of P2,804 after paying groceries and their mortgage to only having P1,859 to take care of other expenses in the household. In effect, Batswana have experienced a double hit on food and living costs as well as interest rate costs because of BoB’s decisions.
So what do I suggest should be done?
In the June article, I implored BoB and MoF to get creative and not treat everything like a nail because we think we only have a hammer in our toolbox. And what I suggested was by no means innovative or unheard of. In 2020, when the economy crashed and unemployment looked like it would shoot through the roof, the government stepped in, and used some unconventional fiscal policy tools like tax breaks and amnesties, the COVID-19 food relief baskets, and even assisting with salaries for companies.
We have also seen the VAT rate reduced from 14% to 12% (though the effectiveness and size of this can be debated). The above moves show that we are not averse to finding creative ways to try and help the economy. In combatting the effects of COVID, we even saw other countries mailing cheques and money to consumers. My recommendation is to look at the causes of our current economic situation.
A lot of what is driving inflation and food costs in Botswana is the cost of fuel which we have seen shoot up in world markets because of the Russia-Ukraine war.
In turn, this has filtered across the board because fuel affects every industry in the economy.
This is the primary problem and I believe this is where we should concentrate our efforts, rather than raising interest rates and choking the economy.
Last week, Germany announced $65 billion in emergency measures to combat rising energy prices as a result of the disruption of gas supplies from Russia.
German Chancellor Scholz said the package is aimed at shielding customers and businesses from soaring inflation with measures including tax breaks for energy companies and public transport subsidies.
The UK Prime Minister, Liz Truss also announced a $150 billion package meant to freeze and subsidise energy prices for the next 18 months.
Considering that as explained above, most of Botswana’s inflation problems are caused by energy/fuel prices, a similar approach should be taken.
Just like the UK and Germany, Botswana should tackle the cost of fuel which filters throughout the economy. Botswana should fund the NPF which is the mechanism we use to control fuel prices.
A team of Botswana’s finest economists at BoB and MoF should sit in a room and calculate what it would cost to bring retail fuel prices down to possibly between P8 and P10 for a period of, for argument’s sake, 18 months, then issue bonds to fund this injection or expenditure (or alternatively defer some government project or expenditure which is not ideal since government spending helps with growing the economy).
In funding the NPF and making fuel much cheaper, this would reduce inflation (though we would still have little control over imported inflation) and should reduce overall pain on the economy and companies.
Prices for food and services should go down and this should free up money for Batswana and reduce the need for interest rate hikes.
In conclusion, I hope that BoB and MoF heed our call not to keep raising rates and focus on the actual problem and deal with it rather than continuing to choke Batswana and Botswana businesses with inflation and ineffective interest rate hikes. Now, where can I drop off my consultancy invoice for MoF and BoB?
*Mphoeng is a director at MP Consultants, a local citizen-owned corporate finance, economics, and business consultancy. Previously, he worked for the University of Botswana as a Lecturer in Accounting and Finance, Botswana Investment Fund Management (BIFM), Standard Chartered Bank, and Bank of Botswana.