November’s year-on-year headline consumer price inflation (CPI) recorded yet another drop to 2.9% – 0.2 percentage points lower than October’s rate of 3.1%. This is also lower than our expectations of an unchanged inflation rate m/m. On a year-on-year basis, CPI is significantly lower than the 4.3% printed in November 2014. This larger than expected drop is due low local fuel prices, combined with lacklustre domestic demand, which exerted greater downward pressures on prices than we had anticipated. This is, however, in line with recent global trends. Inflation has now printed below the 3% bottom band of the inflation target range for four times this year.
Transport, the second biggest category in the inflation basket accounting for approximately 19%, fell by 7.0% y/y, decelerating further from the 6.5%-drop recorded in October. Local fuel prices continue to decline in line with the international oil price and was to a large extent cushioned by the National Petroleum levy, which aims to protect local consumers from the volatility of international oil prices.
In September, retail pump prices of petrol, diesel and paraffin were all reduced by 15 thebe, 40 thebe and 40 thebe respectively. The increase in the Transport deflation was as a result of this reduction as it filtered into the inflation numbers. More recently in December, there was another decrease in local fuel prices and we expect this to exert further downward pressure on Transport inflation, as well as overall CPI. Since this reduction, international Brent Crude Oil prices have come under renewed pressure and fell a further 16.0%, giving yet more room for another reduction in local fuel if prices stabilise around these levels for some time. International oil supply continues to remain stubbornly strong with both OPEC and non-OPEC producers maximising production. Furthermore, with Iran coming into the picture, things are likely to get worse before they can get better as far as the oil price is concerned.
Other components of the CPI basket were generally stable over the past month, recording positive changes of less than 1%. The biggest item in the basket – Food, with a weighting of approximately 22% – has been surprisingly absent among the main contributors to inflation over the year. It recorded a 0.9% increase in prices over the 12 months to November. The Housing, Water, Electricity Gas & Other fuels category recorded the biggest rate of price increase over the 12 months at 9.5%, mostly driven by increase in the Water supply category which was up 26% over the year.
Given the reduction in fuel costs earlier in the month and the delayed effect of the local and regional draught experienced in trickling down into the numbers, we believe the annual inflation rate in December will remain below the 3% bottom band. The favourable exchange rate between the pula and the rand, which limits the extent to which we can import the increasing food inflation from South Africa, will also have a cooling effect on CPI. Inflation for the year to date has averaged 3.0% and we believe this level will be maintained for the full 12 months of 2015.
There are a number of risks to this outlook. On the upside, we believe it will be driven by food inflation and a possible increase in the alcohol levy this December. On the downside, the main driver will be the likelihood of another decline in fuel prices given the continued plunging of international oil prices. Waning local demand, as indicated by the reduction in core inflation which registered a 0.3 percentage decrease to 4.7% from the previous month, is also expected to keep pressures on prices within check.
Against this background, we believe that propelling economic growth remains the primary objective of the central bank. We are therefore convinced that the monetary policy will remain accommodative for the foreseeable future. We do not believe that the central bank will reduce rates any further, as the recent reductions have not really propelled credit growth due to other structural hindrances.
Tshephang Loeto is Analyst, Investec Asset Management
This century is always looking at improving new super high speed technology to make life easier. On the other hand, beckoning as an emerging fierce reversal force to equally match or dominate this life enhancing super new tech, comes swift human adversaries which seem to have come to make living on earth even more difficult.
The recent discovery of a pandemic, Covid-19, which moves at a pace of unimaginable and unpredictable proportions; locking people inside homes and barring human interactions with its dreaded death threat, is currently being felt.
Member of Parliament for Kanye North, Thapelo Letsholo has cautioned Government against excessive borrowing and poorly managed debt levels.
He was speaking in Parliament on Tuesday delivering Parliament’s Finance Committee report after assessing a motion that sought to raise Government Bond program ceiling to P30 billion, a big jump from the initial P15 Billion.
Government Investment Account (GIA) which forms part of the Pula fund has been significantly drawn down to finance Botswana’s budget deficits since 2008/09 Global financial crises.
The 2009 global economic recession triggered the collapse of financial markets in the United States, sending waves of shock across world economies, eroding business sentiment, and causing financiers of trade to excise heightened caution and hold onto their cash.
The ripple effects of this economic catastrophe were mostly felt by low to middle income resource based economies, amplifying their vulnerability to external shocks. The diamond industry which forms the gist of Botswana’s economic make up collapsed to zero trade levels across the entire value chain.
The Upstream, where Botswana gathers much of its diamond revenue was adversely impacted by muted demand in the Midstream. The situation was exacerbated by zero appetite of polished goods by jewelry manufacturers and retail outlets due to lowered tail end consumer demand.
This resulted in sharp decline of Government revenue, ballooned budget deficits and suspension of some developmental projects. To finance the deficit and some prioritized national development projects, government had to dip into cash balances, foreign reserves and borrow both externally and locally.
Much of drawing was from Government Investment Account as opposed to drawing from foreign reserve component of the Pula Fund; the latter was spared as a fiscal buffer for the worst rainy days.
Consequently this resulted in significant decline in funds held in the Government Investment Account (GIA). The account serves as Government’s main savings depository and fund for national policy objectives.
However as the world emerged from the 2009 recession government revenue graph picked up to pre recession levels before going down again around 2016/17 owing to challenges in the diamond industry.
Due to a number of budget surpluses from 2012/13 financial year the Government Investment Account started expanding back to P30 billion levels before a series of budget deficits in the National Development Plan 11 pushed it back to decline a decline wave.
When the National Development Plan 11 commenced three (3) financial years ago, government announced that the first half of the NDP would run at budget deficits.
This as explained by Minister of Finance in 2017 would be occasioned by decline in diamond revenue mainly due to government forfeiting some of its dividend from Debswana to fund mine expansion projects.
Cumulatively since 2017/18 to 2019/20 financial year the budget deficit totaled to over P16 billion, of which was financed by both external and domestic borrowing and drawing down from government cash balances. Drawing down from government cash balances meant significant withdrawals from the Government Investment Account.
The Government Investment Account (GIA) was established in accordance with Section 35 of the Bank of Botswana Act Cap. 55:01. The Account represents Government’s share of the Botswana‘s foreign exchange reserves, its investment and management strategies are aligned to the Bank of Botswana’s foreign exchange reserves management and investment guidelines.
Government Investment Account, comprises of Pula denominated deposits at the Bank of Botswana and held in the Pula Fund, which is the long-term investment tranche of the foreign exchange reserves.
In June 2017 while answering a question from Bogolo Kenewendo, the then Minister of Finance & Economic Development Kenneth Mathambo told parliament that as of June 30, 2017, the total assets in the Pula Fund was P56.818 billion, of which the balance in the GIA was P30.832 billion.
Kenewendo was still a back bench specially elected Member of Parliament before ascending to cabinet post in 2018. Last week Minister of Finance & Economic Development, Dr Thapelo Matsheka, when presenting a motion to raise government local borrowing ceiling from P15 billion to P30 Billion told parliament that as of December 2019 Government Investment Account amounted to P18.3 billion.
Dr Matsheka further told parliament that prior to financial crisis of 2008/9 the account amounted to P30.5 billion (41 % of GDP) in December of 2008 while as at December 2019 it stood at P18.3 billion (only 9 % of GDP) mirroring a total decline by P11 billion in the entire 11 years.
Back in 2017 Parliament was also told that the Government Investment Account may be drawn-down or added to, in line with actuations in the Government’s expenditure and revenue outturns. “This is intended to provide the Government with appropriate funds to execute its functions and responsibilities effectively and efficiently” said Mathambo, then Minister of Finance.
Acknowledging the need to draw down from GIA no more, current Minister of Finance Dr Matsheka said “It is under this background that it would be advisable to avoid excessive draw down from this account to preserve it as a financial buffer”
He further cautioned “The danger with substantially reduced financial buffers is that when an economic shock occurs or a disaster descends upon us and adversely affects our economy it becomes very difficult for the country to manage such a shock”