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INFLATION FORECAST: Prices upward crusade corners BoB

BOB GOVERNOR: Moses Pelaelo

Inflation is forecast to revert into the objective range sooner than what was expected more than a month ago, Bank of Botswana (BoB) said Thursday.  According to Head of Research & Financial Stability Department, Tshokologo Kganetsano, this is due to the increase in transport fares, adjustment in fuel prices and postal office tariffs.

The 8 October 2020 Monetary Policy Committee (MPC) had a projection seeing inflation crawling slowly back to the objective range of 3 – 6 percent. That was the effects of the domestic economy which was almost at standstill as consumers stayed home while shops were closed. Botswana was waking from lockdowns where there was no use of using transport or fuel, hence inflation was 0.9 percent in July before rising marginally to 1 percent in August 2020.

Inflation slumped from 2.4 percent in May to 0.9 in June, the rate that was maintained in July becoming the lowest level since records began in January of 1997. That time prices collapsed further for transport (-6.9 percent vs -6.7 percent in June) and recreation & culture (-0.7 percent vs -0.8 percent).

In October, during the last MPC meeting, inflation was forecasted to revert to within the objective range in the third quarter of 2021. But things have changed with Housing, Water, Electricity, Gas & Other Fuels (1.2 percent), Transport (-0.6 percent) and Food & Non-Alcoholic Beverages (0.6 percent) swelling up the October inflation, increasing it by 0.4 percent from the September rate of 1.8 percent.

According to Kganetsano, the rise of October inflation to 2.2 percent from 1.8 in September, albeit still remaining below the lower bound of the Bank’s objective range of 3 – 6 percent, moved their forecast of inflation returning to the objective rate quickly from the initially projected third quarter of next year to the second quarter. He projects prices to go up towards next year as the economy returns to normal.

Prices rise will leap inflation to jump towards the objective starting range of 3 percent, now short of just 0.8 percent. Observation is that with the spending of the festive season will spike inflation up over the starting range of 3 percent. But that is not the only factor according to Kganetsano, global oil and food prices may help nudge inflation upwards.

“Overall, risks to the inflation outlook are assessed to be balanced. Upside risks relate to the potential increase in international commodity prices beyond current forecasts, aggressive action by governments and major central banks to bolster demand, as well as possible supply constraints due to travel restrictions and lockdowns, though abating,” BoB governor Moses Pelaelo read the MPC decision on Thursday.

Pelaelo continued to say that domestically accelerated implementation of the Economic Recovery and Transformation Plan (ERTP), as well as a possible increase in government levies and/or taxes, could lead to higher inflation. He explained that these risks are moderated by weak domestic and global economic activity, which could be exacerbated by periodic lockdowns due to prolonged COVID-19 infections, and the possible decline in international commodity prices. The governor said should there be implementation capacity constraints, this could hinder the effectiveness of policy stimulus and ERTP initiatives, thus resulting in lower inflation.

Pelaelo also added that the economy is expected to have performed better in the third quarter of 2020 compared to the second quarter given the gradual easing of COVID-19 movement restrictions from that period, and the significant increase in Debswana production in the second half compared to the first half of the year.

While the global output is projected to contract by 4.4 percent in 2020 but to rebound to 5.2 percent in 2021, anchored by better performance than anticipated for the second quarter of 2020, a stronger performance in the third quarter, as well as immense policy support, the MPC said this recovery projections are fraught with uncertainty with respect to the possible resurgence in infections and uncertain availability and distribution of a COVID-19 vaccine.

“The MPC, however, recognised that the short-term adverse developments in the domestic economy occur against a potentially supportive environment including accommodative monetary conditions; reforms to further improve the business environment; concerted efforts by government to mitigate the impact of COVID-19; as well as the anticipated positive impact of the ERTP. These would generally augur well for economic activity in the medium term.

Therefore, the MPC decided to continue with the accommodative monetary policy stance and maintain the Bank Rate at 3.75 percent. The Bank stands ready to respond appropriately should the need arise,” concluded Pelaelo on Thursday.

However after the release of the MPC decision, RMB Botswana Markets Daily is of the view that the effect of these developments is unlikely to see inflation average beyond 3 percent in 2021. The RMB and FNBB researchers said they expect price growth to register an average of 1.9 percent in 2020 and 2.5 percent in 2021.

“Furthermore, the demand side is expected to act as a drag on inflation in 2021 as the bulk of Botswana’s work force will be faced with unemployment challenges as businesses continue to reel from the effects of the pandemic,” said the researchers.

The RMB Botswana researchers said they expect the effect of upside pressures on the headline figure to remain limited, coupled with an uncertain economic outlook as a result of the disruption caused by covid-19. They also believe the central bank still has room to cut rates by a further 25bp in the first half of 2021, to 3.50 percent.

However, the morning before the MPC decision, another commercial bank researchers from BancABC said they do not expect BoB to make an adjustment to the rate at this time, preferring to adopt a wait and see approach into the end of 2020. The researchers said BoB has been aggressive in cutting rates this year, slashing the benchmark rate by some 100 bpts this year.

“Granted this has not been as aggressive as some other countries in the region but it is significant nevertheless. The last cut took place at the October meeting and was 50 bpts in magnitude,” concluded BancABC researchers on Thursday.

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Debswana-Botswana Oil P8 billion fuel partnership to create 100 jobs

18th May 2022
Head-of-Stakeholder-Relations

The partnership between Debswana and Botswana Oil Limited (BOL) which was announced a fortnight ago will create under 100 direct jobs, and scores of job opportunities for citizens in the value chain activities.

In a major milestone, Debswana and BOL jointly announced that the fuel supply to Debswana, which was in the past serviced by foreign companies, will now be reserved for citizen companies. The total value of the project is P8 billion, spanning a period of five years.

“About 88 direct jobs will be created through the partnership. These include some jobs which will be transferred from the current supplier to the new partnership,” Matida Mmipi, Head of Stakeholder Relations at Botswana Oil, told BusinessPost.

“We believe this partnership will become a blueprint for other citizen initiatives, even in other sectors of the economy. Furthermore, this partnership has succeeded in unlocking opportunities that never existed for ordinary citizens who aspire to grow and do business with big companies like Debswana.”

Mmipi said through this partnership, BOL and Debswana intend to impact citizen owned companies in the fuel supply value chain that include transportation, supply, facilities maintenance, engineering, customs clearance, trucks stops and its support activities such as workshop / maintenance, tyre services, truck wash bays among others.

“The number of companies to be on-boarded will be determined by the economics at the time of engagement,” she said. BOL will play a facilitatory role of handholding and assisting emerging citizen-owned fuel supply and fuel transportation companies to supply Debswana’s Jwaneng and Orapa Letlhakane Damtshaa (OLDM) mines with diesel and petrol for their operations.

“BOL expects to increase citizen companies’ market share in the fuel supply and transportation industries, which have over the years been dominated by foreign-owned suppliers. Consequently, the agreement will also ensure security of supply for Debswana operations, which are a mainstay of the Botswana economy,” Mmipi said.

“Furthermore, BOL will, under this agreement, transfer skills to citizen suppliers and transporters during the contract period and ensure delivery of competent and skilled citizen suppliers and transport companies upon completion of the agreement.”

Mmipi said the capacitating by BOL is limited to providing citizen companies oil industry technical capability and capacity to deliver on the requirements of the contract, when asked on helping citizen companies to access funding.

“BOL’s mandate does not include financing citizen empowerment initiatives. Securing funding will remain the responsibility of the beneficiaries. This could be through government financing entities including CEDA or through commercial banks. Further to this, there are financial institutions that have already signed up to support the Debswana Citizen Economic Empowerment Programme (CEEP),” Mmipi indicated.

While BOL is established by government as company limited by guarantee, it will not benefit financially from the partnership with Debswana, as citizen empowerment in the petroleum value chain is core to BOL’s mandate.

“BOL does not pursue citizen facilitation for financial benefit, but rather we engage in citizen facilitation as a social aspect of our mandate. Citizen facilitation comes at a cost, but it is the right thing to do for the country to develop the oil and gas industry,” she said.

Mmipi said supplying fuel to Debswana comes with commercial benefits such as supply margins. These have traditionally been made outside the country when supply was done by multi-nationals for a period spanning over 50 years. With BOL anchoring supply for Debswana, this benefit will accrue locally, and BOL will be able to pay taxes and dividends to the shareholders in Botswana.

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VAT in Africa Guide 2022 – Africa re-emerging

18th May 2022

PwC Africa has presented the eighth edition of the VAT in Africa Guide – Africa re-emerging. This backdrop of renewal informs on the re-emergence of African economies and societies which have been affected by the COVID-19 pandemic.

In this edition, which has been compiled by PwC Africa’s indirect tax experts, covers a total of 41 African countries. It is geared towards sharing insight with our clients based on the constantly changing tax environments that can have a significant impact on business operations.

Within Africa, governments continue to focus on expanding the tax net by improving revenue collection through efficient compliance systems and procedures. PwC Africa has observed that revenue authorities also continue to take a keen interest in indirect taxes as part of revenue mobilisation initiatives.

Maturing VAT system and upskilling SARS 

“In South Africa, VAT is becoming more relevant as a revenue source for the government,” says Matthew Besanko, PwC South Africa’s Indirect Tax Leader. “Strides have been made to upskill South African Revenue Service (SARS) staff and identify VAT revenue leakages, particularly in respect of foreign suppliers of electronic services to people and businesses in South Africa.”

Broadening the tax base and digital economy

In the past year, South Africa, Mozambique and Zimbabwe saw updates to their VAT legislation, or introduced specific legislation targeting electronically supplied services (ESS), which is in line with the global trend of attempting to tax the digital economy. “The expectation is that Botswana will also introduce VAT legislation in due course, while the National Treasury in South Africa has also made mention of revising the rules to account for further developments in the digital economy,” Besanko says.

South Africa’s National Treasury has also drafted legislation with the intention to introduce a reverse charge on gold, which is expected to come into effect later in 2022. While in Zimbabwe, revenue authorities have introduced a tax on the export of raw medicinal cannabis ranging between 10% and 20%, which came into effect on 1 January 2021.

ESG and carbon tax 

Key strides have also been made within the Environmental, Social and Governance (ESG) space. “ESG leadership, strategising and reporting is essential now for organisations that wish to flourish and remain relevant,” Kabochi says. He adds that companies need to consider how ESG and tax intersect, since tax is a significant value driver when businesses need to deliver on their ESG goals.

In South Africa, a carbon tax regime, which is being implemented in three phases, has been adopted. The second phase was scheduled to start in January 2023, however phase one was extended by three years until 31 December 2025.

Until then, taxpayers will enjoy substantial tax-free allowances which reduce their carbon tax liability. At the beginning of 2022, the South African government increased the carbon tax rate to R144 (about US$9), which is expected to increase annually to enable South Africa to uphold its COP26 commitments.

With effect from 1 January 2023, carbon tax payers in South Africa will also be required to submit carbon budgets and adhere to the provisions of the carbon budgeting system which will be governed by the Climate Change Bill. Where set carbon budgets are exceeded, the government plans to impose penalties. “At PwC, we are continuously focused on our renewed global strategy, ” The New Equation,” Kabochi says. “Through this strategy, a key focus area for PwC Africa is to support clients in adding value to their ESG ambitions and building trust through sustained outcomes.”

The New Equation is also an acknowledgement of the fundamental changes in the business environment in which PwC’s clients and other stakeholders operate. PwC continues to reinvent and adapt to these changes as a community of problem solvers, combining knowledge and human-led technology to deliver quality services and value.

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Economists project lower economic growth for Botswana

18th May 2022
CBD

Local and international economists have lowered their projections on Botswana’s economic growth for 2022 and 2023, saying the country is highly likely to fail to maintain high growth rate recorded in 2021 hence will not reach initial forecasts.

Economists this week lowered 2022 forecasts for Botswana’s economic growth rate, from the initial 5.3% to 4.8% and added that in 2023 growth could further decline to 4.0%. The lower projections come on the backdrop of an annual economic growth that recovered sharply in 2021 with figures showing that year-on-year real Gross Domestic Product (GDP) growth increased to 11.4%, up from a contraction of 8.7% in 2020.

Economists from the local research entity, E-consult, this week stated that the 2021 double digit growth that exceeded projections made at the time of the 2022 budget may be short lived due to other developments taking place in the global economy. E-consult Economist Sethunya Kegakgametse stated that the war in Ukraine has worsened supply problems in the global economy and added that before the war, macroeconomic indicators were seen as improving and returning to pre-COVID levels.

According to the economist the global economy was projected to improve in 2022 and 2023. Recent figures show that global growth projections have been revised downwards from the initial forecast of 4.9% in 2022 with the World Bank’s new estimate for global growth in 2022 at 3.2%.

The statistics also shows that International Monetary Fund revised their growth projections for 2022 and 2023 down by 0.8% and 0.2% respectively, falling to 3.6% for both years. “The outbreak of war has severely dampened the global recovery that was under way following the COVID-19 pandemic,” said the economist.

She stated that despite Botswana being geographically removed from the conflict, the country has not and will not be exempt from the disruptions in the global economy. “The disruptions to global supply chains resulting from the war will have a negative effect on both Botswana’s growth and trade activities.

The economic sanctions against diamonds from Russia will add uncertainty to the market which will have knock on effects to Botswana’s growth, exports, and government revenues,” said the economists who added that the disruptions are driving prices up and result with very high inflation in the local economy.

Kegakgametse projected that in an attempt to limit inflation Bank of Botswana will be forced to raise interest rate “Should the sharp increase in both global and local inflation persist, Bank of Botswana much like other central banks around the world will be forced to raise interest rates in a bid to control rising prices. This would mean an end to the expansionary monetary policy stance that had been adopted post COVID-19 to aid economic growth,” she said.

In the latest projections, the UK based economic research entity Fitch Solutions lowered 2022 real GDP growth forecast for Botswana from 5.3% to 4.8% “In 2023, we see economic growth rate decelerating to 4.0%,” said Fitch Solutions economists who also noted that the 2022 and 2023 economic growth projections may come out lower than the current forecasts, as it is possible that new vaccine-resistant virus variants may be identified, which could result in the re-implementation of restrictions. “In such circumstances, we cannot rule out that Botswana’s economy may post weaker growth than our baseline scenario currently assumes,” said the economists.

According to the projections, Fitch Solution stated that there is limited scope for Botswana government to increase diamond production and exports, following the economic sanctions imposed on Russian diamond mining companies operating in Botswana. The research entity added that De Beers is unlikely to scale up diamond output from Botswana in order to prop up diamond prices.

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