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Domestic fuel price hike shakes up inflation

Publishing Date : 10 December, 2018

Author : REARABILWE RAMAPHANE

Inflation for the last quarter of 2018 has been shaken up by a hike of 0.3 percent from 2.9 in September to 3.6 percent in October 2018, Bank of Botswana has revealed on Monday.


When delivering the Bank rate position formulated by Monetary Policy Committee (MPC), Bank of Botswana (BoB) executives indicated that inflation is expected to edge up slightly in the short term, by in large still attributable to increase in domestic fuel prices. Botswana has received back-to-back fuel prices increase within a month period with the last one being two weeks ago where, petrol went up by 0.33t per litre, while diesel increased by 0.36t per litre and paraffin 0.31t per litre up.


The Ministry of Mineral Resources, Green Technology and Energy Security has explained that the increase in retail pump prices was necessitated by the growing numbers of under recoveries since September 2017. Authorities further shared that the actual cost of importing petroleum products into Botswana has been higher than the regulated price aligned to the local retail pump prices as per international trends. The two petrol price increases in a month amount to 0.98t – which is still short from the recommended P1.14, mirroring another possible price hike in the not so far future.


Under recoveries is the difference between the cost of importing fuel and the price set by the government the retail that is to say if it costs companies such as Engen and Shell about P10 per litre to import petrol but then the government says petrol should be charged at P8 per litre at the filling station, it means there is an under recovery of P2 or loss of that amount to the companies. Previously   the differences or losses was paid for by the government through the NPF, which collects a certain amount when Batswana buy fuel.


 But since last year revelations that over P250 million was siphoned from NPF and diverted to the Directorate on Intelligence Security (DIS). While the matter is still before the courts, consumers are for the first time starting to feel the pinch without the protection of the NPF which has been depleted. This week BoB however indicated that the outlook for price stability remains positive as inflation is forecast to remain within the Bank’s 3 – 6 percent objective range in the medium term.


Subdued domestic demand pressures and the modest increase in foreign prices contribute to the positive inflation outlook in the medium term. BOB said the outlook is subject to upside risks emanating from the potential rise in administered prices domestic fuel prices and government levies and/or taxes beyond current forecasts.“However, restrained growth in global economic activity, technological progress and productivity improvement, along with modest wage growth, present downside risks to the outlook,” said Bank of Botswana Governor Moses Pelaelo.


Real GDP grew by 4.4 percent in the twelve months to June 2018, compared to a lower expansion of 3.2 percent in the year to June 2017. The improvement in performance reflects the recovery in the mining sector, which grew by 5.6 percent compared to a contraction of 10 percent in the previous year.


Growth in non-mining GDP moderated to 4.3 percent in the year to June 2018, from 5 percent in 2017. GDP growth is projected to improve in the short to medium term, driven largely by performance of the Services sectors and recovery in mining activity, in line with positive global economic prospects. Furthermore, the projected accommodative monetary conditions in the domestic economy and increase in government expenditure are expected to support growth of economic activity in the non-mining sectors.


 “Overall, it is anticipated that the economy will operate close to, but below full capacity in the medium term, thus posing no upside risk to the inflation outlook.” Global output growth is projected at 3.7 percent in 2018 and 2019, the same as in 2017. Protectionist trade policies, potential build-up of financial vulnerabilities induced by easy financial conditions and geopolitical tensions could negatively affect the medium-term prospects.


Regionally, economic prospects in South Africa are expected to remain subdued in the short term with growth of 0.6 percent in 2018 and 1.9 percent in 2019. Pelaelo noted that the current state of the economy and the outlook for both domestic and external economic activity suggest that the prevailing monetary policy stance is consistent with maintaining inflation within the objective range of 3 – 6 percent in the medium term.


Consequently, the MPC decided to retain the Bank Rate at 5 percent. This signals that consumers will continue with unchanged fees for serving existing bank loans while banks will remain with their existing operating margins. The Monetary Policy Committee meets on a recurring interval of about two months to decide on any movements of the bank rate, basing its decision on the local inflation and other macro-economic factors as well as global economic outlook and key commodities trends like oil prices. The bank rate underpins all other interest rates within the market and any adjustment to it affects indicators such as the prime rate, the deposit rate and others

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