[2007-12-24]  Soaring food prices push inflation up
For the second successive month, the annual inflation rate rose by 0.4 percentage points to 7.7 percent in November from October's figure of 7.3 percent.

This means prices of a general basket of goods and commodities have risen by an average of 7.7 percent from November 2006 to November 2007. The increase in November has all but thrown away any hopes that the Bank of Botswana had of achieving its 2007 annual inflation rate objective of between 4 percent and 7 percent as there is no more room for a downswing in the month of December due to persistent food price induced inflationary pressures.

In a statement, the central bank said the widening gap between the inflation rate and the upper limit of its inflation objective for 2007 of 4-7 percent was due principally to rising food prices.

"While between October and November, the annual rate of food price increases accelerated from 12.9 to 14.9 percent, in most other commodity groups inflation was broadly stable or in decline.

"For clothing and footwear (-2.7 percent), communications (-7.1 percent) and recreation and culture (-1.7 percent), inflation was negative," the bank said.

With further food price increases anticipated on the international market due to food shortages, the bank will be expected to adopt a wider inflation objective going into the new year. The International Food Policy Research Institute this month reported that the world is eating more than it produces and that food prices may climb for years because of expansion of farming for fuel and climate change, risking social unrest. The report added that biofuel expansions alone could push maize prices up more than two-thirds by 2020 and increase oilseed costs by about half, with subsidies for the industry effectively constituting a tax on the poor.

What could put Botswana inflation battle in a more precarious position is that it imports about 90 percent of its food requirements from South Africa, a country that has already been hit by the same problem.

Food inflation, which contributes a significant chunk to the overall index, is directly related to developments in the South African markets where prices have been firming sharply.

On the other front, the exchange rate regime currently being effected by the Bank of Botswana where the local currency is losing ground might mean an even more bloated import bill, which is inflationary. For the month of November on an annual basis, the pula has lost 2.8 percent of its value against the rand.

The bank also reported that by tradeability, November inflation was 9.1 percent for tradeable goods and services, up by 0.7 percent from 8.4 percent in October. However, non-tradeables inflation declined slightly, by 0.2 percent, from 4.9 percent to 4.7 percent.

"The trimmed mean measure of core inflation was 7.7 percent, a 0.4 percent increase from 7.3 percent in October. Excluding administered prices, inflation rose marginally, by 0.1 percent, to 7.1 percent," the bank said. Looking ahead, the bank, as announced in the midterm monetary policy review statement, expects inflationary pressures to continue to modestly rise due to a wide range of domestic factors, which include food prices because of drought, oil prices and the adjustment of health services fees. In its inflation forecast for the second half of the year, the bank also factored in the lagged effects of past sharp increases in prices in South Africa. The continued depreciation of the local currency against the pula will also not help matters as this translates to an ever-increasing import bill in pula terms. "The other upside risk to inflation includes a possible further increase in fuel and other administered prices. In particular, the increase in the cost of fuel and government health services in July and September will initially contribute 1.4 percentage points directly to inflation in the third quarter, while there is a likelihood of an increase in water tariffs associated with drought," said the bank.

Another development likely to exert more inflationary pressures on the economy is a possible power tariff hike emanating from Eskom's proposed tariffs' increase. This week the National Energy Regulator of South Africa was expected to say whether it has approved a request from power utility Eskom for double-digit tariff hikes over the next couple of years, to fund its expansion.

The Botswana Power Corporation is likely to pass the cost to the consumer if Eskom , from which it imports a significant amount of power, gets approval to increase tariffs.



Source: © Mmegi, Since 2002