allAfrica.com: Botswana: Tough Times Not Yet Over (Page 1 of 1)

Despite consumer relief after interest rates were left on hold and a recent decline in fuel prices, tough times are still expected to remain until next year, according to analysts.

Botswana's consumer inflation quickened to 15 percent in July from 14.5 percent in June, largely on higher transport costs, and if Government goes ahead with the proposed 70 percent levy on alcohol, it could add up to 5-6 percent on inflation.

"The recent decline in fuel prices and the decision by the central bank to leave interest rates on hold is a positive step, but it is too premature to conclude that inflationary pressures are over," said Garry Juma of Motswedi Securities.

The decline in local fuel prices by 50thebe was in tandem with the fall in international fuel prices from a high of US$147 per barrel on July 11 to the current levels of around US$110 per barrel due to a firmer US dollar and a decline in global fuel demand.

Despite the bleak short-term outlook aggravated by steep energy and food prices, Juma said the decline in fuel prices would provide much relief to consumers and will dampen inflationary pressures in the short-term.

"If international fuel prices remain weaker in the next two to three months, we expect further reductions in local fuel prices and inflation will certainly come down, assuming food prices also remain stable," he said.

"We expect the August inflation rate to rise, but at a decreasing rate."

But Juma also cautioned that the decline in international fuel prices might just be temporally, without a corresponding increase in fuel supply. Food prices have been relatively stable in the past few weeks.

The situation could get much worse if Governemnt goes ahead with the proposed 70 percent levy on alcohol, which analysts project could add up to 5 to 7 percent on on the already soaring inflation.

Economist Dr Keith Jefferis said at the presentation of BIHL results that the impact of the levy is not yet clear.

"Depending on how the levy is implemented, it could add to inflationary preasures."

He said the increase on inflationary pressures is projected between 5 to 7 percent, but this will be a once-off increase.

He said the rising inflation and higher food and fuel prices possess poverty alleviation challenges, hence the poor are more affected.

The central bank said last month inflation was expected to accelerate in the short-term, peaking in early 2009 before easing towards the 3 to 6 percent target.

It has trended higher since October 2007, driven by food and fuel costs.

The July jump was mainly the result of higher rates of increase in the cost of several categories of goods and services including Transport, Food & Non-alcoholic Beverages, Furnishing, Household Equipment & Routine maintenance and health.

Transport inflation was up at 37.4 percent year-on-year compared with 35.6 percent in June.

The central bank left its bank rate unchanged at 15.5 percent last week, saying it was sufficient to contain second-round inflationary effects.

This usually puts the central bank in a difficult position as it needs to balance demands of reducing inflation while supporting economic growth.

Jefferis said inflation is set to peak in the next three months, but will then fall rapidly if international food and fuel prices stop rising.

Inflation is expected to reach the single digits (<10 percent) by mid-2009.

Meanwhile, Jefferis said Botswana is vulnerable to the slowdown in the US owing to the country's export-dependent economy. The US is the largest market for Botswana's major export diamonds

Jefferis said Botswana had a weak export growth in the first part of 2008.

Textiles, meat and minerals all performed poorly. Only miscellaneous manufacturers showed positive growth.

There was strong import growth in the first part of 2008 - total up 41 percent. Fuel imports were up by 66 percent as Botswana currently spends approxiately P11 billion a month on fuel.

"Rising imports and slower export growth have wiped out positive trade balance in six months to May 2008. There is no immediate problems from worsening balance of trade

because we have an import cover for approximately 24 months," Jefferis said.

The former Bank of Botswana Deputy Governor said setbacks on mining projects (Activox, Mmamabula, AK6) would add to negative points that will gradually weigh down on growth.

He said export uncertainty emanating from American recession, power constraints, higher inflation, reduced spending power and rising interest rates could see growth slow sharply from the current level of around 8 percent.

However the rising government spending could offset the negative points. Jefferis said 2009 should be better for inflation and interest rates.

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