INFLATION REPORT
ISSUE 001 | DECEMBER 2011
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Chart 1: Overall Inflation and Repo Rate
Source: Bank of Botswana

Over the past seven years, inflation has predominantly remained outside the three to six percent
target set by the Bank of Botswana, ranging from 5.0 percent in November 2009 to 15.1 percent in
August 2008, and is currently at 9.2 percent (year on year).

The increase in inflation to 14.2 percent in April 2006, from a level of 6.2 percent in the previous
year shows the continuous effects of a sudden 12 percent devaluation of the Pula after the adoption
of a crawling band exchange rate mechanism in May 2005.

The weakened currency effectively raised the price of imports making them more expensive and
thus driving up overall inflation in country over this period.

After the rapid increase of the overall price level over this period, the deceleration following April
2006 was largely due to the stabilization of the Real Effective Exchange Rate which subsequently
resulted in gradual appreciation in the value of the currency.

Following the third quarter of 2007, inflation started a sharp increase from 6.8 percent in September
to 15.1 percent in August 2008. This was due to the worldwide increase in the price of oil, as well as
the weakening of the rand against the US dollar, and thus the Pula against the US dollar.

The subsequent fall in overall inflation from 15.0 percent in November 2008 to 5.0 percent in
November 2009 was a result of the recovery of the oil price coupled with a fall in the price and
demand for diamonds caused by the global recession. The subsequent loss in revenue from the
diamond industry meant that there was less money in circulation in the country which reduced
aggregate demand in the domestic economy.

A recovery in the global diamond demand resulted in increased “demand pull” inflation which
contributed to exerting upward pressure on the price level, raising it from 5.0 percent in November
2009 to its current level of 9.2 percent which is outside the Bank of Botswana’s medium term target
rate of three to six percent.

Over the past seven years, the repo rate has been maintained at a level between 14.0 percent and
15.5 percent up until the fourth quarter of 2008 after which the interest rate was lowered on 5
occasions, from a level 15 percent in January to 10 percent by December.

Since December 2009, the repo rate has remained largely unchanged with only a single 50 basis
point drop in December 2010. The interest rate currently stands at 9.5 percent
Chart 2: Food price inflation
Source: Bank of Botswana

Food price inflation is a major contributor to overall inflation as it carries a weighting of 22 percent
of the consumer basket, more than any other commodity.

The increase in overall inflationary pressure from the period of March 2007 to August 2008 can be
largely attributed to food price inflation which increased from 8.3 percent to 25.1 percent. The
ensuing deceleration too was a result of food price inflation as it decreased to 2.8 percent (year on
year) in March 2010.

Following this downturn, food inflation stabilized slightly, however remains on a slight upward trend
with a level of 8.4 percent in October 2011.
Chart 3: Transport Inflation
Source: Bank of Botswana

The annual rate of transport inflation increased significantly from 4.9 percent in September 2007 to
37.3 percent in July 2008. This is a direct result of the increase in the global price of oil as in the
corresponding period the price of Brent Crude oil increased from US$71 to US$120 per barrel.

By July 2009 the oil price had recovered to US$80 per barrel and the annual rate of transport
inflation corrected accordingly with a 19.3 percent decrease from the rate of the previous year.

Following the oil price recovery the annual rate of transport inflation has been within the range of 10
percent to 16 percent throughout 2010 and 2011 and is currently sitting at 13.4 percent (October
2011).
Chart 4: Alcohol and Tobacco, Furniture, Housing and Clothing
Source: Bank of Botswana
•
A levy imposed on alcohol and tobacco by the Botswana government in the fourth quarter of
2008 had the effect of artificially driving up inflation on these goods. The sudden fall in alcohol
and tobacco inflation does not represent a fall in prices but rather represents a fall of the year on
year change as a percentage.
•
Clothing and footwear inflation decreased to below zero in November 2007, but climbed again
to a level of just below 10 percent in the second quarter of 2011.
•
In mid 2008, housing inflation peaked at 10 percent and a year on year comparison shows the
figure to be below 5 percent in 2009.
•
Furniture inflation peaked above 10 percent in the second quarter of 2009 and maintained a
level below 10 percent towards the last part of 2011.
Chart 5: Food, Alcohol and Inflation
Source: Bank of Botswana
•
Despite the increase in alcohol and tobacco inflation following the introduction of a new sin tax
it failed to increase the level of overall inflation for a sustained period
•
Between November 2008 and October 2009 food inflation fell from 25.1 to 6.2 percent, while
alcohol inflation increased from 8.8 to 37.8 percent. The weightings of the two in the
consumption basket (22 and 9 percent respectively) mean that the increase in alcohol inflation
over this one year period was more than counteracted by falling food prices.
•
Over the same period transport inflation also decreased (refer to chart 2), further exerting
downward pressure on overall inflation.
Chart 6: Inflation in cities, urban villages and rural areas
Source: Bank of Botswana
•
The chart depicts an adjustment lag of inflation in urban villages and more so in rural areas
compared to that of the inflation rate in towns and cities indicating that inflation is realized at a
later stage in areas further away from cities.
•
This is clearly evident when observing periods of decreasing year on year rates of inflation such
as the second quarter of 2006 to 2007 as well as the latter stages of 2008 /2009.
•
Current rates of inflation for all areas are on an upward trend as rural areas are experiencing a
lower level of inflation at 8.1 percent in October 2011 whilst urban villages and cities are sitting
at 8.9 and 9 percent respectively.
Chart 7: Core monthly inflation
Source: Bank of Botswana
•
Throughout the year of 2007 and the first three quarters of 2008, both measures of core
monthly inflation (excluding food and fuel) lay below the official inflation rate.
•
After the global oil price began to recede in the 3rd quarter of 2008, both core monthly inflation
and the overall inflation rate began to decrease while core monthly inflation excluding
administered prices continued to rise, peaking at 16.4 percent in January 2009 before decreasing
to within the inflation target just below 6 percent in January 2010.
•
Falling core inflation in 2008/2009 indicates a weakening of internal demand pull inflation
factors.
•
From 2010 until present core monthly inflation has kept at a level below that of the official rate,
indicating that the main drivers for overall inflation at present are food and fuel price shocks.
Global inflationary pressures are a significant determinant of inflation in Botswana. The current rate of inflation is on
an upward trend and is almost solely driven by cost push factors such as fuel and food shocks. Transport and food
carry a combined weighting of over 40 percent of the consumption basket and as core inflation has not shown a
major trend increase these will continue to be the main drivers of inflation. As fuel prices are likely to persist at
elevated levels the inflation rate is expected to remain above the Bank of Botswana’s medium term objective of
three to six percent. The Central Bank however remains optimistic as to a return to the target band within the
medium term.
The countries dependence on the diamond industry may pose problems for the price stability in Botswana. As seen
during the global recession, when the demand for diamonds dropped, a loss of revenue from the country’s largest
industry meant less money in circulation and reduced demand at a domestic level. It is only under these
circumstances, where inflation is effected by demand pull factors, that monetary policy measures can be used as
they were throughout 2008 and 2009 marked by a 5 percent drop in interest rates.
The rationale behind Bank of Botswana’s neutral monetary policy stance on interest rates is that the country’s high
inflation rates stem from global forces that are beyond the control of authorities. Furthermore Botswana imports
most of their inflation from their trading partners, in particular South Africa, on whom they are currently dependant
on for food and energy. What’s more, with growth remaining fragile, the Bank will continue to attempt to encourage
growth though low interest rates until inflation becomes unacceptably high.