One-sided match against inflation reaches injury time
Mbongeni Mguni | Monday June 27, 2022 06:00
How high will inflation rise?
The answer depends on who you ask. At Kgori Capital, analysts expect that inflation will average 11.3% this year, a figure which if realised would be the highest average since 2008.
Researchers at First National Bank Botswana expect inflation to average 12% this year.
The Bank of Botswana, whose monetary policy mandate includes price stability, is only prepared to say inflation is expected to come in above 12% for June. The central bank’s hesitance to reveal exactly where inflation could peak at, is due to the need to avoid further fuelling “inflation expectations”.
Expectations of higher inflation are themselves inflationary, the BoB says, as seen when wage demands by unions rise higher because workers expect the prices of goods and services to soar.
“With inflation rising, there could be expectations of inflation continuing to rise meaning that businesses price this into their products and services, leading to higher inflation,” deputy governor, Tshokologo Kganetsano told Mmegi at a recent briefing.
The other reason for the reluctance is because the major driver of inflation at the moment, runaway fuel prices, has become volatile, making accurate forecasts difficult.
“I don’t want to give a specific number and say how high it will get before then because there is so much volatility and prices of food and fuel are going up all the time,” the BoB’s Research and Financial Stability director, Lesedi Senatla told Mmegi at the same briefing.
The volatility is seen in the rapid revisions the BoB has been making concerning when it expects inflation to return to the three to six percent range, the targetted band of price stability the central bank says is healthy for the economy.
In February, the BoB expected inflation to return to the target range by the third quarter of this year and in April, shifted this forecast to the first quarter of 2023. In its last update on June 16, the BoB moved the forecast to the third quarter of 2023.
Kgori Capital analysts have faced similar pressures to adjust their forecasts. The asset management and research consultancy began the year with a forecast of inflation averaging 6.6% for the year, then revised this to 8.2%, before unveiling its forecast of 11.3% last week.
Russia’s invasion of Ukraine on February 24 has been the underlying factor behind the galloping fuel prices and the consequent increases in inflation. Russian crude oil accounts for about five percent of the world’s demand while the country is also a major supplier of refined oils such as diesel and jet fuel. As sanctions landed on Moscow, there was an almost immediate impact on the global supply chain, with a disruption of supplies to major refineries and consumer end markets in Africa.
As the supply and transportation disruptions began, refineries and crude oil producers shifted their supply to markets that could pay the most. Most of the African market has regulated fuel prices and the continent’s pump prices could not keep up with the increases. The continent found itself paying increasingly more, with costs also driven up by the alternative routes suppliers had to take to adhere to the sanctions against Moscow.
As explained by Puma Energy Head of Africa, Fadi Mitri, this week, the invasion has had a disproportionate impact on oil prices in Africa, due to existing vulnerabilities on the continent.
“Energy importing African countries have historically relied on trade flows either directly or indirectly from Russia or from the Middle East,” he told a roundtable with local editors on Wednesday.
“West Africa for example, imports 24% of its diesel and 90% of residual oil from Russia – be it directly or indirectly. The rest of Africa relies mainly on flows from the Middle East.
“Those flows are becoming more and more constrained, if not unavailable, as refiners direct flows to Europe where they can secure more attractive prices.
“As a result of these shifting trade flows, demand for longer distance shipping and logistics is increasing, resulting in considerably greater transit time and cost.”
Mitri says in Botswana, where Puma Energy has the largest share of oil imports, the situation is further complicated by the country’s unique fundamentals, all of which point to pressure on fuel prices going forward.
“Botswana energy supplies are exposed to the international energy crisis, regional changes in supply patterns which are around the decreasing refinery capacity in South Africa and the domestic National Petroleum Fund slate deficit,” he explained.
“There is an outstanding slate, which is intended to be a balancing mechanisms to help cushion fuel prices.
“However with rising prices the slate has grown to an unsustainable level.”
Previously, officials at the Botswana Energy Regulatory Authority told Mmegi that the slate, which is a formula used to calculate pump prices, has been in a state of under-recovery for an extended period. In effect, pump prices at the moment are lower than the costs oil companies are paying to bring fuel into the country, despite the seven increases made by BERA since January 2021.
For April, the under-recovery for unleaded 93 was about P1.52, for unleaded 95 P1.55, for diesel P3.36 and for illuminating paraffin P4.70 and the gap has been increasing since then. The National Petroleum Fund, which uses the fuel levy to fund the under-recovery, has been running on fumes for a prolonged period, pushing government’s arrears to the companies supplying fuel into the hundreds of millions of Pula.
Government is believed to be shifting resources around to keep its arrears to the oil companies from spiralling, but the pressure caused by runaway global oil prices means the gap between actual costs and the pump prices is widening every day.
Energy industry analysts expect that sooner, rather than later, government will have to announce another shock fuel price increase, further fuelling inflation and weighing on the prices of other goods and services in the local economy.
“Given its weighting in the Consumer Price Index basket, the transport index will continue to exert the largest pressure on headline inflation, with local fuel prices ticking up in response to higher international oil prices, as a result of heightened global geopolitical tensions,” says First National Bank Botswana economist, Gomolemo Basele.
The situation suggests that the different analysts and researchers will have to continue making upward revisions to their inflation forecast, at least in the short term.
“That’s how unfortunate the situation is with regards to inflation,” said the BoB’s Senatla.
“It will come down but not before it does the damage it is doing.”