VAT will push inflation out of range 'til 2011-BoB

Brian Benza
Staff Writer | Thursday February 25, 2010 00:00

VAT will increase from 10 percent to 12 percent in April as announced in the national budget for 2010/11 recently.A statement released by BoB PRO Chepete Chepete yesterday says the Monetary Policy Committee (MPC) anticipates that following a short-term spike resulting from the impact of the increase in VAT, inflation will fall within the 3 to 6 percent objective range only in 2011.

Inflation, which registered a remarkable decrease in 2009 that led BoB to cut the Bank Rate by five percentage points during the year, has been on the increase in the past two months, settling at 6.1 percent in January.

The rise in inflation last month mainly reflects the continuing impact of base effects arising from fuel price reductions in the second half of 2008 and early 2009.

But despite the recent upward movement in the inflation rate, the MPC says it has decided to maintain the Bank Rate at 10 percent as the current state of the economy and the assumptions on both the domestic and external economic outlook, as well as the inflation forecast, suggest that maintaining the prevailing interest rates is consistent with the achievement of BoB's 3 to 6 percent inflation objective in the medium term.BoB says in the short-term, inflation is projected to rise as influenced by, among others, the faster quarterly price increases due to South African price developments, base effects related to fuel price changes, as well as the increase in VAT.

'In the medium-term, inflation  is  expected  to  be  within  the  objective  range  on  a  sustained  basis  by  the  first  quarter  of  2011,' says the statement.

'The  risks  to  this  outlook  include  any  substantial  upward  adjustment  in  administered  prices  and  government  levies  as  anticipated  in  the  revenue  projections  announced  in  the  2010  Budget  Speech. 

'Moreover,  there  is  a  risk  that  any  accelerated  world  economic  recovery  may  lead  to  a  rise  in  oil  prices.  It is  anticipated  that  the  pula  exchange  rate  will  be  largely  stable  with  minimal  effect  on  domestic  price  developments.'

The inflation outlook in the short-term could be further worsened  by the anticipated increase in power tariffs as announced by government  officials last week.

Describing the BPC as 'broke,' the Permanent Secretary in the Ministry of Minerals, Energy and Water Resources, Gabaake Gabaake,  last week said a possible tariff increase for the BPC was being discussed in the Office of the President.

Commenting on the real economy, the central bank says indications are that the  decline  in  overall  output  will  continue  in  the  short-term  and  remain  below  trend  while  recovering  in  the  medium-term.

'The decline in output is projected to continue into the first quarter of 2010 and GDP will remain below trend in the medium-term,' says BoB. 'In addition to the slow recovery of world demand for major exports, domestic economic activity  will be lower due to reduced government spending.'