VAT Pushes Inflation Up

Brian Benza
Staff Writer | Monday May 17, 2010 00:00

 

In a bid to plug a hole in the budget after revenue dropped sharply during last year's economic downturn, government lifted VAT to 12 percent from 10 percent from April.

 'All the group indices showed increases between March and April mainly due to the revision of the value added tax,' the CSO said in a statement.

A leap in CPI was largely expected, with analysts last month predicting inflation could climb as much as two percentage points over the next few months, in part also due to higher electricity prices.

Government, effective May 1, increased power tariffs by an average 30 percent in a bid to raise cash resources for the financially -strained national power utility.

 However, despite the increase in inflation, economist Dr Keith Jefferis does not see the central bank raising interest rates.In a recent interview with Business Monitor, Jefferis said Bank of Botswana's neutral monetary policy will try and accommodate the expected inflation jump as much as possible as the economy tries to recover.

' I do not see any major hike in the bank rate because although the bank has acknowledged the expected inflationary pressures in the short term, it noted that these would be offset to some extent by slower economic growth and reduced demand pressures as a result of declining household income and the slower growth of government spending,' he said. In the 2010 Monetary Policy statement released in February, the Bank of Botswana had forecast the VAT increase to add 1.7 percentage points to inflation from April.

Inflation, which registered a remarkable decrease from a peak of 15.1 percent year-on-year in August 2008 to 5.0 percent in November last year leading BoB to cut the Bank Rate by five percentage points during the year, increased in the first two months of the year but settled at 6 percent in March.

'In the medium-term inflation is expected to be within the objective range on a sustained basis by the first quarter of 2011. '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 effects on domestic price developments,' said the central bank in a statement.

The bank left its main lending rate steady at 10 percent in February, saying longer-term inflation was under control while economic growth remained weak.