Inflation spike rattles business confidence

Going up: Inflation is expected to breach the six percent level soon
Going up: Inflation is expected to breach the six percent level soon

Local companies expect cost pressures to rise ‘substantially’ in the second quarter of the year, due to the increase in inflation, which in turn is driven by factors such as the increase in Value Added Tax and others.

The Bank of Botswana’s (BoB) latest business confidence survey covering the first quarter of the year shows that firms are concerned that input costs will rise in the second quarter in line with an uptick in inflation.

The central bank recently said it expected inflation to ‘possibly’ breach the upper bound of the three to six percent medium-term target within the second quarter of the year. Data released by the BoB recently shows inflation reaching as high as 6.5 percent by September 2021.

Local inflation has trended below the three to six percent target range since September 2019, dipping to an all-time record of 0.9 percent in June and July last year, due largely to low domestic demand.

The BoB now expects inflation to rise above six percent by mid-year. “Overall, firms expect cost pressures to rise substantially in the second quarter of 2021, mainly attributable to the expected increase in all input costs in line with the expected increase in inflation, following the recent upward adjustment in some tax rates such as VAT and withholding tax on dividends to residents, increase in the fuel levy, as well as the introduction of a levy on sugar-sweetened beverages effected in April 2021,” the central bank said in its survey. The bank added: “Firms’ expectations about domestic inflation have generally been on a downward trend since 2013 and within the Bank’s inflation objective range of three to six percent effective 2014.”

Despite their concerns about cost pressures, local firms generally expect inflation to be stable and remain within the three to six percent range within 2021 and 2022.

Local firms expect inflation to average 3.8 percent in 2021, while the central bank, in a separate report last week, said after breaching the six percent limit, inflation was expected to revert to within the target range in the first quarter of 2022.

Other factors driving higher inflation this year include a higher rate of depreciation of the pula against the rand, as well as the upward revision in forecasts for trading partner countries inflation and international commodity prices than previously projected.

Researchers at Stockbrokers Botswana noted that inflation had averaged 2.6 percent in the first quarter and described the recent increases in inflation as ‘significant’. Inflation increased from 2.3 percent in January to 3.2 percent in March. Meanwhile, besides cost pressures, COVID-19 restrictions remain at the top of local firms’ biggest concerns going forward.

According to the business confidence survey, this is particularly so for firms in the hotels, restaurants, transport and communications sectors.

“Difficulty in accessing financing was the second most commonly cited impediment to doing business, especially by firms in the financing and business services sector,” the BoB said.

“Furthermore, unavailability of skilled labour was also considered a challenge to doing business in Botswana, particularly by firms in the construction and mining sectors, reflecting reported difficulties experienced in recruiting foreign skilled labour.

“Lastly, weak domestic demand was cited as a challenge to doing business in Botswana, due to perceived slow growth in household disposable incomes following COVID-19 containment measures.” Firms, however, did highlight the local political climate and availability of water as supportive factors to doing business in the country.

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