Import substitution policies fuel food inflation

• Food prices weigh on domestic demand
• Rising oil, gas prices drive cost of fertilizer
• Households exposed to changes price of staple cereals

• Food inflation is expected to be robust

Oil prices have risen by 35 percent year-to-date against the background of Russia’s invasion of Ukraine, according to Kgori Capital, a local fund management company. Russia is a key player in the oil industry and its actions have triggered a surge in energy prices.

Leading bank FNBB has also warned that local utility and rental prices are expected to be revised up due to reduced subventions from the government to major parastatals. “Botswana Housing Corporation’s (BHC) rental prices are expected to be revised upwards due to reduced subventions from the government to major parastatals,” the bank says. “These factors, together with our expectation for local food prices to continue to tick up because of import substitution policies, results in our expectation for inflation to average 7.1 percent in 2022.”

According to finance minister Peggy Serame, approved subventions to SOEs from the Recurrent Budget for the current 2021/2022 financial year amount to P4.08 billion or 2.05 percent of projected GDP. The proposed provision for the next financial year is marginally lower at P4.02 billion, which is 1.85 percent of GDP. “Subventions will be further reduced in the coming years, through a combination of requiring commercial SOEs to cover their own costs, improved efficiencies across the SOE sector, and SOE rationalisation,” the minister said in her budget speech.

As a result of these factors and higher local food prices because of import substitution policies currently in effect, FNBB expects inflation to remain elevated compared to last year. Kgori Capital adds: “We expects inflation to steadily decline in 2022 due to base effects but remain above the BoB’s objective range, (of 3-6 percent).” The fund manager expects inflation to fall within the objective range in Q1 2023. The main upside risk to Kgori’s forecast is Transport inflation as global oil prices have continued to rise.

Geopolitical tensions have added pressure to agricultural products. Available statistics show that Ukraine accounted for 40 percent of global exports of sunflower oil in 2020, while Russia accounted for 18 percent. eNCA recently reported that supply pressures will also have an impact on the availability of the product and that the conflict between Russia and Ukraine is contributing to already ballooning price of sunflower oil in South Africa. Botswana imports mostly from South Africa, hence price changes have been observed in most retailers selling cooking oil locally.

In addition, milling company Bolux Group recently reviewed pricing structures which will take effect on 4 April. Ukraine and Russia combined contribute 33 percent of wheat exports and between 20 percent and 25 percent of maize exports, the group wrote. “We are officially in a global crisis last witnessed in the 2008 financial crisis. SAFEX prices have been on the rise since January, but since the invasion maize prices have increased by 12 percent and what prices by 18 percent and is continuing to increase on a daily basis without the end in sight.”

Bolux increased maize by 17 percent, instant porridge by 5 percent, Chobe special maize meal, Chobe maize rice and Chobe samp by 15.5 percent. Further, wheat increased by 16 percent, pasta by 7 percent, bread by 10 percent and confectionary by 5 percent. Under these circumstances, Bolux warned consumers to expect monthly price increases.

Headline inflation dipped by 0.6 percentage points (ppt) in March, registering 10.0 percent year-on-year (from 10.6 percent y/y in February). Despite the deceleration, FNBB says risks to the headline figure remain tilted to the upside, with the main contributors remaining Transport, which accounted for 5.4ppt, Housing and Utilities at 1.3ppt, Food and Non-Alcoholic Beverages at +0.9ppt and Miscellaneous Goods and Services at +0.7ppt.
As a result of the Russia/Ukraine war, the Botswana Energy Regulatory Authority (BERA) adjusted local fuel prices upwards on 29 March 2022. Unleaded petrol 93 increased by P1.26, unleaded petrol 95 increased by P1.25, diesel 50ppm increased by P1.49, and illuminating paraffin by P1.74.

In its April Economic outlook, the IMF warned that war is likely to have a protracted impact on commodity prices, affecting oil and gas prices more severely in 2022 and food prices well into 2023 (because of the lagged impact from the harvest in 2022). For 2022, IMF projects that inflation at 5.7 percent in advanced economies and 8.7 percent in emerging market and developing economies—1.8 and 2.8 percentage points higher than in the January World Economic Outlook.

In most emerging market and developing economies IMF says rising food prices also played a significant role, as poor weather hit harvests and rising oil and gas prices drove up the cost of fertilizer. “Higher prices for international food commodities impact countries differently depending on the food share of households’ consumption baskets and the types of foods consumed,” IMF says noting that households in low-income countries are particularly exposed to changes in the price of staple cereals, with diets often concentrated in just one type of grain.

“Low-income countries where wheat, corn, and sorghum are a large part of the diet (especially in sub-Saharan Africa) have seen inflation almost wholly driven by rising food prices,” IMF says adding that “higher food prices will hurt consumers’ purchasing power—particularly among low-income households—and weigh on domestic demand”. IMF says food inflation is expected to be robust (about 14 percent) in 2022, before declining modestly in 2023.