Economic think tank Econsult has highlighted the impact of maintaining artificially low inflation through subsidies, emphasising the burden it places on the government. Founded by respected economist Dr. Keith Jefferis, the company noted that administered or regulated prices, such as those for petrol and electricity, continue to fall below the cost of supply or production costs. This situation necessitates substantial subsidies that keep prices artificially low.
Jefferis stated in his Q1 2024 report that the regulated price of electricity is significantly below the cost of production, and it is exceptionally low compared to international standards. This situation necessitates substantial tariff subsidies to Botswana Power Corporation (BPC) from the budget.
According to Econsult, the total electricity consumed in 2023 increased by 11.0 percent to 4,736 GWh, up from 4,265 GWh in 2022. The decrease in the generation of own power is attributed to operational challenges at Morupule B power station during the year. Interestingly, Jefferis noted that the increase in overall electricity consumption surpassed the rate of real economic growth. Real gross domestic product (GDP) grew by 2.7 percent in 2023, compared to 5.5 percent in 2022. The slowdown was mainly due to subdued mining activity.
Although the cost of the Botswana Power Corporation (BPC) subsidy for the 2024/25 financial year is not explicitly stated in the budget documents, Econsult indicated that it is estimated to be around P1.5 billion for the year. This funding is expected to be covered by government borrowing.
Minister of Finance, Peggy Serame recently requested an extension of a government guarantee of P1.722 billion to BPC, indicating that it has been facing acute financial challenges and continues to depend on government financial support of varying types.
The funds will go towards paying overdue balances of up to P1 billion with major suppliers, procuring spare parts for Morupule B 600 Megawatts (MW) power station amounting to P475 million and funding for the power station at P247 million.
According to Serame, BPC has reached out to local financial institutions, including state-owned ones like the National Development Bank, Botswana Savings Bank, Botswana Development Corporation, and Botswana Building Society. Additionally, BPC approached the Botswana Public Officers Pension Fund (BPOPF) for a potential financing facility. However, nearly all of the financiers approached have requested a Government Guarantee.
The approval of the request will allow BPC to fulfill its debt service obligations in the interim while also progressing towards securing new-generation capacity by the end of 2026. This capacity includes 300 MW of base load from the Jindal project and solar photovoltaic generation amounting to 235 MW. These new sources of supply are anticipated to alleviate BPC’s reliance on high-cost electricity imports and emergency diesel generation, which are currently the alternative options in place.
Serame informed Parliament that the debt-ridden utility parastatal had previously received P700 million in July 2023 as part of the supplementary budget. This funding was allocated to support BPC in meeting its obligations related to ongoing projects and the repayment of existing Government-guaranteed loans from the Industrial and Commercial Bank of China (ICBC) and the Nordic Development Fund (NDF).
As of March 31, 2023, Serame indicated that BPC had outstanding loan balances of $316.67 million with ICBC and EUR1.82 million with NDF, resulting in a total outstanding balance of P4.16 billion. This figure includes amounts owed to Morupule Coal Mine, which amounted to P634.5 million as of January 31, 2024, excluding late interest payments charged by Morupule Coal Mine.
The requested government guarantee would maintain the country’s public debt exposure within the statutory limit of 40 percent of Gross Domestic Product (GDP). Serame stated that the total public debt, including guarantees, stands at 20.59 percent of GDP, which falls within the legal limit of 40 percent of GDP. This comprises external debt (including guaranteed external debt) to GDP of 9.54 percent and domestic debt (including guaranteed domestic debt) at 11.05 percent of GDP.
Econsult also found that the domestic price of petrol has lagged rising global fuel prices, requiring subsidies from the National Petroleum Fund (NPF). The government reportedly paid over P1 billion to petroleum companies in the last 24 months. The government has also previously diverted funds from other levies to foot the debt owed to petrol companies when NPF could not cushion consumers. When oil prices rise ahead of local pump prices, the government ought to compensate fuel companies for the loss of margins, in line with the current mechanism.
Fuel prices undergo a cabinet approval process before being implemented, a practice criticised by industry players as being at odds with fair market principles. Although Botswana Energy Regulatory Authority (BERA) conducts monthly price reviews, the adjustment process experiences delays. While fuel consumers inevitably bear
the brunt of price increases, they do so with a time lag and at a cost to government. Former BERA CEO Rose Seretse previously said there is always a consideration for the consumer before an increase in prices.
In a move aimed at recalibrating dynamics of local fuel pricing, the BERA recently launched a comprehensive review of the current pricing mechanism for fuel pumps across the country. While details remain sketchy, petroleum companies hope the new mechanism will match the changes in international benchmark prices.
Global oil prices rose steadily throughout the first quarter of 2024, although they have now stabilised somewhat despite ongoing disruptions to supply routes. Going forward, Econsult expects fuel prices to generate an increase in inflation rather than a decrease, due to higher global prices and increased local tax (the NPF levy), with a price rise already implemented in April and another likely in May.
Jefferis previously highlighted the primary risk of war lies in oil prices. The Bank of Botswana (BoB) also said it is alive to the spillover effects.
Gomolemo Basele, FNBB Economist warned that sanctions imposed by the US on Iran, in support of Israel, could limit Iran’s potential to export oil and affect global energy prices. Basele mentioned that if tensions were to continue escalating, Iran could also disrupt the flow of trade through the Strait of Hormuz, potentially leading to increased global inflation and limiting growth prospects. As a result, he stated that a significant portion of the world’s liquefied gas and oil in transit through the strait would be at risk of seizure by Iran.
The impact of oil prices on local prices is that if local prices lag, government coffers will be strained. However, if the government decides to increase prices to reflect external factors this will have implications for inflation as transport has the highest weight on the basket.
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Econsult revealed a notable fall in inflation and interest rates to 2.9 percent in March 2024. This has been largely driven by the stabilisation of fuel prices, as well as declining global and regional
inflation rates, and hence is in line with broader trends. Inflation is just below the bottom end of the BoB’s three to six percent inflation objective range and in line with broader trends.
Econsult noted that it is encouraging that inflation has been coming in consistently below forecasts in recent months. But while an uptick in inflation is expected through the rest of 2024, it says it should remain within the central bank’s range. Econsult underscores that while the stabilisation of fuel prices and declining global and regional inflation rates contributed to the overall moderation in inflation, domestic pressures persist.
One concern aired by Jefferis is that the main inflationary pressures are now being generated domestically, with inflation for domestic tradeables (which are mostly commodities with broadly market-determined prices, rather than regulated prices) at 4.3 percent in March, meaning that there are mainly domestic (rather than external) inflationary pressures.
The central bank forecast at 2.3 percent for April 2024. The MPC projects that inflation
will remain below the lower bound of the objective range temporarily and revert to within the objective range from the third quarter of 2024 into the medium term, averaging 3.2 percent in 2024 and 5 percent in 2025. The projected low inflation is due to, among others, base effects related to the reversal of value added tax from 12 percent to 14 percent in 2023, subdued domestic demand and the downward revision in recent forecasts of international food prices.
The Bank of Botswana projects that inflation may be exacerbated by potential upward adjustments in prices controlled by the government (administered prices), which are not factored into its current projections.eC
