Inflationary pressures continue to build up in the economy as reflected by the March inflation rate which rose unexpectedly to 7.6% y/y from 7.5% y/y in February, according to data released by Statistics Botswana. On a monthly basis inflation stood at 0.6% m/m in March, up from 0.2% m/m in February.  The April inflation rate is widely expected to come out even higher given the 10% average increase in electricity tariffs which was effected beginning 01 April by Botswana Power Corporation.

Contributing to the March inflation numbers were increases in the ‘alcoholic beverages, tobacco & narcotics’ group, the ‘transport’ group and ‘housing’ group. It is encouraging to note that food prices appear to be somewhat stable and this increases prospects for inflation to fall further during the year.

Source: Statistics Botswana, Motswedi Securities

The change in the exchange rate policy will also absorb some of the impact of imported inflation.  However, our worry is that this might be short lived given the increase in grain prices on the international market mainly due to last year’s draught in the US, which is believed to be the worst in half a century.

The US remains a key source of surplus grain and leads the world in agriculture commodity exports, hence last years draught triggered alarm at the UN Food and Agriculture Organization and in the World Bank as policy makers raised concerns over price volatility and the possibility of panic buying.

Meanwhile, more increases in fuel prices (which is likely) before the end of this year will also slow down the decline of the country’s inflation and delay inflation reaching the 3%-6% Bank of Botswana objective range.  We have revised upwards our inflation forecast and we now expect inflation to reach the Bank of Botswana target range during Q3 2013 before closing the year at 5.1% y/y. (Motswedi Securities)