Diversification has been a watchword for African economies, but what are they actually doing about it? The 2014 oil price drop was felt by many African economies, which discovered that they were over-reliant on natural resources. The need to avoid a repeat and to find more revenue streams to support industrialization has made diversification a critical objective of these governments.
‘’Historically most African countries have relied on monoculture or at least export of primary products and natural resources’’ says Andrew Skipper, head of Hogans Lovells in this recent report. ‘’The challenge is many countries is to build infrastructure and get power in place for them to implement their universally acclaimed aspirations’’ It is a process that has already begun. Skipper notes that in May 2018, oil-producing Nigeria’s other industries accounted for 91% of its GDP, led by agriculture, and agribusiness is one of the main sectors of interest for countries looking to expand their range, along with entertainment, tourism, education, health and fintech.
The limiting factor is scale, he explains ‘’Most individuals countries in Africa, with obvious exceptions, are too small to establish enough scale to diversify to any great extent’’ The signing of the African Continental Free Trade Agreement AfCFTA in 2018 in part intended ‘’to provide sufficient scale from intra-Africa trade to encourage diversification’’ says Skipper. ‘’By driving official intra-African trade from its current low base of around 15% to something even approaching the European Union’s 67% this should lead to diversification.
Interest in the education and healthcare sectors are linked due to interest from universities in the United States and elsewhere, says Washington, DC-based Hogan Lovells partner William Ferreira. ‘’This interest in Africa is much greater than simply the nuts and bolts of an education programme,’’ he says, identifying investment in ‘’treatment and care programmes, public health programmes-HIV and AIDS in particular, clinical trials- because these schools have medical schools- and capacity building programmes’’
That includes public or private sector investors funding the establishment of physical infrastructure, supply chains and providing specialist knowledge. The United States, with its large private education sector, has been a particular player in this regard, including distance education companies selling courses and software. Ferreira has seen particular activity in Nigeria and South Africa, with ‘’a tremendous amount of interest in Zambia’’ and it is a sector which he only expects to grow in the coming years, saying governments are beginning to see ‘’how important it is to have a vibrant education sector, because not only is that important for the vast numbers of youth across Africa, but it has been proved to be an economic engine across many other countries’’
He continues ‘’When there are strong vibrant universities, they have relationships into industry and they have relationships across borders, and there are economic opportunities that come from that’’ Few sectors have generated as much buzz over the past few years as fintech. There has been soaring interest in a wave of start-ups tackling a range of social and business problems, most notably providing banking to people who could not previously access it. Nigeria, Kenya, Uganda and Rwanda have led the way on this, followed by South Africa, and corporations including goggle and IBM are investing in the technology.
James Black, Hogan Lovells counsel in London, notes that with the market still dominated by start-ups, the capital in Africa does not yet match the 54 Billion US Dollars in the Americas or 34 billion US Dollars in Europe, according to a recent KPMG report, but ‘’give that a few years and there will be a huge amount of investment from investment banks, from retail banks and angel investors and the like’’
The other main area of interest has been in financial services for small and medium-sized enterprises, explains Amina Boshoff, a partner in Johannesburg, ‘’on boarding costs for banks have increased over the past decade. It has become more and more difficult for traditional financial institutions to finance small borrowers’’ this has created space for new technology-focused banks and alternative lenders to operate.
Professor Angela Itzikowitz, of the University of the Witwatersrand, says the arrival of the digital banks shows the demand for reduced costs and alternative approaches and that banks are now competing with mobile operators. ‘’while consumers do not have bank accounts, unbanked or under banked, they all have cell phones’’. This places a premium on interoperability, a big focus for mobile operators at the moment.
‘’some of the players are on a fairly robust acquisitive drive, acquiring fintechs, says Itzikowitz, highlighting Goldman Sachs’ investment in mobile banking company JUMO, which operates in many countries across Africa. ‘’coupling the fintech activity with the investment driver is the agency banking model, where banks are partnering with non-bank fintech companies and allowing the companies to conduct banking activity on the back of the bank’’
‘’South Africa is really well placed to get a lot of that investment directed towards it’’, says Black, pointing out that it is English-speaking and has a ‘’focus on rule of law and a well-established legal system as well as a fairly stable economy and being fairly stable politically’’ Meanwhile, recent developments have further changed conceptions of what is possible. ‘’Block chain has brought a fresh breath to the whole industry in terms of the transparency of the technology and reducing that costs of operation’’ argues Alice Blazevic, an associate partner with Ugandan firm. The technology is allowing fintech companies to bypass banks for online money and bringing transparency. ‘’taking care of financial inclusion’’ she says
However, unhelpful attitudes from government were pervasive early on this space too, says Blazevic. ‘’It was the private sector companies that were pushing and they received a lot of resistance at first,’’ due to a lack of understanding about what the technology was and fears due to ‘’a misconception between block chain and crypocurrency’’’’. Time shave already begun to change, however, and ‘’there has been a complete turnaround’’ with governments becoming more helpful, particularly in Uganda, which now has block chain associations and academics.
The need for good regulation is not exclusive to this sector, with Skipper pointing out that all industries ‘’need to have well-developed regulatory structures that are sufficiently advanced to deal with the relevant sector’’, with a particular need for ‘’certainty of policy, rule of law and relative stability in security and currency terms’’ ‘’So many of the shareholders who are buying share in this fintechs are actually foreign companies’’, says Blazevic, and she expects to see more growth in the near future.
‘’I t is definitely not going back in terms of the mainstream financial sector, that is now completely gone, because right now the experience people are having in the financial sector, it doesn’t make sense to go back to the traditional’’ That need to leave the traditional behind is one which will pervade many industries if they are to flourish and allow African countries to diversify.
Botswana’s failure to diversify the economy away from mineral revenue could be coming back to haunt the southern African nation as there are strong signs that it is losing its mineral resources and revenue to a string of unwise investment practices.
This is revealed in a report titled “Wealth Accounting in Botswana” released by the Ministry of Finance and Economic Development recently which shows that while the volatility in mineral resource depletion probably reflects the nature of the mining industry, which is subjected to uncertainties in the global markets for diamonds in particular; however, from 2015 to 2018, official figures show “that mineral resource depletion is rising and caching up (sic) with the rate at which capital stock is being accumulated.”
The capital stock of a country is part of the national wealth which is reproducible, it consists of all resources which contributes to the production of goods and services. On the other hand, mineral resource depletion is the result of an excess of consumption over its production.
While the report shows positive trends such as non-mining sector replacing the mining industry in contributing to economic growth and Botswana “increasing its overall asset base to offset the gradual depletion of its exhaustible natural resources,” it however, shows alarming trends.
Reads the report in part, “Generally, the growth of capital stock is declining overtime and it is even surprising to see that growth of capital stock at its replacement value is also declining overtime. This could also suggest the need to investigate the productive capacity of capital stock that the country invests in.”
Furthermore, the report says, “this could suggest the need to investigate the quality of capital stock, since low quality capital stock is subjected to rapid wearing out, resulting in decline in the future economic benefits of investment.”
Most likely, the report says, “this reflects unproductive investment by government in public infrastructure – for instance; infrastructure being over-priced, badly designed and poorly implemented and even badly selected/prioritised, with marginal investments that are unlikely to deliver significant benefits.”
The report says Botswana’s fiscal strategy is to finance its recurrent spending through non-mining revenue, whereas development spending is intended to be financed through mineral revenues. “It is worth noting that when mineral revenue is used for development spending, it is derived from mineral resource depletion,” says the report says. It is therefore, the report says, important to track and see if the rate of depletion surpasses the rate at which capital stock is accumulated.
The report says Government allocates a significant portion of mineral revenues to development programmes, which include infrastructure development that forms part of capital stock. It says some of the factors which could be the cause of a declining rate of accumulation of capital stock could be associated with lack of prioritising spending.
“It is indicated that during the period between 2012/13 and 2017/18, the rate at which actual spending on development programmes has been growing is less than the growth rate of budgets, indicating that underspending of budgets is an increasing problem. Underspending on development projects due to weak implementation capacity could be one cause of a declining rate of capital stock accumulation,” reveals the report.
According to the report, as a mineral-led economy, Botswana has long aimed to transform its mineral revenues into other classes of assets, namely physical, human and financial capital. This is supported by fiscal policies in place.
It says Botswana’s fiscal rule has been adopted in the country’s National Development Plan (NDP) 11. This rule, the report explains, plays a critical role by providing guidance on how much to consume and save to achieve macroeconomic stability in the short-run and support long-term fiscal sustainability. The report further explains that the fiscal rule states that 40 percent of mineral revenues would be saved in the form of financial assets for future generations, while the remainder would be invested in physical and human capital.
“However, in reality, achieving the fiscal rule targets has been a challenge for the country, due to recurring budget deficits over the previous years,” says the report.It says official figures also show that the country experienced budget deficits during the entire reporting period (between 1994 and 2019).
“Economic shocks that reduced the amount of mineral revenues, coupled with high government expenditure levels, have led to recurring budget deficits. Consequently, the government’s ability to save a portion of mineral revenues, as required by the fiscal rule, was severely compromised,” the report says.
On a positive note, the report says, Botswana’s economy generally grew at an average of 4.1 percent real GDP growth from 2012 to 2019 adding that this growth was mainly attributed to the non-mining sector, which has cushioned the country to some extent against external shocks1. For the past several years, the non-mining sector grew faster than the mining sector, with an average of 5.4 percent, the report reveals further.
It says the slowed growth of the mining sector was due in part to the closure of BCL copper-nickel mine in 2016, which led to a reduction in total mining output in 2016/17. Continued risks associated with constrained growth in advanced as well as emerging and developing economies during this period, reduced the global demand for diamonds, which led to significant reductions in total mining contribution to GDP. On the other hand, the growth of the non-mining sector signifies the country’s efforts to diversify the economy away from minerals, the report says.
Economic diversification, the report says, is key in natural resource-rich economies as it restricts the impact of the Dutch Disease – an economic phenomenon where the rapid development of one sector, particularly minerals, results in negative impact on the overall economy. Therefore, it says, prudent management of the country’s mineral resources and economic diversification have been a central objective of Botswana’s macro-fiscal policies.
The report notes that to date, the country has made strides in terms of achieving economic diversification goals. This, it says, is evidenced by the Trade, Hotels and Restaurant sector, which surpassed the Mining sector since 2017 onwards, in terms of contribution to value added, becoming the largest sector of the economy.
“However, in order to achieve sustainable economic growth, private sector-led growth should continue to be promoted to assist in addressing unemployment and poverty alleviation. Economic diversification also reduces macroeconomic volatility and disperse risks, such as commodity price volatility.
The 2021 Legatum Prosperity Index report indicates that Botswana ranks number 82nd globally out of 167 countries with a prosperity score of 57.1. Compared to the 2020 report, Botswana moved three places up from 85. However this is still lower than the country’s best ever score from 2011, when Botswana was ranked at number 80.
According to the report from Legatum Institute, they had published a new report outlining a framework for natural transformation designed to help leaders as they make decisions to guide their nations on development pathway. The report said legatum Institute is a London -based think-tank with a bold vision to create a global movement of people committed to creating the pathways from poverty to prosperity and the transformation of society.
It states that Botswana performs most strongly in governance and economic quality but is weakest in natural environment, it further states that the biggest improvement compared to a decade ago came in economic equality.
The report suggests that Botswana ranks 4th in Sub-Saharan Africa out of 49 countries. The rank was based on inclusive societies which include; safety and security, personal freedom, governance and social capital. The rank also was based on open economies which includes; investment environment, enterprise conditions, infrastructure market and economic quality and lastly it was also inclusive of empowerment of the people; living conditions, health, education and natural environment.
The Legatum prosperity index report states that inclusive societies are an essential requirement for prosperity, where social and legal institution protects the fundamental freedom of individuals and their ability to flourish. Botswana is ranked 49th globally and 5th in Sub-Saharan region. On Safety and security the report states that a nation, community or society can prosper only in an environment of security and safety for its citizens, Botswana ranks 71st globally and 9th in Sub-Saharan Africa region on this category.
As for personal freedom, the report focused on basic legal rights, individual liberty, the absence of legal discrimination and the degree of social tolerance experienced in a society.Botswana ranks 57th globally and 9th in Sub-Saharan Africa region.
Botswana is pegged at 38th place globally and 2nd in Sub-Saharan Region when it comes to governance. The Legatum report indicates that governance measures the extent to which there are checks and restraints on power and whether governments operate effectively and without corruption. It also states that the nature of a country’s governance has a material impact on its prosperity.
If there is one area where Botswana is struggling, it is social capital. The country ranks 111th globally and 24th in Sub –Saharan African region. The report states that social capital measures the personal and family relationships, social networks and the cohesion a society experiences when there is high institutional trust, and people respect and engage with one another, both of which have a direct effect on the prosperity of a country.
The report further states that under Open Economics Botswana ranks number 80 globally. The country still needs to encourage innovation and investment, promote business and trade and facilities as well as inclusive growth. Open economics includes; investment environment, enterprise conditions, infrastructure and market access, economic quality.
Botswana ranks 5th in Sub-Saharan African region and 72nd globally in investment environmental which measures the extent to which investments are protected adequately through the existence of property rights, investor protection and contract enforcement. The Prosperity Index report states that, the more a legal system protects investments, for example through property rights, the more that investment can drive economic growth.
The Legatum prosperity index ranked Botswana’s enterprise conditions 10th in Sub-Saharan Africa region and 82nd globally. It explains enterprise conditions as measures of how easy it is for businesses to start, compete and expand.
Botswana ranks 6th in Sub-Saharan African region and 105th globally in infrastructure and market access. The Legatum report explains that market access and infrastructure enables trade and inhibitors on the flow of goods and services between businesses hence economic growth.
Economic quality has been explained by the report as a measure of how robust the economy is as well as how the economy is equipped to generate wealth. The country ranks at the apex, 1st in sub-Saharan Africa region and 53rd globally.
The Legatum prosperity report indicated that states could generate prosperity through empowered people. Empowered people considers living conditions, health, education and natural environment. Botswana ranked 116th globally and 44th in the African region when it comes to empowering its people.
Living conditions as one of the components under empowered people, Botswana ranked 7th in sub-Saharan region and 114th globally. The institute indicated that Living Conditions measures whether a reasonable quality of life is extended to the whole population, which is necessary for a nation to be prosperous
Another component under empowered people is health. According to the institute, the coverage and accessibility of effective healthcare, combined with behaviors that sustain a healthy lifestyle, are critical to both individual and national prosperity. Botswana ranks 17th in the Sub-Saharan region and 131st globally.
Botswana ranks 5th in Sub-Saharan region when it comes to Education and ranks spot 101 globally. According to the report, a better-educated population also leads to greater civic engagement and improved social outcomes — such as better health and lower crime rates.
Lastly Botswana ranks very low on aspect of natural environment, pegged at number 116 globally and 44th in the sub-Saharan African region. The Legatum institute explains this category capturing parts of the physical environment that have a direct effect on people in their daily lives and changes that might impact the prosperity of future generations. The report further reads, “A well-managed natural environment benefits a nation by yielding crops, material for construction, wildlife and food, and sources of energy, while clean air leads to a higher quality of living for all”.
In conclusion, the 2021 prosperity index reveals that sub-Saharan Africa has been the bright light in the world of stagnation in prosperity. With its modest but consistent progress, despite the deterioration in the continent’s safety and security. “The prosperity of 40 out of 49 countries improved over a decade, and the rate of extreme poverty has dropped across the region from 49.9 %to 42.3% of the population, much of the progress has to be driven by steady improvements in Health and in infrastructure” the report said. The Legatum Institute’s 2021 Prosperity Index has found that in Sub-Saharan Africa “prosperity has improved for the 11th year in a row” with the rate of extreme poverty falling from 49.9% to 42.3%.
Mauritius continues to prove itself as a beacon of prosperity in Africa, making it to the top 50 of seven of the index pillars. Second in the region Seychelles ranked number 50, Cabo Verde at number 80, Botswana 82nd, South Africa 85th and last both in Africa and the entire report South Sudan at 167th.
In her Foreword of the report, Baroness Philippa Stroud, CEO of the Legatum Institute states that; “Prosperity is built by deliberate choices to develop a society that works for everyone — an inclusive society, with a strong social contract that protects the fundamental liberties and security of each individual. It is driven by an open economy that harnesses the ideas and talents of the people of a nation.
This in turn builds an enabling environment for all to flourish by fulfilling their unique potential and playing their part in strengthening their families, communities, and nations. A prosperous society is not just about what we’re getting, but about who we are becoming — individually and together. The Prosperity Index acts as a spotlight on what builds prosperity or conversely what causes poverty.
It tracks the rise and fall of prosperity over time and captures the outcomes of decisions that either build or destroy prosperity. When we look at what is happening across the nations of the world, this year’s Legatum Prosperity Index shows that global prosperity is stagnating. However, this stagnation is not simply a result of the recent impact of the COVID-19 pandemic.”
Globally, the 2021 Legatum Prosperity Index reveals that “prosperity has plateaued for the second year running” and this is the result of weakening personal freedoms, specifically Freedom of Speech and Freedom of Assembly.
The Index identifies that whilst “COVID-19 has undoubtedly had a short-term impact on prosperity”, the pandemic has not been solely responsibly. “The past decade has seen the increasing suppression of the core liberties which underpin true prosperity.”
According to the 2021 Index, the “key area of concern”, where this suppression is taking place, is the “ongoing deterioration in political accountability and freedom of speech and assembly in most regions of the world”. In the last decade 72% of all nations have seen a decline in freedom of speech.
The report says in 100 countries around the world both freedom of expression and freedom of assembly deteriorated over the last decade. This has significant implications for global prosperity.
Botswana’s headline inflation took a turn back into the upward trajectory in the month of October after a decline in September. Figures released by Statistics Botswana on Monday reveal thatheadline inflation rose from 8.4 percent in September to 8.8 percent in October 2021, which is above the upper bound of the Bank of Botswana‘s medium-term objective range of 3 – 6 percent.
This is also substantially higher than the 2.2 percent recorded in the month October last year 2020. The increase in inflation between September and October 2021 mainly reflects the upward adjustment in domestic fuel prices in October 2021, as reflected by the annual price changes for Transport (from 17.5 to 19.3 percent).
Meanwhile, there were partially offsetting movements in the annual price changes for some categories of goods and services, while for a few, prices remained stable. Annual price changes for the following categories of goods and services also increased: Food & Non-Alcoholic Beverages (from 6.4 to 6.8 percent); Restaurants and Hotels (from 3.8 to 4.1 percent); Clothing and Footwear (from 3.7 to 3.8 percent); Health (from 2.8 to 2.9 percent); and Miscellaneous Goods and Services (from 7.3 to 7.4 percent).
However, the upward pressure on inflation was partially offset by inflation falling with respect to: Communication (from 1.5 to 1 percent); Alcoholic Beverages and Tobacco (from 9 to 8.8 percent); and Housing, Water, Electricity, Gas and Other Fuels (from 8.3 to 8.2 percent). Inflation remained unchanged for: Furnishing, Household Equipment and Routine Maintenance (5 percent); Recreation and Culture (4.3 percent); and Education (2.8 percent).
Similarly, the 16 percent trimmed mean inflation and inflation excluding administered prices increased from 8 percent and 7.1 percent to 8.2 percent and 7.2 percent, in the same period. The inflation rates for regions between September 2021 and October 2021 revealed that the Rural Villages’ inflation rate stood at 8.6 percent in October, showing a rise of 0.6 of a percentage point on the September rate of 8.0 percent.
The Urban Villages’ inflation rate was 9.0 percent in October compared to the September rate of 8.6 percent, while the Cities & Towns inflation rate rose by 0.3 of a percentage point, from 8.4 percent in September to 8.7 percent In October.
The national Consumer Price Index went up by 0.9 percent in October 2021, from 112.3 registered in September 2021 to 113.3. The Rural Villages’ index recorded a growth of 1.1 percent, from 111.1 in September to 112.4 in October.
The Urban Villages’ index advanced from 112.9 in September to 113.8 in October 2021, a rise of 0.9 percent, whereas the Cities & Towns’ Index moved from 112.4 to 113.3, an increase of 0.8 percent. The group indices were generally moving at a steady pace between September and October 2021, recording changes of less than 1.0 percent, except the Transport group index, which recorded 3.0 percent.
The Transport group index recorded a rise of 3.0 percent, from 114.0 in September to 117.5 in October. This was attributed to a growth in the constituent section index of Operation of Personal Transport (5.2 percent) and purchase of Vehicles (1.2 percent). The increase in the Operation of Personal Transport section index was attributed to the rise in retail pump prices for petrol (95) by P0.71 and diesel (50ppm) by P0.55 per litre, which effected on the 8th of October 2021.
The Alcoholic Beverages &Tobacco index group registered a growth of 0.5 percent, from 120.1 in September to 120.8 in October 2021. This was due to an increase in the constituent section index of Alcoholic Beverages (0.6 percent) and Tobacco (0.3 percent).
The Food & Non-Alcoholic Beverages group index moved from 113.5 to 114.0, recording a rise of 0.4 percent. This was owing to the general increase in the constituent section indices, notably; Oils & Fats (1.8 percent), Vegetables (0.9 percent), Sugar, Jam, Honey, Chocolate & Confectionery (0.7 percent) and Food not elsewhere classified (0.7 percent).
The Clothing and Footwear group registered a rise of 0.4 percent, from 107.4 in September to 107.8 in October 2021. The increase was attributed to the general increase in the constituent section indices. The Restaurants & Hotels index group registered an increase of 0.4 percent, from 109.1 in September to 109.6 in October 2021. The rise was due to the rise of the constituent section index of Restaurants, Cafes and the Like by 0.5 percent.
The All-Tradeables index was 114.7 in October 2021, recording a rise of 1.4 percent from 113.0 in September 2021. The Imported Tradeables Index increased from 112.5 in September to 114.6 in October 2021, a rise of 1.9 percent.
The Domestic Tradeables Index realised an increase of 0.3 percent from 114.4 in September to 114.7 in October. The Non-Tradeables Index moved from 111.4 in September to 111.5 in October, an increase of 0.1 percent. The All-Tradeables inflation rate was 12.0 percent in October 2021, recording a rise of 0.7 of a percentage.