President Mokgweetsi Masisi’s first year to lead the country into general elections comes with heavy burdens on his shoulders.
A respected think tank, Moody’s Investors Service sees a challenge of higher wages and protruding capital expenditures against an economy chiefly dependent on mineral revenue while it shows no further attempt of implementing drastic revenue-raising measures. In a bar graph representation, Moody’s demonstrates that Botswana has a higher wage bill as a percentage of the GDP. The think tank also shows that the capital expenditure and this could be due to investment on mineral projects like the recently launched P21.4 billion Cut 9 project.
Moody’s new presentation shows Botswana wage bill to be around 12 percent as almost equating with that of South Africa but lower than that of eSwatini and Namibia. The latest Moody’s report was focused on sovereigns in sub-Saharan Africa (SSA) which the think tanks said they plan further fiscal consolidation to stabilize their elevated debt burdens and reduces pressures on their credit profiles.
It further stated that these plans are generally set under assumptions of broadly stable economic and financing conditions. In the event of shocks, scope to cut government spending rapidly and significantly, or spending flexibility, allows sovereigns to broadly adhere to their plans and lends resiliency to fiscal strength. In the latest report, Moody’s proposed a measure of spending flexibility in SSA consistent with its earlier work for other regions, to inform our assessment of the resilience of fiscal strength to potential shocks.
“Expenditure flexibility, the result of structural features and recent measures, partly determines the resilience of fiscal strength. While SSA sovereigns are generally planning to consolidate their budgets in a way that should stabilize debt, they now face potential negative economic and financing shocks with a weaker starting fiscal position than five years ago.
Expenditure cuts are often easier to implement quickly than revenue-raising measures. Fiscal strength will likely be more resilient for those with capacity to cut expenditure quickly and significantly in the face of a shock,” says Moody’s report. For this country when looking at expenditure on borrowings, Moody’s says Botswana saw only a marginal increase in their interest expenditures.
The agency also said in some cases, higher interest expenditure offset a significant amount of the reduction to spending on wages and transfers, the other components of mandatory spending. Therefore, with Botswana having less interest expenditure pundits may argue that expenditure on wages may be raised as many believe this country’s salaries are below what is expected. Other pundits may cite Botswana’s high capital expenditure as the reason why Masisi’s regime may remain cautious when spending. In this year of elections, calls on spending remain deafening.
Moody’s shows Botswana currently lingers deep in between flexible and severely constrained SSA countries when it comes to mandatory spending. Moody’s measure expenditure flexibility as the share of discretionary spending (capital expenditures and spending on goods and services) in total expenditure. The remainder consists of spending on parts of the budget that governments generally cannot cut rapidly or which can be adjusted more easily over a longer period of time (interest payments, salaries & wages, and transfers).
The rating agency further states that higher borrowing costs and increased debt burdens saw interest expenditures increase over the four year, like it’s a case for Botswana. The time for the polls has become almost ripe with only a matter of weeks Batswana will be lined up to vote for what they expect and what they were promised. Botswana’s elections are held after every five years and Moody’s has noted that this country together with most SSA sovereigns plan to consolidate their budgets to stabilize debt as they are now more vulnerable to potential negative economic and financing because they are in a weaker fiscal position than five years ago.
In January this year Moody’s said Botswana was going at a snail’s pace in fiscal consolidation efforts and this could increase policy uncertainty ahead of the 2019 general elections. This was before Masisi increase salaries in April. According to the rating agency, ahead of elections in Botswana, the authorities have been envisaging a more gradual pace of fiscal consolidation.
The mandatory spending factor and political pressure
While Masisi may have increase salaries in April this year and adjusted wages of disciplined or armed forces later, something which some of his critics call political gimmick, he has a bigger headache of managing high wages and walking along the boundaries of mandatory spending. The International Monetary Fund (IMF) has always advised Botswana to reduce its wage bill which has been seen to be higher than expected.
April this year, the season of the national polls, Masisi led a government initiative to increase public servants salaries for financial year 2019/20 with an increment of 10 percent for scales A and B and 6 percent for scales C and D. Last year IMF suggested that Botswana cut the size of its civil service, something which Masisi appeared to have almost heeded to when he faced the international media on the issue when he said, “we are more efficient, we are leaner, meaner, and we can do business and we are more attractive to the private sector for them to invest”.
However this was quickly tackled by critics including legislator-cum-economist Ndaba Gaolathe, who said there is no compelling evidence that can suggest that Botswana is in a desperate anomaly that requires it to cut off the size of its civil service. Masisi may have toyed with the idea of trimming jobs despite him being a self-proclaimed “Jobs President” just as he assumed office. He is yet to implement National Employment Policy and has been promising jobs in the time when Botswana faces worst record of income inequality and high unemployment rate.
Meanwhile it has been reported that the April salary increment adds additional cost of a little more than P1 billion per annum to government. It is also said the government wage bill is high by international standards, as it currently stands at 11.3 percent of GDP, against the international threshold of 5.0 percent of GDP. Moody’s places the wage bill at around 12 percent of the GDP and recognizes its loftiness when compared to its Sub-Sahara Africa counterparts. Observers believe Masisi is going to be careful with his spending despite a further call for wage hike.
On the dark-point the budget proposals for the 2018/2018 overall balance is estimated at a deficit of P6.35 billion (or 3.3 percent of GDP), which is expected to worsen to P7.79 billion (or 3.8 percent of GDP) in 2019/2020. A major factor when government considers further spending, an add to Masisi’s headache. Also, government acknowledges positive growth of 4.5 percent in the domestic propelled by non-mining sectors but points to a declining global economy which grew by 3.6 percent in 2018 and is anticipated to only grow at 3.3 percent in 2019.
Bank of Botswana however has said the new salary hike will not in anytime have any inflationary effect or cause a collapse. The central bank also said the wage increase will not shake the domestic economy. Already trade unions are seeking for a further increase of salaries.
A Malaysian private firm Performance Management and Delivery Unit(PEMANDU) who conducted a salary adjustment on behalf of the Directorate of the Public Service Management (DPSM) “remunerations system project report for grades A to D” was unfazed by government’s lack of funds to spend on increase of wages. Government hired PEMANDU as a consultant at a tune of P 17, 6 million.
On the issue of high wage bill, PEMANDU sees that as an excuse by government to avoid motivating its workforce. “The increase in wage bill represents approximately 10.3 percent of the country’s Gross Domestic Products (GDP), the current wage bill being 9.4 percent of GDP. This is still below the regional Sub-Saharan bench mark of 11 percent,” states the report.
The PEMANDU proposal if implemented will add an additional P1.23 billion per annum. PEMANDU has made a proposal of a salary hike of 20 percent for grades A and B; 10 percent for grades C and D and 15 percent for grade E and F. According to the Malaysian firm the new implementation was to bridge the widening gap between lower and higher paid civil servants, while higher grades of E and F should receive no increment in the proposals and keeps their range.
Government before increasing salaries for the public sector in April has always promised that the PEMANDU report will be implemented. However recently something seems to have changed, Vice President Slumber Tsogwane made an announcement suggesting that government is constrained to put more funds for increment of civil servant wages as per the PEMANDU report.
Following a devastating first half of the year 2020 due to COVID-19, the global diamond industry started gaining positive momentum towards the end of the year as key markets entered into thanks giving and holiday season.
However Bruce Cleaver, Chief Executive Officer of De Beers Group cautioned that the industry is not out of the woods yet, citing prevailing challenges ahead into 2021.
The first half of 2020 was characterized by some of the worst challenges in history of global diamond trade.
The midstream, where rough diamonds are traded in wholesale and bulk to cutters and polishers, was for the most part of second quarter 2020, suffocated by international travel restrictions as countries responded to the contagious Corona Virus.
This halted movement of buyers and shipment of the rough goods , resulting in unprecedented decline of sales, in turn ballooning stockpiles as the upstream operations produced with little uptake by the midstream.
The situation was exacerbated by muted demand in the downstream where jewelry industries and tail end retailers closed to further curb the spread of COVID-19.
However towards the end of third quarter getting into the last quarter of the year, demand in both midstream and downstream started to steadily pick up as countries relaxed COVID-19 restrictions.
De Beers, the world’s largest diamond producer by value started reporting significant recovery in sales in the sixth and seventh cycle, figures began to reflect an upswing in sentiment as well as increase in uptake of rough goods by midstream.
Sales for the sixth cycle amounted to $116 Million, following a sharp downturn in the previous cycles, significant jump was realized during the seventh cycle, registering $320 million, an over 175 % upswing when gauged against the proceeding cycle.
De Beers noted that diamond markets showed some continued improvement throughout August and into September as Covid-19 restrictions continued to ease in various locations.
“Manufacturers focused on meeting retail demand for polished diamonds, particularly in certain product areas, accordingly, we saw a recovery in rough diamond demand in the seventh sales cycle of the year, reflecting these retail trends, following several months of minimal manufacturing activity and disrupted demand patterns in all major markets,” said De Beers Chief Executive, Bruce Cleaver in September last year.
The diamond mining behemoth continued to register impressive sales in the eighth and ninth cycle signaling the industry could end the year on a positive note.
The momentum was indeed carried into the last cycle of the year. The value of rough diamond sales (Global Sightholder Sales and Auctions) for De Beers’ tenth sales cycle of 2020 amounted to $440 million, a significant increase from the 2019 tenth sales cycle value.
Against what seemed like a positive year end that would split into the New Year Bruce Cleaver, CEO, De Beers Group, however warned the industry not to count eggs before they hatch.
“Positive consumer demand for diamond jewellery resulting from the holiday season is supporting the continuation of retail orders for polished diamonds from the diamond industry’s midstream sector. This in turn supported steady demand for De Beers’s rough diamonds at our final sales cycle of 2020,” Cleaver had said in December.
In caution the De Beers Chief noted that “While the diamond industry ends the year on a positive note, we must recognise the risks that the ongoing Covid-19 pandemic presents to sector recovery both for the rest of this year and as we head into 2021.”
All segments of the supply chain were severely impacted by the global lockdown measures introduced in response to the Covid-19 pandemic in the first half of 2020.
After a strong US holiday season at the end of 2019, the rough diamond industry started 2020 positively as the midstream restocked and sentiment improved.
However, from February 2020, the Covid-19 outbreak began to have a significant impact on diamond jewellery retail sales and supply chain, with many jewelers suspending all polished purchases and/or delaying payments to their suppliers.
Rough diamond sales were materially affected by lockdowns and travel restrictions, delaying the shipping of rough diamonds into cutting and trading centers and preventing buyers from attending sales events.
These resulted in significant decline in total revenue for the business in the first six months of 2020. Total revenue decreased by 54% to $1.2 billion from $2.6 billion registered in the prior half year period ended 30 June 2019.
For the entire first six (6) months of the year 2020 De Beers Rough diamonds sales fell drastically to $1.0 billion from $2.3 billion in the prior H1 period ended 30 June 2019. Sales volumes decreased by 45% to 8.5 million carats compared to 15.5 million carats registered in the prior period.
Next month Minister of Finance & Economic Development, Dr Thapelo Matsheka will face the nation to deliver Botswana‘s first budget speech since COVID-19 pandemic put the world on devastating economic trajectory.
The pandemic that broke out in late 2019 in China has put the entire world on unprecedented chaos ,killing over P1 million people across the globe , shattering economies and almost rendering the year 2020 – a 12 months stretch of complete setback.
The 2021/22 budget speech will come at time when Botswana’s economy is still trying to emerge out of this.
National lockdowns and local travel restrictions have hit small medium enterprises hard, while international travel restrictions halted movement of both good and people, delivering by far some of the heaviest and worst catastrophic blows on the diamond industry and tourism sector, the likes of which this country has never seen before on its largest economic sectors.
As Minister Matsheka faces parliament next month, the reality on the ground is that Botswana’s national current cash resource, the Government Investment Account (GIA) is depleting at lightning speed.
On the other hand the COVID-19 economic mess is prevailing, the virus is reported to have taken a new dangerous shape of a deadly variant, spreading like fueled veld fire and causing some of the world’s super powers back to tough restrictions of lockdown.
According official figures released by Bank of Botswana, in October 2020 the GIA was running at P6 billion compared to the P18.3 billion held in the account in October 2019.
However reports indicate that the account could be currently holding just about P3 billion. The draw down from the GIA has been by exacerbated by declining diamond revenue, the country‘s largest cash cow. The sector was experiencing significant revenue decline even before COVID-19 struck.
When the National Development Plan (NDP) 11 commenced three (3) financial years ago, government announced that the first half of the NDP would run at a budget deficits.
This as explained by Minister of Finance in 2017 would be occasioned by decline in diamond revenue mainly due to government forfeiting some of its dividend from Debswana to fund mine expansion projects.
Cumulatively, since 2017/18 to 2019/20 financial year the budget deficit totaled to over P16 billion, of which was financed by both external and domestic borrowing and drawing down from government cash balances.
Taking into account the COVID-19 economic mess in 2020/21 financial year, the budget deficit could add up to P20 billion after revised figures.
Drawing down from government cash balances to finance these budget deficits meant significant withdrawals from the Government Investment Account, hence the near depletion of this buffer.
Meanwhile should Botswana’s revenue streams completely dry up to zero levels; the country would only have 11 months, before calling out for humanitarian aids and international donors, because foreign reserves are also on slow down.
During 2019, the foreign exchange reserves declined by 8.7 percent, from Seventy One Billion, Four Hundred Million Pula (P71.4 billion) in December 2018 to Sixty Five Billion, Three Hundred Million Pula (P65.3 billion) in December 2019.
The reserves declined further in 2020, falling by 2.3 percent to Sixty Three Billion, Seven Hundred Million Pula (P63.7 billion) in July 2020. This was revealed by President Masisi during State of the Nation Address in November last year.
The decrease was mainly due to foreign exchange outflows associated with Government obligations and economy-wide import requirements.
However latest statistics(October 2020) from Bank of Botswana reveal that Botswana’s foreign reserves are estimated at P58.4 billion, with government’s share of these funds significantly low.
Government has since introduced several measures to contain costs and control expenditure with the most recent intervention being the halting of recruitment in government departments and parastatals.
Furthermore, Value Added Tax has been signaled to go up from 12% to 14% in April this year with more hikes and service fees anticipated as government embarks on unprecedented domestic revenue mobilization.
Botswana Stock Exchange listed hotel group Cresta Marakanelo Limited (“CML” or “the Company”) announced the signing of a lease agreement for Phakalane Golf Estate Hotel & Convention Centre, which will see CML extend its footprint by adding the 4 star Gaborone property to its already impressive portfolio. The agreement is subject to regulatory approvals therefore the effective date of the transaction is expected to be 1 February 2021.
CML brings a wealth of expertise to the lease and despite the difficult year for the tourism and hospitality industry, due to the impact of the COVID-19 pandemic, CML remains confident in the recovery of the sector and the need to invest in expanding the Company’s footprint.
CML Managing Director, Mr Mokwena Morulane commented: “Our continued efforts to improve our offerings, understand the market dynamics and modern day trends in the face of global challenges, means we are ready for the changing face of tourism and international travel, and this addition to the Cresta portfolio signals our confidence in the future.
“Despite the headwinds faced in 2020, Management has continued to focus on projects that enhance CML’s product offering such as the refurbishments at Cresta Mowana Safari Resort & Spa in the tourism capital Kasane and the ongoing refurbishment of Cresta Marang Residency in Francistown. The signing of the lease for the 4 star Phakalane Golf Estate Hotel & Conference Centre is a great addition to the Cresta portfolio and will unlock shareholder value in the future.
“We remain vigilant to value-enhancing opportunities including acquisitions or leases, after having reconsidered our pipeline against current and expected market conditions.”
Commenting on the lease agreement, the Chief Executive Officer, Mr S Parthiban, speaking on behalf of Phakalane noted; “No hotel chain holds as much expertise in the region, understands our local culture and tastes and what hospitality is about better than Cresta Marakanelo Limited. We believe that the renovations done to the property has made Phakalane Hotel and Convention Centre a unique product in Botswana and at par with international facilities. We believe that this lease will benefit not only us as Phakalane , but the market in general as Cresta has run hotels successfully in Botswana for over 30 years and is therefore expected to bring new offerings that appeal to the local and international markets as well as the residents and visitors to the Golf Estate. We look forward to a long mutually beneficial relationship with Cresta.”
CML like the rest of the tourism and hospitality industry and the entire value chain was hard hit by lockdowns with the surge of COVID-19. By investing during the low period, the company hopes to realise the future value of spending time in preparing for the new consumer dynamics and behaviour. Despite business interruptions as a result of a six-month long state of emergency and several lock-down periods declared by the Government of Botswana to limit the spread of COVID-19, the Company is starting to record an increase in occupancies, which bodes well for the recovery of the industry and the Company’s future prospects.