African Development Bank’s Country Strategy Paper (CSP) 2015-2019 says Botswana is at a critical juncture in its development. CSP indicated that this has led to a rethinking of the country’s development strategy, saying that Botswana needs to accelerate economic transformation from the primary sector to advanced manufacturing and services in order to reduce its vulnerability to shock in the diamond trade.
The global financial crisis of 2009 exposed the country’s vulnerability to external shocks due to its reliance on one commodity. Real Gross Domestic Product contracted by 7.8 percent from an annual average growth of 10 percent experienced over the previous four decades. In addition, Botswana’s economy will face a difficult challenge in the medium term with the depletion of its diamond resources.
‘’The country needs to revive the growth of private sector investments and increase the productivity of economic investments. To achieve this, the government needs to invest in high impact infrastructure to improve competitiveness, provide a sound regulatory environment that is friendly to business, and further enhance skills development,’’ reads CSP.
Further, it noted that Botswana has made huge strides socioeconomic development over the past four decades, transforming itself from an underdeveloped country into a middle-income economy. However, a striking feature of the Botswana economy is the rather limited economic transformation.
“The structure of production has changed very little since the 1990s, minerals still dominate the economy, while labor-intensive manufacturing, which normally absorbs unskilled laborers who exit traditional agriculture, has not developed. As a result, the economy has high levels of unemployment and inequality. The 2009 global economic downturn exposed the country’s vulnerability to external shocks due to reliance in one commodity. At the same time, growth in the non-mining sector softened.”
To reduce unemployment and inequality, CSP notes that the country will need to accelerate growth of private sector investments and increase the productivity of economic investments. The CSP, which is anchored on the Bank’s ten-year strategy responds to the need to transform the Botswana economy in accordance with its national development agenda, outlined in the government’s 10th National Development Plan NDP10 covering the period 2009-2016.
The CSP is aligned with the priorities of the NDP10 that intersect with those of the ten-year strategy and focuses on the Bank’s core areas of competence. It is organized around two strategic and complementary pillars, infrastructure development to increase productivity and private sector development. The CSP calls for increased productivity and achieving high, inclusive and sustainable growth in Botswana, which is the shared goal of the ten-year strategy and the NDP10.
CSP continued to note that the structure of production of the Botswana economy has changed very little since the 1990s. The Strategy paper says the economic base remains narrow and the economy is still dominated by mining and government. The mining sector constitutes between 30 and 35 percent of the gross domestic product and government contributes around 16 percent of the GDP. These percentages have not changed significantly over the last decade.
The fastest growing sector has been services and its overall contribution to GDP has increased mainly due to the slowdown in mining as a result of the global economic slowdown. Within the sector, the fastest growing subsectors such as government services, banking, insurance and construction are al linked to revenue from the mining sector.
It also stated that agriculture, especially cattle farming is the dominant source of livelihood, saying more than half of Botswana’s population live in rural areas and are dependent on subsistence farming. However, domestic agriculture production meets only a small proportion of the nation’s food needs. The contribution of the agriculture sector to the GDP has continued to decline and is now under2.5 percent from a peak of 3.4 percent in the 1990s. The limited contribution of agriculture to GDP is mainly due to the severe water shortage and inadequate rain.
The share of the manufacturing sector in GDP has remained limited in the range of 5 to 6 percent since the 1990s. Unlike in many MICs, non-mining manufacturing has not been a dynamic absorber of labor. Rather, its share in GDP has been declining. Some attempts were made in the past to boost the textile industry and take advantage of access to the US market under the African Growth and Opportunity AGOA, but this has now become difficult due to strong competition from other developing countries.
Furthermore, CSP highlighted that Botswana continues to rank low with regard to important determinants of private investment. It says non-price competitiveness indicators suggest that Botswana has been moving steadily downwards in global rankings. Between 2008 and 2013, the country slipped 18 positions from 56 to 74 in the Global Competitiveness Index and 21 positions from 38th to 59th in the World Bank’s Ding Business ranking. The decline is explained largely by the absence of improvements rather than worsening policies.
According to the 2014/15 Global Competitiveness Index, Botswana’s primary weaknesses continue to include technological readiness, small market size and efficiency, as well as inadequate basic health and education. The country is rated highly in macroeconomic environment, reliable and legitimate institutions, and a well-developed financial market. In the World Bank’s Doing Business indicators, Botswana ranks poorly in trading across borders, dealing with construction permits and starting business.
Protection of intellectual property rights has improved and the legal system is sufficient to ensure commercial dealings. While access to credit has not emerged as a major concern, available evidence points to the need to improve access to credit by small and medium enterprises as they play a critical role towards the actualization of economic diversification.
The domestic banking system has remained profitable, liquid and well capitalized, although recently there have been increases in nonperforming loans to households. CSP indicated that the robustness of the financial sector is demonstrated by a number of prudential indicators pertaining to asset composition and portfolio quality.
Access to financial services remains low and it is estimated that about 33 percent of adults do not have access to such services. Non-Bank Financial Institutions have been growing rapidly in recent years, resulting in closer linkages with commercial banks. This has increased the probability of contagion with implications to the financial system and the economy. However, there has been a notable progress on supervision of the non-banking financial sector, including the establishment of a Non-Bank Financial Institutions Authority NBFIRA. NBFIRA has benefited from efforts to enhance its capacity and to develop a legal and regulatory infrastructure.
Greater challenges are coming from the high concentration of bank loans to households and the rapid growth of unsecured lending. The growth of household indebtedness has the potential of creating stress in the financial sector, and is a liability to the macroeconomic environment. Striking an appropriate balance between financial inclusion and stability is therefore emerging as a policy challenge for Botswana.
Meanwhile, the country’s capital markets have developed over the past two decades, but both the stock and bond markets are characterized by low liquidity which undermines their ability to provide price signals to the market. Capital market operations are largely conducted through Botswana Stock Exchange which operates and regulates equities and fixed interest securities market. While market capitalization is reasonably high at about 28 percent of GDP, there is a dearth of long tenured assets.
The government is the main issuer, however, the issuance is limited to only twice a year and currently the longest issuance has a 17-year tenor. To address the shortcomings in the financial sector, the government has launched a financial sector development strategy aimed at maintaining a robust framework for financial access for the underserved, and deepening financial markets and supporting intermediation of long-term financing, mainly by strengthening key institutions such as Botswana Stock Exchange and the Botswana Development Corporation.
HIGH LEVELS OF INEQUALITY
Inequality in Botswana is among the highest in the world despite the sharp decline in poverty, CSP added. It said income inequality as measured by the Gini coefficient is in excess of 0.55. This reflects the disparities in the quality of economic opportunities and services and underlines the need to ensure a more inclusive development.
The persistent high inequality level mainly emanates from the limited economic diversification and the dominance of minerals extraction in the country’s GDP and exports. Because mining absorbs only a small proportion of the workforce, long-term policies for poverty reduction have not been complemented by effective absorption of the poor into the productive economy.
Inequality also stems from the fact that Botswana’s vast size and thinly spread and small population make the provision of economic infrastructure and social services extremely expensive and present daunting challenges for the government. As a result, public support programmes have not generated significant growth in employment, and hence poverty reduction.
In conclusion, the CSP noted that the Kalahari Desert occupies 77 percent of Botswana’s land mass, leaving the country with limited supplies of arable land and fresh water. Erratic rain and drought are the country’s most frequent natural disasters. The country is also faced with land degradation due to overgrazing and diversification. Climate change is expected to adversely impact agricultural production and water resources.
The government has put in place a national environmental policy framework that covers all the relevant sectors. Conservation and sustainable management of natural resources are fully integrated in the development planning process. Over a third of the country’s total land area is under some form of conservation, with 17 percent designated as national parks and game reserves, 20 percent as wildlife management areas and 1 percent as forest reserves. Participation of communities in natural resource conservation is ensured through a community-based natural resources management programme.
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The recent discovery of a pandemic, Covid-19, which moves at a pace of unimaginable and unpredictable proportions; locking people inside homes and barring human interactions with its dreaded death threat, is currently being felt.
Member of Parliament for Kanye North, Thapelo Letsholo has cautioned Government against excessive borrowing and poorly managed debt levels.
He was speaking in Parliament on Tuesday delivering Parliament’s Finance Committee report after assessing a motion that sought to raise Government Bond program ceiling to P30 billion, a big jump from the initial P15 Billion.
Government Investment Account (GIA) which forms part of the Pula fund has been significantly drawn down to finance Botswana’s budget deficits since 2008/09 Global financial crises.
The 2009 global economic recession triggered the collapse of financial markets in the United States, sending waves of shock across world economies, eroding business sentiment, and causing financiers of trade to excise heightened caution and hold onto their cash.
The ripple effects of this economic catastrophe were mostly felt by low to middle income resource based economies, amplifying their vulnerability to external shocks. The diamond industry which forms the gist of Botswana’s economic make up collapsed to zero trade levels across the entire value chain.
The Upstream, where Botswana gathers much of its diamond revenue was adversely impacted by muted demand in the Midstream. The situation was exacerbated by zero appetite of polished goods by jewelry manufacturers and retail outlets due to lowered tail end consumer demand.
This resulted in sharp decline of Government revenue, ballooned budget deficits and suspension of some developmental projects. To finance the deficit and some prioritized national development projects, government had to dip into cash balances, foreign reserves and borrow both externally and locally.
Much of drawing was from Government Investment Account as opposed to drawing from foreign reserve component of the Pula Fund; the latter was spared as a fiscal buffer for the worst rainy days.
Consequently this resulted in significant decline in funds held in the Government Investment Account (GIA). The account serves as Government’s main savings depository and fund for national policy objectives.
However as the world emerged from the 2009 recession government revenue graph picked up to pre recession levels before going down again around 2016/17 owing to challenges in the diamond industry.
Due to a number of budget surpluses from 2012/13 financial year the Government Investment Account started expanding back to P30 billion levels before a series of budget deficits in the National Development Plan 11 pushed it back to decline a decline wave.
When the National Development Plan 11 commenced three (3) financial years ago, government announced that the first half of the NDP would run at 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. Drawing down from government cash balances meant significant withdrawals from the Government Investment Account.
The Government Investment Account (GIA) was established in accordance with Section 35 of the Bank of Botswana Act Cap. 55:01. The Account represents Government’s share of the Botswana‘s foreign exchange reserves, its investment and management strategies are aligned to the Bank of Botswana’s foreign exchange reserves management and investment guidelines.
Government Investment Account, comprises of Pula denominated deposits at the Bank of Botswana and held in the Pula Fund, which is the long-term investment tranche of the foreign exchange reserves.
In June 2017 while answering a question from Bogolo Kenewendo, the then Minister of Finance & Economic Development Kenneth Mathambo told parliament that as of June 30, 2017, the total assets in the Pula Fund was P56.818 billion, of which the balance in the GIA was P30.832 billion.
Kenewendo was still a back bench specially elected Member of Parliament before ascending to cabinet post in 2018. Last week Minister of Finance & Economic Development, Dr Thapelo Matsheka, when presenting a motion to raise government local borrowing ceiling from P15 billion to P30 Billion told parliament that as of December 2019 Government Investment Account amounted to P18.3 billion.
Dr Matsheka further told parliament that prior to financial crisis of 2008/9 the account amounted to P30.5 billion (41 % of GDP) in December of 2008 while as at December 2019 it stood at P18.3 billion (only 9 % of GDP) mirroring a total decline by P11 billion in the entire 11 years.
Back in 2017 Parliament was also told that the Government Investment Account may be drawn-down or added to, in line with actuations in the Government’s expenditure and revenue outturns. “This is intended to provide the Government with appropriate funds to execute its functions and responsibilities effectively and efficiently” said Mathambo, then Minister of Finance.
Acknowledging the need to draw down from GIA no more, current Minister of Finance Dr Matsheka said “It is under this background that it would be advisable to avoid excessive draw down from this account to preserve it as a financial buffer”
He further cautioned “The danger with substantially reduced financial buffers is that when an economic shock occurs or a disaster descends upon us and adversely affects our economy it becomes very difficult for the country to manage such a shock”