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Botswana is at a critical juncture in its Development – ADB

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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Debswana-Botswana Oil P8 billion fuel partnership to create 100 jobs

18th May 2022
Head-of-Stakeholder-Relations

The partnership between Debswana and Botswana Oil Limited (BOL) which was announced a fortnight ago will create under 100 direct jobs, and scores of job opportunities for citizens in the value chain activities.

In a major milestone, Debswana and BOL jointly announced that the fuel supply to Debswana, which was in the past serviced by foreign companies, will now be reserved for citizen companies. The total value of the project is P8 billion, spanning a period of five years.

“About 88 direct jobs will be created through the partnership. These include some jobs which will be transferred from the current supplier to the new partnership,” Matida Mmipi, Head of Stakeholder Relations at Botswana Oil, told BusinessPost.

“We believe this partnership will become a blueprint for other citizen initiatives, even in other sectors of the economy. Furthermore, this partnership has succeeded in unlocking opportunities that never existed for ordinary citizens who aspire to grow and do business with big companies like Debswana.”

Mmipi said through this partnership, BOL and Debswana intend to impact citizen owned companies in the fuel supply value chain that include transportation, supply, facilities maintenance, engineering, customs clearance, trucks stops and its support activities such as workshop / maintenance, tyre services, truck wash bays among others.

“The number of companies to be on-boarded will be determined by the economics at the time of engagement,” she said. BOL will play a facilitatory role of handholding and assisting emerging citizen-owned fuel supply and fuel transportation companies to supply Debswana’s Jwaneng and Orapa Letlhakane Damtshaa (OLDM) mines with diesel and petrol for their operations.

“BOL expects to increase citizen companies’ market share in the fuel supply and transportation industries, which have over the years been dominated by foreign-owned suppliers. Consequently, the agreement will also ensure security of supply for Debswana operations, which are a mainstay of the Botswana economy,” Mmipi said.

“Furthermore, BOL will, under this agreement, transfer skills to citizen suppliers and transporters during the contract period and ensure delivery of competent and skilled citizen suppliers and transport companies upon completion of the agreement.”

Mmipi said the capacitating by BOL is limited to providing citizen companies oil industry technical capability and capacity to deliver on the requirements of the contract, when asked on helping citizen companies to access funding.

“BOL’s mandate does not include financing citizen empowerment initiatives. Securing funding will remain the responsibility of the beneficiaries. This could be through government financing entities including CEDA or through commercial banks. Further to this, there are financial institutions that have already signed up to support the Debswana Citizen Economic Empowerment Programme (CEEP),” Mmipi indicated.

While BOL is established by government as company limited by guarantee, it will not benefit financially from the partnership with Debswana, as citizen empowerment in the petroleum value chain is core to BOL’s mandate.

“BOL does not pursue citizen facilitation for financial benefit, but rather we engage in citizen facilitation as a social aspect of our mandate. Citizen facilitation comes at a cost, but it is the right thing to do for the country to develop the oil and gas industry,” she said.

Mmipi said supplying fuel to Debswana comes with commercial benefits such as supply margins. These have traditionally been made outside the country when supply was done by multi-nationals for a period spanning over 50 years. With BOL anchoring supply for Debswana, this benefit will accrue locally, and BOL will be able to pay taxes and dividends to the shareholders in Botswana.

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VAT in Africa Guide 2022 – Africa re-emerging

18th May 2022

PwC Africa has presented the eighth edition of the VAT in Africa Guide – Africa re-emerging. This backdrop of renewal informs on the re-emergence of African economies and societies which have been affected by the COVID-19 pandemic.

In this edition, which has been compiled by PwC Africa’s indirect tax experts, covers a total of 41 African countries. It is geared towards sharing insight with our clients based on the constantly changing tax environments that can have a significant impact on business operations.

Within Africa, governments continue to focus on expanding the tax net by improving revenue collection through efficient compliance systems and procedures. PwC Africa has observed that revenue authorities also continue to take a keen interest in indirect taxes as part of revenue mobilisation initiatives.

Maturing VAT system and upskilling SARS 

“In South Africa, VAT is becoming more relevant as a revenue source for the government,” says Matthew Besanko, PwC South Africa’s Indirect Tax Leader. “Strides have been made to upskill South African Revenue Service (SARS) staff and identify VAT revenue leakages, particularly in respect of foreign suppliers of electronic services to people and businesses in South Africa.”

Broadening the tax base and digital economy

In the past year, South Africa, Mozambique and Zimbabwe saw updates to their VAT legislation, or introduced specific legislation targeting electronically supplied services (ESS), which is in line with the global trend of attempting to tax the digital economy. “The expectation is that Botswana will also introduce VAT legislation in due course, while the National Treasury in South Africa has also made mention of revising the rules to account for further developments in the digital economy,” Besanko says.

South Africa’s National Treasury has also drafted legislation with the intention to introduce a reverse charge on gold, which is expected to come into effect later in 2022. While in Zimbabwe, revenue authorities have introduced a tax on the export of raw medicinal cannabis ranging between 10% and 20%, which came into effect on 1 January 2021.

ESG and carbon tax 

Key strides have also been made within the Environmental, Social and Governance (ESG) space. “ESG leadership, strategising and reporting is essential now for organisations that wish to flourish and remain relevant,” Kabochi says. He adds that companies need to consider how ESG and tax intersect, since tax is a significant value driver when businesses need to deliver on their ESG goals.

In South Africa, a carbon tax regime, which is being implemented in three phases, has been adopted. The second phase was scheduled to start in January 2023, however phase one was extended by three years until 31 December 2025.

Until then, taxpayers will enjoy substantial tax-free allowances which reduce their carbon tax liability. At the beginning of 2022, the South African government increased the carbon tax rate to R144 (about US$9), which is expected to increase annually to enable South Africa to uphold its COP26 commitments.

With effect from 1 January 2023, carbon tax payers in South Africa will also be required to submit carbon budgets and adhere to the provisions of the carbon budgeting system which will be governed by the Climate Change Bill. Where set carbon budgets are exceeded, the government plans to impose penalties. “At PwC, we are continuously focused on our renewed global strategy, ” The New Equation,” Kabochi says. “Through this strategy, a key focus area for PwC Africa is to support clients in adding value to their ESG ambitions and building trust through sustained outcomes.”

The New Equation is also an acknowledgement of the fundamental changes in the business environment in which PwC’s clients and other stakeholders operate. PwC continues to reinvent and adapt to these changes as a community of problem solvers, combining knowledge and human-led technology to deliver quality services and value.

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Economists project lower economic growth for Botswana

18th May 2022
CBD

Local and international economists have lowered their projections on Botswana’s economic growth for 2022 and 2023, saying the country is highly likely to fail to maintain high growth rate recorded in 2021 hence will not reach initial forecasts.

Economists this week lowered 2022 forecasts for Botswana’s economic growth rate, from the initial 5.3% to 4.8% and added that in 2023 growth could further decline to 4.0%. The lower projections come on the backdrop of an annual economic growth that recovered sharply in 2021 with figures showing that year-on-year real Gross Domestic Product (GDP) growth increased to 11.4%, up from a contraction of 8.7% in 2020.

Economists from the local research entity, E-consult, this week stated that the 2021 double digit growth that exceeded projections made at the time of the 2022 budget may be short lived due to other developments taking place in the global economy. E-consult Economist Sethunya Kegakgametse stated that the war in Ukraine has worsened supply problems in the global economy and added that before the war, macroeconomic indicators were seen as improving and returning to pre-COVID levels.

According to the economist the global economy was projected to improve in 2022 and 2023. Recent figures show that global growth projections have been revised downwards from the initial forecast of 4.9% in 2022 with the World Bank’s new estimate for global growth in 2022 at 3.2%.

The statistics also shows that International Monetary Fund revised their growth projections for 2022 and 2023 down by 0.8% and 0.2% respectively, falling to 3.6% for both years. “The outbreak of war has severely dampened the global recovery that was under way following the COVID-19 pandemic,” said the economist.

She stated that despite Botswana being geographically removed from the conflict, the country has not and will not be exempt from the disruptions in the global economy. “The disruptions to global supply chains resulting from the war will have a negative effect on both Botswana’s growth and trade activities.

The economic sanctions against diamonds from Russia will add uncertainty to the market which will have knock on effects to Botswana’s growth, exports, and government revenues,” said the economists who added that the disruptions are driving prices up and result with very high inflation in the local economy.

Kegakgametse projected that in an attempt to limit inflation Bank of Botswana will be forced to raise interest rate “Should the sharp increase in both global and local inflation persist, Bank of Botswana much like other central banks around the world will be forced to raise interest rates in a bid to control rising prices. This would mean an end to the expansionary monetary policy stance that had been adopted post COVID-19 to aid economic growth,” she said.

In the latest projections, the UK based economic research entity Fitch Solutions lowered 2022 real GDP growth forecast for Botswana from 5.3% to 4.8% “In 2023, we see economic growth rate decelerating to 4.0%,” said Fitch Solutions economists who also noted that the 2022 and 2023 economic growth projections may come out lower than the current forecasts, as it is possible that new vaccine-resistant virus variants may be identified, which could result in the re-implementation of restrictions. “In such circumstances, we cannot rule out that Botswana’s economy may post weaker growth than our baseline scenario currently assumes,” said the economists.

According to the projections, Fitch Solution stated that there is limited scope for Botswana government to increase diamond production and exports, following the economic sanctions imposed on Russian diamond mining companies operating in Botswana. The research entity added that De Beers is unlikely to scale up diamond output from Botswana in order to prop up diamond prices.

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