A local economic think tank, econsult Botswana has advised that the key challenge for the country is the implementation of broad-based reforms that will reverse the decline in Botswana’s rankings on business environment rankings. The observations are captured in econsult’s Economic Bulletin for the period January-March 2019.
According to this report compiled by Keith Jefferis, Sethunya, Sejoe, and Kitso Mokhurutshe, “this requires the implementation of a coherent policy agenda, based on prior analysis of the likely impact of policy proposals, and ensuring that policy measures are in line with the Transformation Agenda laid out in Vision 2036, whereby Botswana will become more globally integrated, with growth driven by high productivity, innovation and competitiveness.”
Jefferis and his team are of the view that measures such as the tax limit on interest deductions make starting a business more difficult, not easier, and the proposal to make it more difficult for non-citizens to buy property makes Botswana less globally integrated, not more. Similarly, they observe that Botswana should avoid populist measures such as import controls and border closures, which raise the costs of trade and make the country less competitive, not more.
Furthermore econsult says a disappointing development during the quarter was Botswana’s inclusion on new lists issued by the European Union (EU) regarding Tax Co-operation and Anti-Money Laundering (AML). The EU issued two new lists. The first related to tax transparency and the exchange of information regarding tax compliance. Botswana was “greylisted” as a country that had made some improvements, but would have to implement more changes before the end of 2019 to bring tax transparency standards into line with international norms if the country is not to be blacklisted next year.
The second list relates to anti-money laundering and counter-terrorist financing frameworks (AML-CFT). Botswana has been included on the list of 23 countries identified as having strategic deficiencies in their AML-CFT frameworks. According to Jefferis and his team, Banks and other entities covered by EU anti-money laundering rules are required to apply increased checks (due diligence) on financial operations involving customers and financial institutions from these high-risk countries to better identify any suspicious money flows.
“This may make such financial institutions reluctant to deal with Botswana, which has adverse implications for attempts to diversify and attract foreign investment. A prominent challenge is therefore to rectify the AML-CFT framework in order to ensure that Botswana is removed from the EU blacklist at the earliest possible opportunity,” they observe. A further disappointing development, according to the E-Consult economists is the failure to issue more work permits for foreign workers and investors.
The number of work permits in issue as at the end of 2018, 5,605, was 3% lower than a year earlier. “So, despite the proclaimed intention to liberalise the issuance of work permits and be more responsive to the needs of firms, the actual impact has been limited. Whether this is due to a lack of applications for permits, or a continued high level of rejections is not known; the statistics published by Statistics Botswana do not include information on the numbers of applications and rejections.”
The econsult economists in their Q1 Economic bulletin opine that there have also been a couple of policy mis-steps, due in part to a lack of proper analysis of proposals before being implemented. “For example, the Income Tax Amendment Act, passed in December 2018, introduced a restriction on the amount of loan interest that firms could claim against taxable profits.
The rationale for this measure was to reduce the potential transfer of profits out of the country through debt-financed “thin capitalization” companies owned by foreign investors; the measure is in line with OECD recommendations to avoid Base Erosion and Profit Shifting (BEPS). However, as introduced in Botswana, the restriction applies to all companies, whether domestic or foreign owned. Hence it goes way beyond BEPS prevention.” Jefferies and his team argue that this effectively makes start-ups more difficult, as they often have high levels of debt and low profits in their early years.
“Companies supported by the Citizen Entrepreneurial Development Agency (CEDA) would be amongst those affected. It also kills the Variable-Rate Loan Stock (VRLS) property company model, which was introduced to enable (tax-exempt) investors such as pension funds to invest in property through a fund model rather than directly, and therefore to benefit from professional property management expertise. Debt finance is penalised, even when the loans are from domestic financial institutions (which are taxable, so the issue of profit-shifting is not relevant),” says the econsult Economic Bulletin.
Meanwhile Botswana’s outlook for 2019 is for growth at or slightly below the 2018 level. The IMF is projecting real GDP growth of 3.9% in 2019. Our view is that growth will be within the range of 3.5%-4.0%. The public sector pay rise to be paid in April 2019 will add somewhat to domestic demand, which will provide some relief for retailers and other service sectors that have been squeezed by slow real income growth in recent years.
According to the econsult report, the first quarter of 2019 has seen a mixed but broadly positive set of economic developments. Real GDP data for the fourth quarter of 2018 (and hence completing the picture for the year as a whole) showed an improvement in economic growth to 4.5% for the year. This was broadly in line with expectations, but was sharply higher than the previous year, when growth was only 2.9%. The recovery was driven by improved output in the mining sector, with higher output from Debswana and Botswana Ash.
In addition, the impact of the closure of the BCL copper-nickel mine in 2016 dropped out of the annual growth calculations. The non-mining private sector also performed well in 2018, with the only major detractor being a slowdown in diamond trading activity (part of the wholesale sector of the economy) during the year, as total sales volumes through De Beers Global Sightholder Sales (DBGSS) were 4 percent lower in 2018 than in 2017.
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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”