While acknowledging that the recent salary increment by government which was done for the 2019/20 financial year will lead to credit grown and increase in domestic demand, Bank of Botswana governor Moses Pelaelo said this will not overheat inflation beyond the objective range of 3 – 6 percent in the medium term.
The governor said this when delivering the Monetary Policy Statement of 2019 released this week. Pelaelo said despite expected spending in school fees which happens normally in the beginning of the year, inflation will not go overboard. He emphasized that people will take loans or credit will increase in banks, but that will not move inflation beyond its position which is a range of 3 – 6 percent. This is also despite the drought which is being experienced by the region and covers Botswana and its food import partners. Food prices may go up, but BoB does not see any sign of inflation overheating above range.
When making economic prospects for 2019 BoB said both external and domestic pressures on inflation are expected to be benign, and it is projected that inflation will remain within the 3 – 6 percent objective range in the short to medium term. “This forecast incorporates the estimated impact of the increase in public service salaries and prospects for continued accommodative monetary conditions.
Having said that, it is worth underscoring the point that any upward adjustment in administered prices and government levies and/or taxes and any increase in international commodity prices that is substantially beyond current projections present upside risks to the inflation outlook.” In contrast, downside risks to inflation arise from the restrained growth in global economic activity, the tendency of the ongoing technological progress to lower costs and the reduction in commodity prices,” said Pelaelo.
The 10 percent-6 percent recent increase in wages by government is expected to gobble close to P2 billion from government’s purse in a period of two financial years being 2019/20 and 2020/21. Economists believe the increase will help cushion purchase power to some point as they will be increase in personal incomes which will lead to credit growth in households hence increase in economic activity.
The BoB Monetary Policy Statement of 2019 released this week suggests that the domestic economy woke from a hangover of “subdued domestic demand pressures, as a result of the restrained growth in personal incomes and largely stable foreign inflation” of 2018. According to the Bank’s Monetary Policy Statement, last year was the year of restrained growth in the personal incomes as the nominal national increased only by a paltry 3 percent on average which was below the average inflation rate for the period resulting in erosion of purchasing power.
However, according to BoB governor Moses Pelaelo, the Bank did not lose monetary policy control as it maintained price stability with inflation remaining within the objective range of 3 – 6 percent in the medium term. According to the Bank, Inflation fell from 3.8 percent in November to 3.5 percent in December 2018.
“This favourable medium-term outlook for inflation is in the context of moderate growth in economic activity and a sound and stable financial system. Therefore, prospective developments augur well for maintenance of an accommodative monetary policy that supports productive lending to businesses and to households, for welfare enhancements that also drive 17 economic activities.
The Bank’s implementation of monetary policy will continue to focus on entrenching expectations of low, predictable and sustainable inflation, through timely responses to price developments; while at the same time, taking due care to ensure that policy decisions are consistent with ensuring financial stability and supportive of sustainable economic growth and employment creation,” said Pelaelo this week.
When looking back domestic output is estimated to have expanded by 5.1 percent in the twelve months to September 2018, compared to lower growth of 2.4 percent in the year to September 2017 and his expansion was mainly driven by sustained improvement in non-mining GDP growth and the recovery in mining output.
According to the Bank, inflation was low and stable, and fluctuated around the lower end of the objective range of 3 – 6 percent for most of 2018; and the outcome was broadly consistent with projections for the year. The BoB governor said the low rate of annual price increase was mostly due to the decrease in food inflation. Food price inflation decreased from 1.1 percent in 2017 to a negative 0.2 percent in 2018, however fuel prices increased significantly by 16.1 percent during 2018, due to upward adjustments in May, October and November.
“This compares to a relatively smaller increase of 9.5 percent in 2017. Overall, the increase in administered prices (including fuel prices, public transport fares, as well as 10 electricity tariffs) added 1.86 percentage points to inflation in 2018,” said Pelaelo. Pelaelo said the overall modest increase in prices in Botswana was in the context of subdued domestic demand pressures, as a result of the restrained growth in personal incomes and largely stable foreign inflation. According to the governor monetary policy was therefore conducted against the background of below-trend economic activity and a positive medium-term outlook for inflation and moderate fiscal expansion.
Government expenditure grew by 6.6 percent in 2018 compared to a contraction of 6.3 percent in the prior year. It should be recognized, in this respect, that beyond the increase in wages, the short-term impact of government spending on domestic demand is moderated to the extent that a significant component involves infrastructure and capacity development. “In the context of Botswana, this type of spending tends to be import intensive and the economic benefits of such public investments are derived in the medium to long term,” said Pelaelo.
Regarding wage developments, it is notable that government recurrent expenditure included a 3 percent salary increase with effect from April 1, 2018. Government increased salaries last year 1 April 2018 by 3 percent and BoB there was nominal national wages increased only by 2.3 percent- which was below the average inflation rate for the period-a development that suggest a modest impact on domestic demand and inflation.
According to last year’s statistics commercial bank credit accelerated from 5.6 percent in 2017 to 7.7 percent in 2018 and included a faster increase in lending to businesses, from 3.2 percent in 2017 to 10 percent in 2018. However for households, annual credit expansion fell from 7.2 percent in 2017 to 6.2 percent in 2018 and this is attributed to restrained growth in personal incomes as the last year 3 percent salary increment did not raise the bar any further.
In the households, this included a 7 percent increase in personal loans and 4.9 percent for mortgages, compared to respective growth rates of 9.2 percent and 4.8 percent in 2017. However Pelaelo said when looking at the monetary issue in a broad picture, the rate of credit growth continued to be supportive of economic activity, with minimal risk to financial stability.
The Global economy and the trade war
The domestic economy is forecast to grow by 4.2 percent in 2019, slightly lower than the estimate of 4.5 percent for 2018. According to BoB, the main factors expected to support growth in economic activity include conducive financing conditions associated with an accommodative monetary policy stance and a sound financial environment.
Therefore the budgeted 3.6 percent expansion in government spending in 2019/20 and the implementation of initiatives such as the doing business reforms, are expected to further support growth in economic activity and employment creation according to the Bank. According to BoB the global economy on the other hand is expected to grow by 3.5 percent in 2019, lower than estimated expansion of 3.7 percent in 2018. The Bank says the projected lower growth is premised on anticipated slower expansion in advanced economies, mostly reflecting subdued performance in the euro area.
The US GDP growth is forecast to decline from 2.9 percent in 2018 to 2.5 percent in 2019, as the impact of the fiscal stimulus dissipates while growth in emerging market and developing economies is projected at 4.5 percent in 2019, slightly lower than the 4.6 percent in 2018. According to the Bank the risks to the global economic activity are skewed to the downside, with prospects for escalation of trade tensions (trade war), tightening financial conditions, a no-deal Brexit and relatively weaker growth in China presenting key risks to the outlook.
“Global inflationary pressures are forecast to be modest in the short to medium term, reflecting below-potential output. In this environment, it is anticipated that monetary policy will remain accommodative in most economies, complemented by measures aimed at facilitating financial intermediation, while fostering resilience of the financial sector, to support growth in economic activity.
It is, therefore, notable, that the earlier anticipated monetary policy normalization (or increase of interest rates) in the advanced countries is being re-assessed and restrained with the advent of generalized weaker economic performance and heightened policy uncertainty,” said Bank of Botswana in its recent Monetary Policy Statement.
Botswana’s economy showed slight growth signs in the first quarter of 2021, following a devastating year in 2020.
During 2020, the entire second quarter was on zero economic activity as the country went on total lockdown in an effort to curb the spread of the virus.
Diamond trade plummeted to record low levels as global travel restrictions halted movement of both goods and people and muted trade.
The end result was a significant decline for the local economy, at an estimated 7 percent contraction, just marginally below the 2008/09 global financial crises.
According to figures released by Statics Botswana this week, the country’s nominal Gross Domestic Product for the first quarter of 2021 was P47.739 billion compared to a revised P45.630 billion registered during the previous quarter.
This represents a quarterly increase of 4.6 percent in nominal terms between the two periods.
During the quarter, Public Administration and Defence became the major contributor to GDP by 18.4 percent, followed by Wholesale & Retail by 11.4 percent. The contribution of other sectors was below 6.0 percent, with Water and Electricity Supply being the lowest at 1.6 percent.
Real GDP for the first quarter of 2021 increased by 0.7 percent compared to a contraction of 4.6 percent registered in the previous quarter.
The improvement in the first quarter 2021 GDP reflected continued efforts to reopen businesses and resume activities that were postponed or restricted due to the COVID-19 pandemic.
The real GDP increased by 0.7 percent during the period under review, compared to an increase of 1.2 percent in the same quarter of 2020.
The recovery in the domestic economy was observed across majority of industries except Accommodation & Food Services, Mining & Quarrying, Manufacturing, Construction, Other Services and Agriculture, Forestry & Fishing.
The overall slow performance of the economy was mainly due to the impact of measures that were put in place to combat the spread of the COVID-19 pandemic.
The Non-mining GDP increased by 4.1 percent in the first quarter of 2021 compared to 4.0 percent increase registered in the same quarter of the previous year.
Agriculture, Forestry and Fishing industry decreased by 2.0 percent in real value added during the first quarter of 2021, relative to a contraction of 5.2 percent registered during the same quarter of 2020.
The main driver of the unfavorable performance stems from a decrease in real value added of Livestock farming by 3.0 percent.
Mining and Quarrying registered a decrease 11.4 percent in the real value added, this was mainly influenced by the drop in the Gold and Diamond real value added by 17.5 and 12.5 percent respectively.
Diamond production in carats went down by 12.1 percent while the tonnage of Gold produced went down by 17.5 percent.
The poor performance of the diamond sub-industry is attributed to the reduction in production due to a lower grade feed to the plant at Orapa in response to heavy rainfall and operational issues, including continued power supply disruptions.
With regard to Gold is due to diminishing resource base which affect production.
The Manufacturing industry recorded a decline of 7.4 percent in real value added during the first quarter of 2021, compared to a decrease of 2.3 percent registered in the corresponding quarter of 2020.
The deep low performance in the industry is observed in the two major sub-industries of Beverages & tobacco and Diamond cutting, polishing and setting by 57.0 and 38.5 percent respectively.
The reduction in Beverages is attributed to alcohol sale ban imposed during the quarter under review in order to reduce the spread of the COVID-19 virus. On the other hand, exports of polished diamonds went down by 24.9 percent compared to a decrease of 11.5 percent registered in the same quarter of the previous year.
The construction industry recorded a decline of 4.8 percent compared to an increase of 4.3 percent realized in the corresponding quarter in 2020.
This industry comprises of buildings construction, civil engineering and specialized construction activities. The industry is still showing signs of the consequences of COVID-19 pandemic. The industry recorded a negative growth of 7.4 percent in the previous quarter.
Water and Electricity Water and Electricity value added at constant 2016 prices for the first quarter of 2021 was P506.2 million compared to P378.2 million registered in the same quarter of 2020, recording a growth of 33.8 percent.
In the first quarter of 2021, Electricity recorded a significant growth of 62.4 percent compared to a decrease of 67.6 percent recorded in the corresponding quarter of 2020.
The local electricity production increased by 22.4 percent while Electricity imports decreased by 33.3 percent during quarter under review. The water industry recorded a value added of P231.3 million compared to P209.0 million registered in the same quarter of the previous year, registering an increase of 10.7 percent.
Wholesale and Retail Trade real value added increased by 11.4 percent in the first quarter of 2021 compared to an increase of 5.5 percent registered in the same quarter of the previous year. The industry deals with sales of fast moving consumer goods.
Diamond Traders recorded a significant growth of 112.7 percent as opposed to a decline of 22.7 percent recorded in the corresponding quarter last year. The positive growth is due to improved demand of diamonds from the global market.
The Transport and Storage value added increased by 0.6 percent in the first quarter of 2021, compared to a 2.4 percent increase recorded in the same quarter of the previous year.
The slight improved performance of the industry was mainly attributed to the increase in real value added of Road Transport and Post & Courier Services by 4.3 and 2.1 percent respectively.
The slow growth was influenced by a significant reduction in Air Transport services of 69.7 percent due to reduced number of passengers carried. Rail goods traffic in tonnes went down by 6.4 percent and passenger rail transport was not operating during the quarter under review.
Accommodation and Food Services Accommodation and Food Services real value added declined by 31.7 percent in the first quarter of 2021 compared to a decrease of 4.4 percent registered in the same quarter of the previous year. The reduction is largely attributed to a decrease of 42.1 percent in real value added of the Accommodation activities subindustry.
The suspension of air travel occasioned by Covid-19 containment measures impacted on the number of tourists entering the borders of the country and hence affecting the output of Hotels and Restaurants industry. COVID-19 restriction measures resulted in reduced demand for leisure and conferencing activities, as conferences are largely held through virtual platforms.
Finance, Insurance and Pension Funding industry registered a positive growth of 8.3 percent due to the favorable performance from monetary intermediation and Central Banking Services by 16.4 and 5.4 percent respectively during quarter under review.
It is still tough in the tourism industry — big players in this sleeping giant are not having it easy, but options are being explored to keep the once vibrant multibillion Pula sector alive until the world gets back to normalcy.
One of the primary measures against the spread of Covid-19 is to stay home; this widely pronounced precaution against the global contagion that has claimed over 4 million lives across the world is however a thorn in the flesh of one of the major industries in the global economy — the tourism sector .
This sector is underpinned by travel – an act which is the virus‘ number one mode of spread, especially across borders.
Chobe Holdings Limited, one of Botswana’s leading high end eco-tourism giants said its survival strategies are underpinned by well-crafted stakeholder engagements in the mist of these unprecedented times of muted trading activity.
“Throughout the COVID-19 pandemic, Chobe continued to invest in and strengthen its relationships with key stakeholders in both its traditional markets and the SADC region,” the company directors updated shareholders this week.
To keep the business afloat, the company which owns and operates some of the exquisite tourism destinations along the banks of the mighty Chobe said it has triggered its existing available debt financing avenues.
Chobe revealed that its current overdraft of BWP 25 million has been extended on favourable terms.
The company shared that it has negotiated a further USD 1.5 million (over P16 million) standby loan with a flexible settlement terms and preferable cost implications to the bottom line.
“We are confident that the Group has sufficient cash inflows, cash reserves and un-utilized prearranged borrowing in place to settle any liabilities falling due and support the smooth recovery of operations in the short and medium term,” the company directors said, noting that they will retain the flexibility to vary operations should market conditions change.
Early this year, Chobe announced that the ongoing crisis in the tourism industry forced the company to draw from its prearranged overdraft facility of P25 million to the extent of P11.6 million.
Last year Chobe’s occupancy levels around its lodges and hotels went down 89 percent. This resulted in unprecedented revenue decline of 93% to P27.78 million from the P373.94 million in the previous year ended February 2020.
Operating profits went down 159% with profit after tax down 170%, mirroring a loss of over P67 million.
Chobe management said during the last half of the financial year they have done all they could to contain costs across the company’s operations.
During the last half of the year Chobe’s marketing and reservations teams continued to pursue the “don’t cancel but defer policy”.
“We thus continue to hold advance travel receipts, to the value of about P34 million at the financial year end,” the company revealed early this year.
Chobe said it continues to engage Government, through HATAB and BTO to prioritize the vaccination of workers in the tourism sector.
“Throughout the pandemic we have ensured that employees are trained in and comply with COVID-19 infection mitigation protocols as well as ensuring that all visitors to our remote camps and lodges as well as our staff and contractors are tested for COVID-19 before reaching the camp or lodges,” the company said.
However, the company said vaccinating the tourism staff will provide the best way to ensure that both employees and guests are protected from the virus.
“We continue to manage our cashflow through stringent cost control measures, balanced against the protection of the Group’s physical assets and the wellbeing and retention of its people,” the company said.
Chobe has successfully retained its top management through the pandemic. To this end the company directors continue to closely monitor the Group’s recovery from COVID-19 and adjust salary reductions to support operations and aid retention.
Domestic and regional travel resumed during the second quarter of the 2020/21 financial year with the Group opening a strategic mix of camps and lodges.
A comprehensive domestic, regional and international marketing plan was put in place to support these openings.
International travel resumed in the first quarter of the 2021/22 financial year with occupancies forecast to steadily increase, albeit from a low base, through the second quarter.
The company is optimistic that forward bookings are strong for the 2022/23 financial year.
“There is pent-up demand from our traditional source markets to travel now, but this is tempered by uncertainty and access constraints,” the company stated.
“Both the domestic and international markets are sensitive to such uncertainty, and it is critical that both the private and public sector work together to develop and publish clear, authoritative and consistent travel information in order to build confidence”
Chobe entered the pandemic with the Shinde camp rebuild in progress — one of its high end camps and this was completed in the first half of the 2020/21 financial year accounting for the majority of the Group’s capital expenditure for that period.
De Beers Group, the world’s leading rough diamonds producer by value and Botswana’s partner in the diamond business, ramped up its production in the second quarter of 2021, in response to stronger demand for rough diamonds in the global markets.
The London headquartered diamond mining giant revealed in its production report this week that rough diamonds output increased by 134% to 8.2 million carats in the three(3) months of quarter 2 2021, “reflecting planned higher production to meet stronger demand for rough diamonds”.
This was against the backdrop of curtailed demand in the same quarter last year, mirroring the impact of Covid-19 lockdowns across southern Africa during that period.
In Botswana, where De Beers sources majority of its rough diamonds through partly government owned Debswana, production increased by 214% to 5.7 million carats. The percentage jump mirrored planned low production in the second quarter of 2020 where output was adjusted to market demands and implemented Covid-19 protocols.
Debswana operates four (4) Mines: Jwaneng Mine- being its flagship producer and largest revenue contributor. Jwaneng Mine which is the wealthiest diamond mine in the world by value is envisaged for multi-billion expansion to an underground operation in future to stretch its existence by few more decades.
The underground project which is anticipated to cost a whooping P65 billion will be the world‘s largest underground diamond mine.
The company which accounts for over 65 % of De Beers’s global production also operates Orapa Mine- one of the world’s largest by area, Letlhakane Mine currently a tailings treatment operation and Damtshaa Mine which is under care and maintenance following market shrink in 2020.
Namibia production decreased by 6% to 0.3 million carats, primarily due to planned maintenance of the Mafuta vessel which was completed in the quarter and another vessel remaining demobilized. In Namibia De Beers sources diamonds both in land and marine through Namdeb and Debmarine respectfully.
In South Africa-the spiritual home ground of De Beers Group, production increased by 130% to 1.3 million carats, due to planned treatment of higher grade ore from the final cut of the Venetia open pit, as well as the impact of the Covid-19 lockdown in Q2 2020.
Production in Canada increased by 14% to 0.9 million carats, primarily reflecting the impact of the Covid-19 measures implemented in Q2 2020.
De Beers said consumer demand for polished diamonds continued to recover, leading to strong demand for rough diamonds from midstream cutting and polishing centers, despite the impact on capacity from the severe Covid-19 wave in India during April and May.
Rough diamond sales totaled 7.3 million carats (6.5 million carats on a consolidated basis), from two Sights, reflecting the impact of the reduced Indian midstream capacity on Sight 4, compared with 0.3 million carats (0.2 million carats on a consolidated basis) from two Sights in Q2 2020, and 13.5 million carats (12.7 million carats on a consolidated basis) from three Sights in Q1 2021.
The H1 2021 consolidated average realized price increased by 13% to $135/ct (H1 2020: $119/ct), driven by an increased proportion of higher value rough diamonds sold.
While the average price index remained broadly flat, the closing index increased by 14% compared to the start of 2021, reflecting tightness in inventories across the diamond value chain as well as positive consumer demand for polished diamonds.
Full Year Guidance Production guidance is tightened to 32–33 million carats (previously 32-34 million carats (100% bases)), subject to trading conditions and the extent of any further Covid-19 related disruptions.
When commenting to 2021 quarter 2 production figures, Mark Cutifani, Chief Executive of Anglo American- De Beers parent, said the entire Anglo American Group delivered a solid operational performance supported by comprehensive Covid-19 measures to help safeguard the lives and livelihoods of its workforce and host communities.
“We have generally maintained operating levels at approximately 95% of normal capacity and, as a consequence, production increased by 20% compared to Q2 of last year, with planned higher rough diamond production at De Beers” he said.