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X-ray view into Matambo’s briefcase

In two days’ time, the Minister of Finance and Economic Development Kenneth Matambo will open his iconic briefcase and the nation expects it to be pregnant with hope as it is always the case with any Budget Speech of a government especially on its election year.

However the 2019/20 Budget was planned at a menacing projected budget deficit of P5 billion, increasing fiscal policy uncertainties which experts see as a gloomy picture for Botswana. This is mainly due to the fact that President Mokgweetsi Masisi’s first impression will be judged by the speech this Monday. The 2019 Budget Strategy Paper which was unveiled at last year’s Budget Pitso projected that total revenues are forecast to be lower than projected total expenditures, resulting in a budget deficit of P5.11 billion, or 2.4 percent of GDP.

“With total revenue and grants estimated at P61.28 billion, which is lower than the projected total expenditure of P66.40 billion, the budget deficit is estimated at P5.11 billion, or 2.4 percent of GDP,” said the 2019 Budget Strategy Paper giving a gloomy hope to the coming Budget Speech. According to the 2019 Budget Strategy Paper, budget deficits are forecast in the medium-term, mainly as a result of lower revenue collections, resulting from the expected sluggish mineral revenue receipts and volatility of the Customs and Excise revenue.

On the other hand, emerging expenditure pressures, from both development and recurrent expenditure sides, should continue to be managed in order to ensure fiscal sustainability, the Paper further states. When responding to the perpetual incurrence of budget deficit in his maiden State of The Nation Address which was announced last two months, President Masisi decried of P1.98 billion budget deficit recorded in the 2017/18 year which was followed by an expected “moderate” budget deficit for the 2018/19 financial year.

The upcoming Budget Speech will come at the right time for Botswana’s current National Development Plan 11 (NDP 11, 2017-2023) as in his last year’s State Of The Nation Address Masisi revealed that NDP 11 is due for its Mid-Term Review in the next financial year( meaning the 2019/20) which will be launched by Monday’s budget speech). This is where Masisi promised that “it is during this process that most of our transformative adjustments will be effected.”

Matambo’s pre-budget document, the Budget Strategic Paper 2019 states: “The strategic thrust for the next financial year 2019/2020 continues to be centred around the broad national priorities identified in NDP 11, which are: Developing Diversified Sources of Economic Growth; Human Capital Development; Social Development; Sustainable Use of Natural Resources, Good Governance and Strengthening of National Security, as well as monitoring and evaluation.”

When commenting on government’s continual battle against fiscal deficits, Masisi promised that despite the constrained fiscal outlook his government is committed to the principle of a balanced budget in the medium term, as outlined in the current National Development Plan (NDP11). The public’s high expectation on this year’s Budget Speech to be more promising as it is elections year coincides with the rating agency Moody’s view which expects pressure on spending by government in this important time of Botswana’s history.

Recent Moody’s view sees uncertainty and delay in fiscal consolidation efforts towards the 2019 General Elections and the rating agency highly expects Matambo’s Monday speech to vindicate that.  “Ahead of elections in Botswana, the authorities now envisage a more gradual pace of fiscal consolidation…,” said Moody’s. A public voice echoed by workers who now regard themselves as the “working poor” has been reverberating for years and this year it is even louder towards the national polls hence an expected spending pressure by government.

Unionist Tobokani Rari did not mince words when making his promises heard by this publication. He said since 2011 he does not remember government attempting to cushion workers who have continued to struggle against inflation or cost living since the 2009 global recession.
With regards to cushioning of workers from inflation, Rari said, the government has been accumulating arrears since 2011 as it has been increasing salaries with small percentages which would not cushion against inflation; only around 3 percent and 4 percent.

“This was not enough as the actual inflation was never met halfway by reasonably increasing prices. The increment of lesser percentages did not reflect compensation of inflation and rather it fell short by almost 16 percent,” said Rari who is against these lesser salary increments which would never compensate for erosion of salaries. Rari expects Masisi’s administration to bring back lost value of workers salary and he also believes this would enhance productivity.

He said Masisi should prioritize in human resource as it is a vital remedy for a healthy economy. It appears the NDP 11 reiterates Rari’s comments that government has been doing less in terms of increasing productivity which is vital for economic health. “With the positive relationship between total factor productivity and economic growth in Botswana, the failure to effectively address the issue of low productivity undermines the country’s ability to operate at its full potential,” says the NDP 11 which was released in 2016.

The NDP 11 further says the country’s ambition of being an upper income country may be difficult to realise in the foreseeable future. Any significant improvements in productivity in both the public and private sectors will have salutary effects on the economic growth and overall health of the economy, according to NDP 11.Meanwhile a Malaysian private consultancy firm appointed by government, Performance Management and Delivery Unit (PEMANDU), has secretively proposed that government increase salaries by 20 percent in a pyramid manner.

This means that the additional cost to the government will be P1.23 billion per annum and this is expected to be in Matambo’s briefcase. While economist Moatlhodi Sebabole is talking against irresponsible spending by the treasury in any occasion or important season like the time of elections, the expert encourages cautious spending by government and believes the current projected deficit was in no way over the bar or overboard.

He gave a scenario of 2009 when Botswana was waking up from global recession with a heavy fiscal deficit of over P9 billion-a time when the economy was still smaller than it is today. According to Sebabole, a projected deficit of P5, 11 billion should not scare as it is not that bad as it seems and will be recovered. Sebabole also welcomes the treasury’s current projected deficit saying it is a counter-cyclical fiscal policy.

He said in this kind of fiscal policy government has spent its revenues on mining projects like the development of Cut 9 in Jwaneng and the Cut 3 at Orapa projects which is expected to bring back returns that will cushion the impending fiscal deficits.  Sebabole believes that the fiscal deficits may shrink even to P1.6 billion, even below the expected estimates. The economist believes fiscal consolidation by government should not in any way astray from the NDP 11 route and achievement of Vision 2036 goals or pillars.

 “In my view I believe in cautious fiscal spending. In every hot national event fiscal spending pressures is expected to cater for management of elections and when the fiscal policy is under pressure to deliver in an election year,” said Sebabole. Sebabole believes government has always been spending within the fiscal spending threshold which also coincides with the fiscal rule. He explained that the fiscal rule has always been to spend not above 4 percent of the GDP and this should be maintained even at a time of elections.

Permanent Secretary to the President and Secretary to the Cabinet Carter Morupisi told this publication that government will not be swayed by pressure of elections year and the budgetary process have not changed like in the past years. He echoed Masisi and Matambo’s last year comments that the upcoming Budget Speech will be mirroring priorities of NDP 11. “That will be the principal of good governance. Government should remain committed to prioritizing ongoing projects first before looking and new commitment,” he said.

Morupisi explained that a budget is prepared by looking at projected revenues and spending which are mostly planned on assumptions. He highlighted that after looking at ongoing projects compulsory payments will be made as in salaries of workers and government debts.
Priorities versus Promises. According to the 2019 Budget Strategy Paper one of the Fiscal Policy Objectives is to; manage the fiscal risks in a prudent manner and to ensure fiscal consolidation through expenditure prioritization that will result in quality spending.

Government’s main priority is to keep it’s spending below 4 percent of the GDP in the face of a projected fiscal deficit of P5. 11 billion which is the 2.4 percent of the GDP, according to Morupisi.  Also the PSP says top on Matambo’s list will be closing government’s ongoing projects and paying debts and liabilities as well as pay workers’ salaries.Matambo at the Budget Pitso said the projected P5.11 billion budget deficit will be financed through a combination of borrowing, both domestically and externally, and drawing down on government cash balances.

 “Government remains committed to pursuing fiscal sustainability and thus, additional measures to raise domestic revenues or trim the planned expenditure during the implementation of the Plan will be considered, if necessary, to restore the fiscal balance to sustainable levels,” says this year’s budget paper. As a self-proclaimed ‘Jobs President’, Masisi has a bigger headache before him, to increase employment while making sure that the jobs he created are decent. In his maiden SONA Masisi highlighted poverty and unemployment “as a matter of urgency.”

Masisi’s administration lives with the promise of increasing jobs. This is why Masisi further announced that his administration has come up with the National Employment Policy (NEP) to address the unemployment problem facing the country and live to his title of ‘Jobs President’.
Another promise by Masisi is to increase workers’ salaries or improve their living conditions. This is why the same NEP’s other goal is “to assist the country to achieve productive, gainful and decent employment for all, to contribute to the reduction of income inequality and as well as to support Government’s poverty eradication efforts.

“It is seen that the NEP in this aspect supports the NDP 11 which states that one of the problems facing the country is the decline in total factor productivity, especially labour productivity. NDP 11 complained that, “growth in labour productivity in the country, as measured by value added per person employed, has been declining over the past two decades.” The NEP gets technical and financial support from World Bank. The Draft National Employment Policy for Botswana is expected to be delivered by March 2019, a month after the Budget Speech.

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Global recovery from COVID-19 remains unbalanced

2nd March 2021
Global recovery

As COVID-19 and its variants continue to cast a shadow over the world’s health systems and economies, the level of uncertainty and strength of the economic recovery will vary across countries. The real GDP in all G-20 countries is expected to grow compared to the previous year, but some countries will take longer than others to return to full capacity.

According to Mooody’s Global Macro Outlook 2021-22 report released this week, precautionary behavior and official restrictions are still hampering interpersonal interactions. The resulting toll on global economic activity has been staggering, even as the economy has also shown a remarkable degree of resilience.

Overall economic outcomes in 2020 exceeded Moody’s forecasts in most countries because of stronger-than-expected rebounds in the second half of the year. Aided by technology, many people and businesses quickly adapted so that they could carry on with daily activity with reduced in-person interactions.

However, Moody’s says the recovery remains unbalanced, with the pandemic affecting individual businesses, sectors and regions very differently. According to the group, goods demand has almost fully recovered because goods can be produced and consumed with limited in-person interactions, while the recovery in service continue to lag.

Within services, businesses that were able to effectively deliver their products at arms-length have stabilized, if not prospered. Large businesses with access to cheap funding have performed better than small and mid-sized firms. According to the report, the transportation, hospitality and leisure and arts sectors continue to languish, but the information technology, consumer goods, pharmaceuticals and financial sectors have thrived.

According to the report, many individuals around the world (including Botswana), have lost their jobs and continue to face employment uncertainty, but on the flip side, the forced decline in household consumption and the rise in asses prices have buttressed household financial balances at an aggregate level. Moody’s reported that all G-20 countries will post growth rates in 2021 and 2022, but the pace of recovery will vary significantly.

“The COVID-19 shock has exposed differences between countries in terms of political leadership, community health management, fiscal and monetary policy response, economic structures and inherent economic dynamism. Public health considerations drove the economic shock of the pandemic. In that sense, the steep declines in GDP in 2020 across advanced and emerging market countries were less a reflection of underlying weaknesses in the economy, and more a function of the combined effects of the spread of the virus and the stringency of lockdown measures,” says Moody’s.

Economic outcomes will remain closely tied to the pandemic, Moody’s said. “The quicker countries can curb the spread of the virus, the faster their economic activity will recover. Otherwise the costs of keeping parts of the economy shut, in terms of lost income and revenue, will keep adding up. The longer the crisis lasts, the more difficult it will be for governments to compensate the private sector for its continuing losses.”

Without adequate government support, Moody’s predict that large-scale deterioration in asset quality will ensue. Such detrimental effects, it says, could eventually transmit the shock through financial channels to other parts of the economy.

“We have cut or estimate of the 2020 contraction for the G-20 countries. We now expect a collective contraction of 3.3%, compared with our previous estimate of 3.8%, because of a better-than-expected recovery across a wide range of advanced and emerging market economies in the second half of the year. We expect the G-20 countries to grow by 5.3% in 2021 and 4.5% in 2022, up from our prior forecasts of 4.9% and 3.8% respectively.”

US ECONOMY TO LEAD THE GLOBAL SERVICES DEMAND RECOVERY

The US economy advanced at a 4.0% annualized rate in the fourth quarter 2020, but the headline figure masks the fact that the economy has lost momentum since November, when COVID-19 cases began to rise. Moody’s says it expects this current moderation in economic growth to be temporary. Economic momentum will likely puck up pace over the course of 2021 and 2022, supported by: enhanced pandemic control, significant additional fiscal support to the economy and a more predictable policy environment.

With infection rates now starting to fall, economic momentum should naturally pick up in the second quarter and into the summer as individual states progressively ease up social distancing restrictions, Moody’s reports.  “We believe that a stronger pandemic management response from the Biden administration, will increase public confidence and allow for a relation of restrictions over this year and next.”

COVID-19 SHOCK EXACERBATES EXISTING STRUCTURAL CHALLENGES IN SOUH AFRICA

South Africa’s economy is expected to growth by 4.5% in 2021 and by 11% in the following year, following an estimated 7.0% contraction last year. According to Moody’s, this will make South Africa’s recovery one of the weakest among emerging market countries. The economy has struggled to build momentum for many years, and as a result suffers from chronically high unemployment. The COVID-19 shock has made the economic situation all the more challenging, says Moody’s.

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BOL, MDC advised to take interest in Kavango oil tale

2nd March 2021
BOL-MDC

Reconnaissance Africa, a Canadian exploration company has started piercing the natural resource-rich lands of Kavango basin in Namibia, the company in searching for oil and gas.

The prospective area stretches into North West district of Botswana, the company through its local subsidiary Recon Africa Botswana has been given the nod by Ministry of Mineral Resources, Green Technology & Energy Security to explore petroleum mineral for four (4) years.

Amid all the negative reports around the company’s drilling activities in the Kavango basin, which covers ecosystem components feeding into the mighty Okavango Delta, the bottom line is that there are prospects of billions of dollars beneath the area in form of oil and gas-and Recon Africa is out to unearth the treasures.

Member of Parliament for Selibe Phikwe Dithapelo Keorapetse says Botswana should strive to participate in the exploration and development of these potential oil and gas deposits in the North West district. Contributing to the 2021/22 budget speech on Monday Keorapetse cautioned government against watching from afar while a potential multi-billion pula industry unfolds in the Okavango area.

He implored Botswana Oil Limited(BOL) and Mineral Development Corporation Botswana (MDCB) both state owned enterprises, to take up equity stakes in the exploration activities as early as now to “ rather than being spectators and waking up late when the foreigners are enjoying the billions”.

ReconAfrica through its subsidiary Recon Botswana was issued an exploration license under the Petroleum Act to explore for petroleum minerals in the North West District of Botswana, on 1 June 2020, for a period of four years.

“Botswana Oil as the country ‘s petroleum investment company together with MDC-a state owned mineral interest holding company must come together and acquire a stake in the ongoing exploration activities ,not to wait until Recon is making money and you say you want shares”. Keorapetse made reference to Karowe mine which Botswana’s diamond mining partner De Beers Group sold to Lucara over a decade ago while still at exploration stage.

Lucara bid on the site, and its internal partner Lundin provided a bank guarantee to De Beers for fifty million dollars, capturing some seventy per cent of the stake.Soon afterward, Lucara bought the remaining stake by acquiring De Beers’s London-based junior venture partner, African Diamonds. Lucara now owns AK6 (now Karowe Mine), having spent a little more than seventy million dollars.

The mine has since developed into a prolific rare gem producer celebrated worldwide, having unearthed some the world’s largest diamond ever in history , such as the over 1000 carats Lesedi La Rona, Sewelo and the magnificent 813 carats Constellation.

“We are now mulling acquisition of shares in Lucara but when transactions were happening in 2009 we were just spectators, we could have acquired shares back then when they were affordable now it is expensive to buy into Karowe mine, we must not make the same mistake with this oil and gas projects” said Keorapetse urging Government to be pro-active and move quickly to approach Recon Africa for a stake in Recon Africa Botswana.

ReconAfrica is a junior oil and gas company engaged in the exploration and development of oil and gas in North East of Namibia and North West of Botswana—the Kavango Basin. The company officially launched the oil and gas exploration project in Namibia in early January 2021. The exploration activities are taking place in the Kawe area, Kavango East Region, Namibia.

ReconAfrica holds a 90% interest in a petroleum exploration license in Namibia which covers the entire Kavango sedimentary basin in Namibia, the remaining 10% is owned by Government of Namibia. The exploration licence covers an area of 25,341.33 km2 (6.3 million acres), and based on commercial success, it entitles ReconAfrica to obtain a 25-year production license.

Further, ReconAfrica holds a 100% interest in petroleum exploration rights in Botswana over the entire Kavango sedimentary basin in the country. This covers an area of 8,990 km2 (2.2 million acres) and entitles ReconAfrica to a 25-year production license over any commercial discovery. The company acquired a high-resolution geomagnetic survey of the license area and conducted a detailed analysis of the resulting data and other available data, including reprocessing and reinterpretation of all existing geological and geophysical data.

The survey and analysis confirm that the Kavango Basin reaches depths of up to 9,000 m (30,000 feet) under optimal conditions to preserve a thick interval of organic rich marine source rock, and is anticipated to hold an active petroleum system.

“We believe that the Kavango Basin is another world class Permian basin, analogous to the Permian basin in Texas It is estimated that the oil generated in the basin could be billions of barrels. Recon Africa’s initial goal is to establish the presence of an active petroleum system with its fully funded 3-well drilling program starting early January 2021.

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Lucara suffers P287 million loss in 2020

2nd March 2021
LUCARA

Canadian mining company, Lucara Diamond Corporation, well known globally for producing rare gems of unprecedented quality, has not been spared by the 2020 global market downturn caused by the COVID-19 pandemic.

In their financial results for the year ended 31st December 2020, released from Vancouver Canada late Monday, the junior minor reported a significant net loss of $26.3 million for the year (approximately P287 in Botswana currency).

This according to the financials is a loss of $0.07 loss per share, which is a significant decline when compared to net income of $12.7 million ($0.03 per share) in 2019. The company which wholly owns and runs Botswana’s Karowe mine registered total revenues of $125.3 million (over P1.3 billion), a 34 percent drop compared to $192.5 million (almost P2 billion) recorded in 2019 or $335 per carat from $468 per carat in 2019.

The decrease in revenue resulted in adjusted EBITDA of $18.4 million, a decline when compared to adjusted EBITDA for the same period in 2019 of $73.1 million. Lucara executives explained that total revenue decline was a result of challenging market conditions, a longer ramp-up for production and polished sales in the latter half of 2020 under the HB supply agreement.

“As a result, revenue from certain polished diamonds from Lucara’s highest value stones that would otherwise have been recorded as revenue in 2020, is now expected to be realized in 2021.” reads a commentary alongside the figures.

During the year ended December 31, 2020, Lucara sold 373,748 carats at an average price of $335 carat. Diamond sales for the fourth quarter of 2020 were held through a combination of regular tenders, Clara, for diamonds less than 10.8 carats, and through HB under the supply agreement for those diamonds greater than 10.8 carats.

The Company recognized revenue of $42.4 million or $402 per carat from the sale of 105,648 carats. Price recovery was observed in most size and quality classes. Of note, prices achieved for goods sold on Clara (under 10.8 carats in size) in January 2021 have now recovered to the level of pricing achieved early in 2020.

For the year ended December 31, 2020, Lucara registered revenue totaling $55.2 million from the two agreements with HB, including an accrual for variable consideration of $7.2 million related to “top-up” payments arising from polished diamond sales in excess of the initial purchase price paid to Lucara.

With global restrictions impeding travel for many diamantaires, Lucara says interest in Clara grew significantly in 2020 and the number of buyers on the platform increased from 27 to 75.
During 2020, Clara began selling stones on behalf of third party sellers, which was a significant objective for the year.

“As Clara becomes the online marketplace of choice for rough buyers, discussions are underway with several producers to begin trials for the sale of their diamonds on Clara” the company said
Amidst challenging circumstances for the diamond industry in 2020 Lucara forged ahead with the Karowe mine underground project.

During the year period under review $18.7 million (over P190 million ) was spent on project execution activities including the following: Site earthworks (consisting of laydown preparation and clearing of shaft and surface infrastructure locations), geotechnical test pitting and drilling, and completion of two pilot holes at the shaft locations, a 746 metre hole for the ventilation shaft and a 768 metre hole for the production shaft.

The Company was able to complete on-site earth works and geotechnical studies by using local contractors while a State of Emergency remained in effect in Botswana.  Long lead time item orders were also placed for shaft muckers, and hoist and winder refurbishment was initiated. In addition, power line engineering and detailed shaft design and engineering (consistent with original targets for 2020) progressed.

In Q4 2020, the Government of Botswana approved the proposed powerline route and granted a 25-year extension to the Karowe Mine License to 2046, sufficient to cover the remaining open-pit life (to 2026) and the expected life of the proposed underground expansion, currently planned to 2040.

Lucara says it’s currently actively exploring opportunities to arrange debt financing for the underground expansion for those amounts which are expected to exceed the Company’s cash flow from operations during the construction period. The underground expansion program has an estimated capital cost of $514 million (over P5 billion) and a five year period of development.

President & Chief Executive Officer of Lucara Diamond Corporation, Eira Thomas said the measures that Lucara took early in the pandemic, including the decision not to sell rough diamonds in excess of +10.8 carats after Q1, helped protect and support prices for large, high value diamonds that account for more than 70% of the company’s revenues.

“These efforts in conjunction with our transformational supply agreement with HB Antwerp executed in July, resulted in strong price recoveries by Q4, a trend which has continued into 2021.”
Thomas said the recent recovery of two, high value +300 carat stones “continue to highlight the extraordinary nature of the Karowe resource and underpin the rationale for underground expansion, extending our mine life out to at least 2040”.

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