Botswana’s poor infrastructure; health care concerns, lack of business dynamism and innovation capability is hindering the country’s economy from becoming competitive, according to the Global Competitiveness Report 2018 released this week.
The Global Competitiveness Report is a yearly report published by the World Economic Forum. Since 2004, the Global Competitiveness Report ranks countries based on the Global Competitiveness Index. The Global Competitiveness Index measures the set of institutions, policies, and factors that set the sustainable current and medium-term levels of economic prosperity. This year countries were measured on 11 pillars; institutions, infrastructure, ICT adoption, macro-economic stability, health, skills, product market, labour market, financial system, market size, business dynamisms and innovation capability.
Botswana fell five places from last year’s ranking of 85th to 90th out of 140 countries in the world. According to the report, pillars makes clear that in many countries, the root causes of slow growth and inability to leverage new opportunities offered by technology continue to be the ‘old’ developmental issues—institutions, infrastructure and skills.
“Notably, the disappointing economic performance of most Sub-Saharan African countries is more attributable to weaknesses in these areas than in any others, and the much-vaunted economic leapfrogging will not happen unless these issues are addressed decisively, “the report notes. Botswana has fared badly in the infrastructure pillar. This pillar looks at the quality and extension of transport infrastructure (road, rail, water and air) and utility infrastructure. Botswana is ranked 108 in the infrastructure pillar.
The report argue that infrastructure is a necessary component because better-connected geographic areas have generally been more prosperous. “Well-developed infrastructure lowers transportation and transaction costs, and facilitates the movement of goods and people and the transfer of information within a country and across borders. It also ensures access to power and water—both necessary conditions for modern economic activity,” indicates the report.
Botswana’s worst ranking comes in the health pillar, ranking 115 in the world. The health pillar captures the Health-adjusted life expectancy (HALE)—the average number of years a new-born can expect to live in good health. “Healthier individuals have more physical and mental capabilities, are more productive and creative, and tend to invest more in education as life expectancy increases. Healthier children develop into adults with stronger cognitive abilities,” says the report.
Botswana ranks 98th in ICT adoption pillar which looks at the degree of diffusion of specific information and communication technologies. This is so because the report is of the view that the ICTs reduce transaction costs and speed up information and idea exchange, improving efficiency and sparking innovation. As ICTs are general purpose technologies increasingly embedded in the structure of the economy, the report says, they are becoming as necessary as power and transport infrastructure for all economies.
Botswana however scores big in the macroeconomic stability, scoring 100 percent, and ranking 1st together with other 30 economies. This pillar looks at the level of inflation and the sustainability of the country’s fiscal policy. “Moderate and predictable inflation and sustainable public budgets reduce uncertainties, set returns expectations for investments and increase business confidence—all of which boost productivity. Also, in an increasingly interconnected world where capital can move quickly, loss of confidence in macroeconomic stability can trigger capital flight, with destabilizing economic effects,” observes the report.
In the skills pillar, Botswana is ranked 92nd in the world. The pillar looks at the general level of skills of the workforce and the quantity and quality of education. The report contends that while the concept of educational quality is constantly evolving, important quality factors today include: developing digital literacy, interpersonal skills, and the ability to think critically and creatively.
“Education embeds skills and competencies in the labour force. Highly-educated populations are more productive because they possess greater collective ability to perform tasks and transfer knowledge quickly, and create new knowledge and applications,” said the report. In the financial system pillar Botswana ranks 69 in the world. The pillar looks at the depth, namely the availability of credit, equity, debt, insurance and other financial products, and the stability, namely, the mitigation of excessive risk-taking and opportunistic behavior of the financial system.
“A developed financial sector fosters productivity in mainly three ways: pooling savings into productive investments; improving the allocation of capital to the most promising investments through monitoring borrowers, reducing information asymmetries; and providing an efficient payment system,” argues the report. “At the same time, appropriate regulation of financial institutions is needed to avoid financial crises that may cause long-lasting negative effects on investments and productivity.”
In the pillar of market size, Botswana is ranked 111th in the world, while China is ranked first. The pillar looks at the size of the domestic and foreign markets to which a country’s firms have access. It is proxied by the sum of the value of consumption, investment and exports. “Larger markets lift productivity through economies of scale: the unit cost of production tends to decrease with the amount of output produced. Large markets also incentivize innovation.
As ideas are non-rival, more potential users means greater potential returns on a new idea. Moreover, large markets create positive externalities as accumulation of human capital and transmission of knowledge increase the returns to scale embedded in the creation of technology or knowledge,” notes the report.
Other pillars which Botswana was ranked on include Product Market (95th), Labour Market (57th), Business Dynamism (103rd) and Innovation capability (101ST). In the Sub-Saharan Africa, ranked the lowest in competitiveness, there are three more countries ranked ahead of Botswana; Mauritius (49), South Africa (67), Seychelles (74).
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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”