International Monetary Fund (IMF) Regional Economic Outlook Report on Africa released last week projects that Sub Saharan Africa economies will grow from 2.8 percent in 2017 to 3.4 percent in 2018 on average.
The report anticipates growth to accelerate in about two-thirds of the countries in the region aided by stronger global growth, higher commodity prices, and improved capital market access. Further, the report says the region is set to enjoy a modest growth uptick adding that decisive policies are needed to both reduce vulnerabilities and raise medium-term growth prospects. “On current policies, average growth in the region is expected to plateau below 4 percent barely 1 percent in per capita terms over the medium term highlighting the need for deliberate actions to boost growth potential,” reads the report.
According to the Washington Based Global Economic Policy think tank turning the current recovery into sustained strong growth consistent with the achievement of the SDGs would require policies to both reduce vulnerabilities and raise medium-term growth prospects. The report further shares that prudent fiscal policy was needed to rein in public debt, while monetary policy must be geared toward ensuring low inflation. The IMF also advices that countries should also strengthen revenue mobilization and continue to advance structural reforms to reduce market distortions, shaping an environment that fosters private investment.
BOTSWANA ECONOMIC OUTLOOK
As for the Botswana economy, the International Monetary Fund projects a 4.6 percent economic growth in 2018 compared to 4.8 percent in 2017. IMF economic researchers underscored in the report that the risk of spillover into the region from the weak performance of the South African economy will not spare Botswana. “The recent weak economic performance in South Africa has slowed growth in neighboring countries,” reads the report.
“The regional spillovers are likely to be transmitted through various channels, including intraregional trade such as the Southern African Customs Union and Fast Moving Consumer Good trade for Botswana.” The mixed forecasts for the economy this year signals the performance of Botswana economic engine diamond sector where output from Debswana rose 12% in the first quarter to 5.8 million carats, while rough diamond sales dropped eight percent to P8.8 billion. The IMF said recovering commodity prices would support sub-Sahara African growth, although broadly the average growth rate per capita remains around zero.
The global economic organ has maintained Botswana’s 2018 inflation projection at 3.7 percent, while marginally upping its 2019 forecast from 3.7 percent to 3.8 percent. The IMF emphasizes private investment as a critical factor for the Sub Saharan region to achieve sustainable growth and improve social outcomes over the medium term.
“While public investment in the region is a similar level to other regions of the world, private investment in sub Saharan Africa lags well below other regions. As such reforms such as Public –Private Partnerships (PPP), Special Economic Zones (SEZs) and proper mechanism to attract foreign direct investment needed to be given more attention,” underscores the report.
The organization however highlights that PPPs need to be considered carefully in view of the risks, advising that proper management of PPPs requires the adopting of institutional and legal frameworks to asses and limit risks as such projects often entrain contingent liabilities. In terms of Special Economic Zones, the IMF says while in some cases others are successful in attracting investors to the region the SEZs benefit their economies more where they establish strong links with host country firms and become better integrated in the national and regional development strategies.
Botswana has adopted the concepts of Public Private Partnerships (PPPs) and Special Economic Zones as cardinal instruments in reshaping the country‘s economic direction. The country recently set up the Special Economic Zones Authority to facilitate harnessing the ideal of SEZs fully.
To further fully tap into these observers underscores that Botswana needs to restructure the country administrative setup. Calls by experts reiterate that local authorities cannot remain under an underfunded ministry that Local Government is arguing that District Councils were actually the institutions in direct contact with the ordinary and masses of Botswana’s citizenry. “They have to be capacitated and well resourced with investment acumen, management ability and research capacity to be in position to unearth the economic potential of their parameters better.”
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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”