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Commodities’ price dip slows economy

The resource curse, also known as the paradox of plenty, refers to the paradox that countries with an abundance of natural resources – like minerals, tend to have less economic growth, less democracy, and worse development outcomes than countries with fewer natural resources.

Well, Botswana had actually turned this theory upside down over the years, but lately, things have turned a bit on the economic growth aspect. Low and unstable commodity prices are definitely shaking the country’s well managed economy, and the call for diversification is becoming more louder.

From the latest Statistics Botswana Indices of the Physical Volume of Mining Production, First Quarter 2017 Stats Brief, the Index of Mining Production stood at 77.1 in the first quarter of 2017 showing a year-on-year decline of 14.4 percent from 90.1 during 2016 first quarter. The quarter-on-quarter analysis gives a decline of 6.4 percent from 82.4 during 2016 fourth quarter, observes a report compiled by Statistician, Mothati Goweditswe Madande.

It concludes that the closure of the three copper-nickel mines as well as unstable world commodity prices for all minerals are the major factors that contributed negatively to the growth of mining production during the first quarter of 2017. “The main contributors to the decline in the year-on-year percentage change in the physical volume of mining production during the first quarter of 2017 were copper-nickel-cobalt matte contributing negative 11.3 percentage points followed by diamonds and Soda Ash with 2.4 percentage points and 0.5 of a percentage point respectively.”

Even though coal production had a positive year-on-year percentage change, this was not able to make a positive contribution (% points) to the overall year-on-year percentage change in the volume of mining production due to its insignificant weight in the index.

Low prices influenced mineral production cut

The technical causation also arise for production at various mines in Botswana. Comparisons between production during the first quarter of 2017 and the same quarter of 2016 paint a picture of decrease all round except for coal. According to the Statistics Botswana report, diamond production recorded a decrease of 2.7 percent during the first quarter of 2017 as compared to the first quarter of 2016. The decline was largely due to the mining of lower grades diamonds in Jwaneng mine as well as maintaining business strategy to align production to trading conditions.

The quarter-on-quarter analysis shows that diamond production decreased by 5.0 percent during the first quarter of 2017 when compared with production during the last quarter of 2016. Meanwhile gold production declined by 26.0 percent in the first quarter of 2017 when compared to the same quarter of 2016. This decline was as a result of unstable commodity prices. The quarter-on-quarter production comparison shows a decrease of 37.2 percent for production during the quarter under review when compared to 2016 fourth quarter production.

The same applies to Soda Ash as a decrease of 39.0 percent in production was registered during the first quarter of 2017 when compared to the same quarter of 2016. “The quarter-on-quarter comparisons reflects a decrease of 52.4 percent during the period under review as compared to last quarter of 2016. Salt production recorded a decrease of 31.7 percent in the first quarter of 2017 when compared to the first quarter of 2016.” The quarter-on-quarter comparison shows a decrease of 52.1 percent in production during the first quarter of 2017 as compared to production during the last quarter of 2016.

The report from Statistics Botswana notes: “The decline for both soda ash and salt is attributed to low commodity demand as well as the unstable commodity prices in the international markets.” But there is one performer from the first quarter analysis, Coal is the only commodity that recorded positive growth in production, increasing by 14.7 percent in the first quarter of 2017 as compared to the corresponding quarter of 2016. However, the comparison of the first quarter of 2017 and fourth quarter of 2016 shows a decline of 9.6 percent.

“It is important to note that though Morupule power plant demand for coal resulted in the year-on-year increased demand for the commodity, the closure of the BCL mine in the last quarter of 2016 (one of the local markets for the commodity) negatively affected the coal production leading to low coal production in the first quarter of 2017,” reads the report. Copper-Nickel-Cobalt Matte, Silver and Copper in Concentrates recorded zero production during the period under review. The instability and uncertainty of commodity prices had negatively affected the mines, leading to the provisional liquidation of the concerned companies.

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Botswana on high red alert as AML joins Covid-19 to plague mankind

21st September 2020

This century is always looking at improving new super high speed technology to make life easier. On the other hand, beckoning as an emerging fierce reversal force to equally match or dominate this life enhancing super new tech, comes swift human adversaries which seem to have come to make living on earth even more difficult.

The recent discovery of a pandemic, Covid-19, which moves at a pace of unimaginable and unpredictable proportions; locking people inside homes and barring human interactions with its dreaded death threat, is currently being felt.

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Finance Committee cautions Gov’t against imprudent raising of debt levels

21st September 2020
Finance Committe Chairman: Thapelo Letsholo

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.

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Gov’t Investment Account drying up fast!  

21st September 2020
Dr Matsheka

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”

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