The poor performance of commodities in the market, especially minerals has seen the country’s Gross Domestic Product (GDP) move up at a snail’s pace during the first quarter of 2017.
According to the latest statistics released by Annah Majelantle, the Statistician General of Statistics Botswana, the decrease in the real mining value added of 28.9 percent was because of the closure of copper/nickel mines during the fourth quarter of 2016.She says in the quarter under review, copper/nickel production was zero due to the provisional liquidation of the BCL mine in October 2016. On the other hand, diamond value added decreased by 2.8 percent during the quarter under review because diamond prices continue to be vulnerable to market tremors hence a reduction in diamond production.
Other commodities have not been doing well either, Soda Ash value added decreased by 41.5 percent because the markets remain restrained due to low demand as some of the industries utilizing the commodity have been affected by the low metal prices.
The statement by Majelantle further reflects that coal prices also remain depressed and stagnated which continues to negatively impact on the commodity export viability. The BCL closure also impacted on the Morupule Colliery Mine production. Other mining value added went down by 22.2 percent mainly due to a decrease in Gold production by 22.5 percent, the statement reads.
The estimated GDP at current prices for the first quarter of 2017 was P43, 647.0 million compared to P43, 657.4 million registered in the fourth quarter of 2016. The estimated GDP at constant 2006 prices for the first quarter of 2017 was P22, 466.4 million compared to P22, 421.6 million registered in the fourth quarter of 2016. According to the statement by Majelantle, the domestic economy increased by 0.8 percent in the first quarter of 2017 compared to an increase of 2.3 percent recorded in the same quarter of 2016.
“The increase was attributed to real value added of Trade, Hotels & Restaurants and Finance & Business Services which increased by 18.7 and 5.4 percent respectively. All other industries recorded positive growths of more than 1.2 percent with the exception of Water & Electricity, Mining and Manufacturing which decreased by 32.2, 28.9 and 0.3 percent respectively.”
Meanwhile Trade, Hotels & Restaurants growth of 18.7 percent was attributed to the increase in real value added of Wholesalers, Vehicle dealers and Hotels & Restaurants by 76.0, 7.2 and 6.3 percent respectively. Wholesaler’s value added increased significantly due to the positive performance realized from downstream diamond industries. The increase of 5.4 percent in the real value added of the Finance and Business Services industry was mainly due to the rise in the value added of Business Services and Real Estate by 8.4 and 6.2 percent respectively.
BCL closure also hit on water and electricity as Majelantle observes that: “Water and Electricity value added at constant 2006 prices for the first quarter of 2017 was P112.1 million compared to P165.5 million registered in the same quarter in 2016, recording a decrease of 32.2 percent. In the first quarter of 2017, Electricity recorded a negative value added of P46.7 million compared to a positive value added of P77.7 million registered in the fourth quarter of 2016.
Electricity value added decreased mainly because of the closure of the BCL mine. Total electricity distribution in kwh went down by 15.1 percent, with distribution to BCL decreasing by 79.1 percent.” In the first quarter of 2017, the real value added of water sector decreased by 7.0 percent compared to an increase of 11.1 percent recorded in the same quarter of the previous year.
“The decrease of 0.3 percent in the real value added of the Manufacturing industry was mainly due to the decrease in the real value added of all sub industries except other manufacturing which increased by 2.5 percent. Non mining GDP increased by 5.6 percent in the first quarter of 2017 compared to 3.7 percent registered in the same quarter of the previous year. The increase was mainly due to Trade, hotels and restaurants particularly the wholesale sub industry,” she notes.
In the first quarter of 2017, Trade, Hotels and Restaurants was the major contributor to GDP by 20.9 percent while Mining contribution stood at 17.6 percent. Trade, Hotels and Restaurants contribution increased because of the wholesaler’s performance which comprises of diamond aggregation processes.
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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”