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Revenue pool under pressure

Economist, Dr Keith Jefferis

Renowned Economist Dr Keith Jefferis has emphasized the need to mobilize more revenue from domestic sources as the country’s revenue pool is under pressure.

Speaking in Gaborone this week, Jefferis said the revenue pool is under pressure due to the countries over dependency on minerals revenue and SACU customs pool.

Minerals particularly diamonds are still by far the largest contributor to the country’s revenue.

“Government revenues are under pressure hence there is need to mobilize revenue from domestic sources and diversify the export base,” he said.

This year’s projected revenues of around P51.7 billion are 6.5 percent lower than those forecasted in the original budget and are lower than those for the past year. The decline in revenues reflects lower revenues from minerals by P1.85 billion, Value added tax by P1.17 billion from the Southern African Customs Union.

“The continued dominance of revenues from minerals especially diamonds and the SACU pool poses a systemic risk on the economic growth,” he said.

Recently, the World Bank also warned that Botswana will remain heavily exposed to external shocks for as long as its growth is heavily dependent on commodity exports and public sector activity.

It said the slowdown in China and falling global prices for commodities caused the mining sector to contract sharply in the third and fourth quarters of 2015, with the mining gross domestic product (GDP) having contracted by 21 percent for the year.

In addition, the bank said slowing revenue growth over coming years, partly reflecting declining Southern African Customs Union (SACU) receipts, requires careful management of expenditure pressures, especially in relation to the wage bill.

The fall in mining revenue is expected to gradually recover as developed economies stabilise. However, SACU transfers are expected to remain soft mainly due to a weak economic outlook for South African growth to near 1 percent through 2017.

Further- on, Jefferis poured cold water on the enthusiasm over coal which he said ‘could not replace diamonds’.

There is a widely believed notion that coal could replace diamonds as a mainstay of the economy.  To him coal offers “a narrow window of opportunity” defined by increased international efforts to reduce greenhouse gas emissions and renewable energy (solar and wind) getting cheaper.

“Coal cannot replace diamonds as the coal margins and profitability of even a large coal industry would not generate anything like the volumes that diamonds had generated,” said Jefferis.

The economist said the barriers to seaborne coal export would require a big ramp up of the rail, but the $15-billion investment needed was not likely to be made at current low coal prices and general uncertainty around coal.

 Fortunately, diamond production looked set to continue at 25-million carats a year for two decades, but with an outlook of diminishing profitability. Tourism is now completely eclipsing copper and nickel, which were once Botswana’s second largest source of export revenue.

Touching on the closure of mines in Botswana, Jefferis placed emphasis on the absolute necessity for low-cost mining production.

 “If we think we can continue as a mining country without being a low cost producer, that will be a big mistake,” Jefferis.

The real challenge was to ensure that mines could survive in tough times to enable them to thrive in times of plenty. Drawing attention to the precarious state of a still-operating Botswana nickel mine, which was struggling to produce at the correct cost level, Jefferis said the many mines that had closed in recent years highlighted the lack of focus on low cost production.

 “Being a low cost producer is absolutely essential, copper and nickel had a dismal 2015 on the smelter closure at BCL and the closure of two copper mines. 2015 was a bad year for mining,” the economist commented.

The generation of new jobs was hugely challenging with only 1 000 new jobs created for 40 000 students coming out of the education system.

“Mining won’t solve the unemployment problem,” he said, adding that jobs would have to come from elsewhere.

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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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