Foreign Direct Investment in Botswana shows a downward movement when compared to the size of the economy, according to a third quarter review by Econsult.
An economic review compiled by economists, Dr Keith Jefferis, Brandon Basele, and Sethunya Sejoe has revealed that FDI inflows for the past ten year period from 2005-2014 has been on a downward trend.
“The trend over this ten year period is clearly downward,” stated the report.
The economists have attributed the downward trend to the dominance of mining in FDI in Botswana. Over the years the mining sector’s performance has been mutable.
“The performance of the mining sector has been highly variable in recent years, and is subject to major variations in global demand, which in turn impacts on economic growth as evidenced by the revision in official growth projections for 2015 from 4.9 percent to 2.6 percent as a result of softened rough diamond demand,” reads the report.
The report states that using the IIP data over the period 2005-2014, in Pula terms, FDI inflows vary considerably from year to year. Notably, after increasing slowly between 2005 and 2008, FDI decreased significantly in 2009 – 10 before recovering sharply in 2011, then dropping back since then. During these periods, Botswana was hit by the 2008-9 global financial crisis, which was felt by the global economy and caused investment flows everywhere to decline.
The peak in 2011 is attributable to economic activity in the mining sector, particularly investments associated with Debswana’s “Cut 8” project to extend the life of the Jwaneng mine. Other notable economic activities included the relocation of the Diamond Trading Centre (DTC) to Gaborone and investment in sectors like finance.
Apart from the peak in 2011, FDI has declined from nearly 5% of GDP in 2006 to only 2.5% of GDP in 2014 – a fall of almost 50%.
“Overall, Botswana’s investment policy has not been as successful as it should have been, despite the government’s efforts to make the business environment competitive to attract direct investment,” the economists highlighted.
Data published by the BoB shows that FDI in Botswana is dominated by the mining sector, followed by banking and finance.
In addition the economists note that the structure of the economy has over the years shifted away from mining, manufacturing and agriculture towards services and many service activities require relatively little fixed capital, as compared to mining and manufacturing.
“Nevertheless, the downward trend is a concern, Botswana should be attracting increased FDI inflows if export-led economic diversification is to be achieved,” reads the report.
Foreign Direct Investment (FDI) has been found to be one of the factors that promote economic diversification. They further note that, Botswana’s low FDI may be due to the high costs of doing business and also the country’ success with the trade surplus and balance of Payment created by the high valued diamond export.
Several studies on FDI and competitiveness to asses Botswana’s performance, such as the Global Competitiveness report ranked Botswana 4th in Africa after Mauritius, South Africa and Rwanda and 74th in the World Bank doing Business Report, which also ranked Botswana 4th in Africa and 56th in the world on the ease of doing business.
The economists have underscored the need for better data to enable improved monitoring of FDI trends in different sectors of the economy.
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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.
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”