President Lt Gen Ian Khama has raised hopes high when he made a major pronouncement that Botswana will tap in its foreign reserves to stimulate the economy. In what is now known as the Economic Stimulus Package, the president is upbeat that the package is exactly what the doctor has ordered for the ailing economy.
The stimulus package is intended to jumpstart tourism development, construction, land allocation and manufacturing. The end results will be a booming diversified economy that will create thousands of jobs.
The pronouncement has caused a frenzy of curiosity and excitement that has played out in a protracted debate that seeks to unravel the benefits of the economic stimulus package. It does not help that President Khama in delivering the envisaged stimulus package left out major talking points, for example, the amount that will be taken from the reserves. To help you better understand we put some things into context.
An economic stimulus is an act of revitalising a struggling or sluggish economy through the use of monetary policy or fiscal policy. A struggling economy encompasses depressed aggregate demand due to high levels of unemployment, high debts hindering investments and also other factors.
To stimulate the economy, the country has two options. It could use monetary policy by using interest rates, cutting interest rates makes borrowing cheaper hence businesses and individuals could borrow to finance investments. The other option is the use of fiscal policy, here the government could either lower taxes or increase its spending to stimulate the economy.
Botswana has used both approaches in stimulating the economy, recently the Bank of Botswana lowered its interest rate in an effort to jolt businesses and individuals in getting access to cheap borrowing. The Economic Stimulus Package will make use of fiscal policy in the hope of reigniting economic activities. Both policy choices have different aspects to them, monetary policy brings short term relief while fiscal policy as a long term remedy.
It would appear that the big debate surrounding the economic stimulus package stems from how it will be financed. Botswana prides itself in its foreign reserves that currently stand at P88 billion, enough to cover Botswana for 20 months should the country stop receiving revenues. This will be the first time the government has to resort to it, even when the government was running a deficit budget (Expenditure exceeding revenues) they did not tap into it. To tap in the reserves requires parliamentary approval.
Can an economic stimulus be financed through reserves only? The answer is no. The economic stimulus can also be financed through borrowing. In fact Botswana has a good credit record, its debt to Gross Domestic Product stood at 23.10% and has good credit ratings pegged at stable by leading credit agencies.
This means it will be easy for Botswana to access loans at lower interest rates. Botswana could also tap into local markets for financing the economic stimulus. Consider this, Botswana Public Officers Pensions Fund has an excess of P60 billion in assets and is planning on investing more in the local market, this represents an opportunity for the government to act on it. A domestically held debt poses no problem unlike sovereign held debts.
Countries all over the world use the economic stimulus to prop their economies. During the financial crisis, the American Recovery and Reinvestment Act of 2009 — better known as the “economic stimulus” was instituted to jumpstart the economy. The $800 billion stimulus even up to now remains largely controversial and divisive. On the other hand you have those that purport that it worked while others remain unfazed and posit that it did nothing to kick-start the economy.
This is the nature of economic stimulus packages they have mixed results depending on implementation. Economic stimulus lead to deficits, the high expenditure will invariably be greater than revenues.
This could be problematic for Botswana considering that the country has a huge import bill, should demand for diamonds continue to fall, the results might be dire. Hence the paradox of economic stimulus: Big spending in stimulating the economy, slow recovery or returns.
On the surface economic stimulus makes sense. If the private sector is not spending, the government sweeps in with the big cheque and starts spending. This creates jobs and saves jobs from companies that were on the brink of retrenchments.
But for this to work, economists usually turn to multipliers. The expenditure is stimulative if the multiplier is greater than 1.0 (For an extra 1 pula spent, the GDP rises by more than P1 pula). However, many economists think that at best, the multiplier is 1.0 (simple replacement of spending that would already occur) and at worst less than 1.0 (For every pula spent, GDP will rise by less than 1 pula).
The trick of economic stimulus lies in the shot reaching the intended patient, it should revive factors that are slowing the economy. It happens that economic stimulus may dissipate to the right and wrong people. People and businesses that benefit from the stimulus package might lock into their gains by putting away the money in savings instead of expanding their business operations and hiring additional workers. This will defy the intended benefits of the economic stimulus which promotes national gains over private gains.
The president’s economic stimulus package is desirable. Botswana’s economy is not producing as much as it could and that there are many more people who want to work than there are jobs available. So a stimulus will boost both output and employment. Whether it will work or not will be dependent on the finer details that are supposed to be dealt with in the coming weeks. The success of it will require immense monitoring and evaluation during the implementation stages.
The recent study on youth entrepreneurship in Botswana has identified difficult access to funding, land, machinery, lack of entrepreneurial mindset and proper training as serious challenges that continue to hamper youth entrepreneurship development in this country.
The study conducted by Alliance for African Partnership (AAP) in collaboration with University of Botswana has confirmed that despite the government and private sector multi-billion pula entrepreneurship development initiatives, many young people in Botswana continue to fail to grow their businesses into sustainable and successful companies that can help reduce unemployment.
University of Botswana researchers Gaofetege Ganamotse and Rudolph Boy who compiled findings in the 2022 study report for Botswana stated that as part of the study interviews were conducted with successful youth entrepreneurs to understand their critical success factors.
According to the researchers other participants were community leaders, business mentors, Ministry of Trade and Industry, Ministry of Youth, Gender, Sport and Culture, financial institutions, higher education institutions, non-governmental institutions, policymakers, private organizations, and support structures such as legal and technical experts and accountants who were interviewed to understand how they facilitate successful youth entrepreneurship.
The researchers said they found that although Botswana government is perceived as the most supportive to businesses when compared to other governments in sub-Saharan Africa, youth entrepreneurs still face challenges when accessing government funding. “Several finance-related challenges were identified by youth entrepreneurs. Some respondents lamented the lack of access to start-up finance, whereas others mentioned lack of access to infrastructure.”
The researchers stated that in Botswana entrepreneurship is not yet perceived as a field or career of choice by many youth “Participants in the study emphasized that the many youth are more of necessity entrepreneurs, seeing business venturing as a “fall back. Other facilitators mentioned that some youth do not display creativity, mind-blowing innovative solutions, and business management skills. Some youth entrepreneurs like to take shortcuts like selling sweets or muffins.”
According to the researchers, some of the youth do not display perseverance when they are faced with adversity in business. “Young people lack of an entrepreneurial mindset is a common challenge among youth in business. Some have a mindset focused on free services, handouts, and rapid gains. They want overnight success. As such, they give up easily when faced with challenges. On the other hand, some participants argue that they may opt for quick wins because they do not have access to any land, machinery, offices, and vehicles.”
The researchers stated that most youth involved in business ventures do not have the necessary training or skills to maintain a business. “Poor financial management has also been cited as one of the challenges for youth entrepreneurs, such as using profit for personal reasons rather than investing in the business. Also some are not being able to separate their livelihood from their businesses.
Lastly, youth entrepreneurs reported a lack of experience as one of the challenges. For example, the experience of running a business with projections, sticking to the projections, having an accounting system, maintaining a clean and clear billing system, and sound administration system.”
According to the researchers, the participants in the study emphasized that there is fragmentation within the entrepreneurial ecosystem, whereby there is replication of business activities without any differentiation. “There is no integration of the ecosystem players. As such, they end up with duplicate programs targeting the same objectives. The financial sector recommended that there is a need for an intermediary body that will bring all the ecosystem actors together and serve as a “one-stop shop” for entrepreneurs and build mentorship programs that accommodate the business lifecycle from inception to growth.”
Botswana Housing Corporation (BHC) is said to have recorded an operating surplus of P61 Million, an improvement compared to the previous year. The housing, office and other building needs giant met with stakeholders recently to share how the business has been.
The P61 million is a significant increase against the P6 million operating loss realized in the prior year. Profit before income tax also increased significantly from P2 million in the prior year to P72 million which resulted in an overall increase in surplus after tax from P1 million prior year to P64 million for the year under review.
Chief of Finance Officer, Diratsagae Kgamanyane disclosed; “This growth in surplus was driven mainly by rental revenue that increased by 15% from P209 million to P240 million and reduction in expenditure from P272 million to P214 million on the back of cost containment.” He further stated that sales of high margin investment properties also contributed significantly to the growth in surplus as well as impairment reversals on receivables amounting to P25 million.
It is said that the Corporation recorded a total revenue of P702 million, an 8% decrease when compared to the P760 million recorded in the prior year. “Sales revenue which is one of the major revenue streams returned impressive margins, contributing to the overall growth in the gross margin,” added Kgamanyane.
He further stated professional fees revenue line declined significantly by 64% to P5 million from P14 million in the prior year which attributed to suspension of planned projects by their clients due to Covid-19 pandemic. “Facilities Management revenue decreased by P 24 million from P69 million recorded in prior year to P45 million due to reduction in projects,” Kgamanyane said.
The Corporation’s strength is on its investment properties portfolio that stood at P1.4 billion at the end of the reporting period. “The Corporation continues its strategy to diversify revenue streams despite both facilities management income and professional fees being challenged by the prevailing economic conditions that have seen its major clients curtailing spending,” added the CEO.
On the one hand, the Corporation’s Strategic Performance which intended to build 12 300 houses by 2023 has so far managed to build 4 830 houses under their SHHA funding scheme, 1 240 houses for commercial or external use which includes use by government and 1 970 houses to rent to individuals.
BHC Acting CEO Pascaline Sefawe noted that; BHC’s planned projects are said to include building 336 flat units in Gaborone Block 7 at approximately P224 million, 100 units in Maun at approximately P78 million, 13 units in Phakalane at approximately P26 million, 212 units in Kazungula at approximately P160 million, 96 units at approximately P42 million in Francistown and 84 units at approximately P61 million in Letlhakane. Emphasing; “People tend to accuse us of only building houses in Gaborone, so here we are, including other areas in our planned projects.”
Researchers from some government owned regulatory institutions in the financial sector have projected that the banking sector’s profitability could increase, following Bank of Botswana Monetary Policy Committee recent decision to increase monetary policy rate.
In its bid to manage inflation, Bank of Botswana Monetary Policy Committee last month increased monetary policy rate by 0.50 percent from 1.65 percent to 2.15 percent, a development which resulted with commercial banking sector increasing interest rate in lending to household and companies. As a result of BoB adjustment of Monetary Policy Rate, from 1.65 percent to 2.15 percent commercial banks increased prime lending rate from 5.76 percent to 6.26 percent.
Researchers from Bank of Botswana, the Non-Bank Financial Institutions Regulatory Authority, the Financial Intelligence Agency and the Botswana Stock Exchange indicated that due to prospects of high inflation during the second half of 2022, there is a possibility that the Monetary Policy Committee could further increase monetary policy rate in the next meeting in August 25 2022.
Inflation rose from 9.6 percent in April 2022 to 11.9 percent in May 2022, remaining above the Bank of Botswana medium-term objective range of 3 – 6 percent. According to the researchers inflation could increase further and remain high due to factors that include: the potential increase in international commodity prices beyond current forecasts, logistical constraints due to lags in production, the economic and price effects of the ongoing Russia- Ukraine conflict, uncertain COVID-19 profile, domestic risk factors relating to possible regular annual administered price adjustments, short-term unintended consequences of import restrictions resulting with shortages in supplies leading to price increases, as well as second-round effects of the recent increases in administered prices “Furthermore, the likelihood of further increases in domestic fuel prices in response to persistent high international oil prices could add upward pressure to inflation,” said the researchers.
The researchers indicated that Bank of Botswana could be forced to further increase monetary policy rate from the current 2.15 percent if inflation rises persistently. “Should inflation rise persistently this could necessitate an upward adjustment in the policy rate. It is against this background that the interest rate scenario assumes a 1.5 percentage points (moderate scenario) and 2.25 percentage points (severe scenario) upward adjustment in the policy rate,” said the researchers.
The researchers indicated that while any upward adjustment on BoB monetary policy rate and commercial banks prime lending rate result with increase in the cost of borrowing for household and compnies, it increase profitability for the banking sector. “Increases in the policy rate are associated with an overall increase in bank profitability, with resultant increases in the capital adequacy ratio of 0.1 percentage points and 0.2 percentage points for the moderate and severe scenarios, respectively,” said the researchers who added that upward adjustment in monetary policy rate would raise extra capital for the banking sector.
“The increase in profit generally reflects the banking industry’s positive interest rate gap, where interest earning assets exceed interest earning liabilities maturing in the next twelve months. Therefore, an increase of 1.5 percentage points in the policy rate would result in industry gains of P71.7 million (4.1 percent increase), while a 2.25 percentage points increase would lead to a gain of P173.9 million (6.1 percent increase), dominated by large banks,” said the researchers.