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Low cost oil a double edged sword for Botswana

An Economist at private economic consultancy – eConsult, Bogolo Kenewendo

Low priced oil has brought joy for oil net importer countries like Botswana, reducing inflation to unprecedented lows and a boost for balance of payments.

However, for exporter countries especially, whose economies are directly linked to oil exports such Nigeria and Russia, this has been a blow to their net exports, weakening the strength of their currencies.

But for Botswana, the low oil price also brings a dark side with low Inflation and Interest rates keeping commodity prices low as well, making mining unprofitable and leading to possible job losses.

At a meeting, this week to discuss the impacts and implications of low oil prices and on the local and global economies, which was hosted by asset management firm Afena Capital, Bogolo Kenewendo, an economist at private economic consultancy, eConsult, said that the low oil prices have hurt some commodity prices globally.

Latest data suggests weak demand with growing US stock while production levels have been maintained.


Kenewendo said that global growth forecasts have been cut while high cost producers are likely to fall away in the medium term as prices are maintained below cost of production.

“Oil prices will be reduced almost everywhere hence lowering inflation globally,” said Kenewendo.

Locally, the weight of fuel costs on the consumer price index is as high as 10.92 percent, dragging down local inflation to just 2.8 percent in Feb 2015.

“Inflation expected to remain below 3 percent for the rest of the year,” she added.

She said that Oil and commodity prices to rebound in medium term albeit with price levels unlikely to reach level of $100 per barrel.

Kenewendo said that low commodity prices, which are currently prevailing, will render the development of the Trans Kalahari Railway line unfeasible.

 “The construction of TKR is increasingly unlikely with current price levels (of coal) prohibitive, narrowing the window of opportunity,” said Kenewendo.

She said that coal prices have a six year cycle and that “by the time prices rebound, it would be too late”.

The 1477 kilometers railway line, whose total capital costs are estimated at USD14.2 billion (P140 bilion), will run from Mmamabula through six coal producing regions in Botswana, to Walvis Bay, Namibia. The railway line is expected to unlock the monetisation of Botswana’s coal resources, which are seen as a way to augment the depleting diamond resources that have been the mainstay of the country’s economy.

Global oil prices have fallen sharply over the past seven months, leading to significant revenue shortfalls in many energy exporting nations, while consumers in many importing countries are likely to have to pay less to heat their homes or drive their cars.

From 2010 until mid-2014, world oil prices had been fairly stable, at around $110 a barrel. But since June prices have more than halved. Brent crude oil has now dipped below $50 a barrel for the first time since May 2009 and US crude is down to below $48 a barrel.

The reasons for this change are twofold – weak demand in many countries due to subdued economic growth, coupled with surging United States production.

But some observers, Kenewendo points out, have put the finger of blame for the falling on Saudi Arabian producers who are trying to push out the shale oil producers from the markets by making the oil industry unprofitable, by over producing and keeping prices low.

Though US shale oil producers have far higher costs than conventional rivals in the Oil producing countries, it is reported that many need to carry on pumping to generate at least some revenue stream to pay off debts and other costs.

Kenewendo said that while Botswana is lucky in that diamond prices behave differently from other commodities, other exports such as copper are likely to be hurt by falling commodity prices due to low inflation.

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

21st September 2020
Botswana-on-high-alert-as-AML-joins-Covid-19-to-plague-mankind-

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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