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IMF to Botswana: It’s time for a new growth model

Deputy Managing Director of the International Monetary Fund (IMF), Tao Zhang has called on Botswana to fast-track coming up and swiftly implementing a completely new growth model to transform Botswana’s economy before it is weighed down by increasing external shocks and stagnant domestic growth rate.

Tao Zhang was speaking at a workshop on economic diversification held in conjunction with Bank of Botswana in Kasane this past weekend. Zhang noted that Botswana’s success story from one of the poorest countries in the world before independence to one of the most celebrated rapid economic growth examples today cannot go untold.

The IMF Top Executive however underscored that it is now time to elevate to another level “This has been one of the inspiring transformations in Sub-Saharan Africa, however the need for a new growth model to accelerate Botswana’s convergence and transition to high-income status cannot be over emphasized,” he said.

Zhang cautioned that in the short term Botswana has to guard against external shocks, those to the diamond market and climate change, stressing that these short- and long-term challenges could be addressed by diversifying the economy. “The government of Botswana has made clear its objectives. The question that remains is how best to achieve them, macroeconomic stability and a predictable policy environment are critical to supporting good outcomes from the interventions geared towards realizing these aspirations,” he said.

The IMF’s Second in command posed questions to attendees who included amongst others policy makers, members of the National Economic Transformation Strategy committee and top officials from Ministry of Finance, Bank of Botswana and Ministry of Investment Trade & Industry. “What is the role of the Government? Should it follow sector-neutral or horizontal policies, letting market forces choose sectors and activities, or should it follow a more active approach as many countries have done?” posed the Washington based lender Deputy Chief.

Zhang cited  Chile as one of the countries that realized return on investment from their economic growth matrix “Whether Chile followed the standard growth recipe or went beyond it in developing the salmon industry, we need to learn and benchmark on that and see how best we can curtail that to our own economic circumstance and growth requisites,” he said. According to the IMF Executive the notion that markets do indeed fail and government intervention could be warranted is in practice difficult as it often not easy to identify a market failure realistically than it is on paper.

“Even abstracting from market failures, some countries have targeted specific sectors. And there the question arises, which sector should be targeted? Should we stick to the existing perceived comparative advantage and develop vertically along the supply chain of existing products?” Zhang reiterated that if policymakers decide to support a particular sector, then a question on how to support the sector, whether that sector should be regulated or not remain cardinal decisions for leaders to make.

“There is, of course, a wide range of policies including specific  tax incentives, tariff and non-tariff barriers, cheap financing  for special economic zones, and public research and development, but even tapping on those we need to ensure we do not  undermine other economic growth requisites like domestic resource mobilization” Tao said. Tao Zhang’s visit comes after a mission undertaken by IMF team led by Mr. Papa N’Diaye late last year which held discussions for the 2019 Article I Consultation with Botswana.

The discussions focused on macroeconomic policies to increase the resilience of the economy in the face of persistently low mineral revenue and transfers from the Southern African Customs Union (SACU), as well as the structural reforms needed to achieve the authorities’ objective to transition to a knowledge-based economy and high-income status by 2036.

The IMF team noted that after a relatively good performance in 2018, Botswana‘s economy faced headwinds in the year 2019 related to weaknesses in the diamond market, a severe drought, and slower growth in neighboring countries. It was noted that growth would slow to about 3.5 percent in 2019, while inflation would remain low. The Government current account was projected to move to negative territory, contributing to a decline in reserves.

The fiscal deficit was signaled to reach 5.75 percent of GDP due to lower-than-expected revenue, higher-than-expected increase in public wages and other recurrent spending. Despite these challenges, the banking sector was projected to remain well capitalized with improving liquidity. For the year 2020, the IMF team noted that under its baseline scenario, growth is expected to recover to 4.2 percent in 2020, as the diamond market normalizes and copper production comes into stream, and hover around 4 percent thereafter.

This was however noted by N’Diaye’s team to be a level too low to achieve Botswana’s development objectives and create enough jobs to absorb the new entrants into the labor market. N Diaye further noted that infection would accelerate amid accommodative monetary policy but remain in the bottom half of the Bank of Botswana target band. Fiscal consolidation will gradually reduce the deficit and would contribute to a gradual rebuilding of buffers over the medium term.

“The outlook is subject to significant downside risks, including a global rise in protectionism, a faster-than-anticipated slowdown in China and in the euro area, and continued slow growth in South Africa,” he said. Experts say over the medium term, Botswana’s economy remains vulnerable to volatile mineral revenue and SACU transfers and to climate shocks.  Economists say upside risks could stem from higher-than-expected mining production such as coal.

Papa N’Diaye’s team noted that Botswana’s objective to return to a fiscal surplus over the medium term in line with their track record of fiscal discipline was a welcome ambition. “While Botswana still has some fiscal space that allows a gradual adjustment, fiscal consolidation should start in full year 2020, supported by both revenue and expenditure measures. In advancing consolidation, the composition of the adjustment needs to be carefully calibrated to minimize the impact on competitiveness, growth, and the most vulnerable,” recommended the IMF.

The Global economic think tank further noted that for Botswana to achieve its objectives of moving to a knowledge-based economy and to high-income status by 2036, the country will require changing the growth model from a mining and government-led model to a private sector and export-driven. This entails revamping the macroeconomic policy frameworks to increase the resilience of the economy and accelerating the implementation of supply-side reforms.

Recommended fiscal reforms include amongst others modifying the fiscal rule to prevent further erosions in buffers and achieve Botswana’s intergenerational equity objectives. The IMF also recommended that Botswana should increase its revenue mobilization through broadening the tax base and advancing tax reform, as well a public financial management reforms to enhancing the efficiency of spending.

Botswana was also advised to reform parastatals and other extra-budgetary entities, including by enforcing compliance to best governance practices and strengthening their monitoring and accountability, and revamping the debt management framework.“Regarding monetary and exchange rate policy, Bank of Botswana was advised to  use the flexibility afforded by its current exchange rate regime to help the economy adjust to the persistent decline in mineral and trade resources and structural transformation.

“Recent reforms to strengthen the monetary transmission mechanism and deepen the domestic financial  market should continue, including by further developing the secondary market for government securities, leveraging Fintech, facilitating the attachment of collateral, and improving credit information,” said IMF chiefs.

The Global lender says transitioning to a knowledge-based economy and a high-income status will require prioritizing investment in human capital, upgrading digital skills and deepening Information and Communications Technology penetration, as well as promoting integration in regional and global value chains.

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Diamond industry crises not over yet – De Beers Chief

13th January 2021
De Beers Group Chief Executive Officer: Bruce Cleaver

Following a devastating first half of the year 2020 due to COVID-19, the global diamond industry  started gaining  positive momentum towards the end of the year as key markets entered into  thanks giving and holiday season.

However Bruce Cleaver, Chief Executive Officer of De Beers Group cautioned that the industry is not out of the woods yet, citing prevailing challenges ahead into 2021.

The first half of 2020 was characterized by some of the worst challenges in history of global diamond trade.

The midstream, where rough diamonds are traded in wholesale and bulk to cutters and polishers, was for the most part of second quarter 2020, suffocated by international travel restrictions as countries responded to the contagious Corona Virus.

This halted movement of buyers and shipment of  the rough goods , resulting  in unprecedented decline of sales, in turn  ballooning stockpiles as the upstream  operations produced with little uptake by the midstream.

The situation was exacerbated by muted demand in the downstream where jewelry industries and tail end retailers closed to further curb the spread of COVID-19.

However towards the end of third quarter getting into the last quarter of the year, demand in both midstream and downstream started to steadily pick up as countries relaxed COVID-19 restrictions.

De Beers, the world’s largest diamond producer by value started reporting significant recovery in sales in the sixth and seventh cycle, figures began to reflect an upswing in sentiment as well as increase in uptake of rough goods by midstream.

Sales for the sixth cycle amounted to $116 Million, following a sharp downturn in the previous cycles, significant jump was realized during the seventh cycle, registering $320 million, an over 175 % upswing when gauged against the proceeding cycle.

De Beers noted that diamond markets showed some continued improvement throughout August and into September as Covid-19 restrictions continued to ease in various locations.

“Manufacturers focused on meeting retail demand for polished diamonds, particularly in certain product areas, accordingly, we saw a recovery in rough diamond demand in the seventh sales cycle of the year, reflecting these retail trends, following several months of minimal manufacturing activity and disrupted demand patterns in all major markets,” said De Beers Chief Executive, Bruce Cleaver in September last year.

The diamond mining behemoth continued to register impressive sales in the eighth and ninth cycle signaling the industry could end the year on a positive note.

The momentum was indeed carried into the last cycle of the year. The value of rough diamond sales (Global Sightholder Sales and Auctions) for De Beers’ tenth sales cycle of 2020 amounted to $440 million, a significant increase from the 2019 tenth sales cycle value.

Against what seemed like a positive year end that would split into the New Year Bruce Cleaver, CEO, De Beers Group, however warned the industry not to count eggs before they hatch.

“Positive consumer demand for diamond jewellery resulting from the holiday season is supporting the continuation of retail orders for polished diamonds from the diamond industry’s midstream sector. This in turn supported steady demand for De Beers’s rough diamonds at our final sales cycle of 2020,” Cleaver had said in December.

In caution the De Beers Chief noted that “While the diamond industry ends the year on a positive note, we must recognise the risks that the ongoing Covid-19 pandemic presents to sector recovery both for the rest of this year and as we head into 2021.”

All segments of the supply chain were severely impacted by the global lockdown measures introduced in response to the Covid-19 pandemic in the first half of 2020.

After a strong US holiday season at the end of 2019, the rough diamond industry started 2020 positively as the midstream restocked and sentiment improved.

However, from February 2020, the Covid-19 outbreak began to have a significant impact on diamond jewellery retail sales and supply chain, with many jewelers suspending all polished purchases and/or delaying payments to their suppliers.

Rough diamond sales were materially affected by lockdowns and travel restrictions, delaying the shipping of rough diamonds into cutting and trading centers and preventing buyers from attending sales events.

These resulted in significant decline in total revenue for the business in the first six months of 2020. Total revenue decreased by 54% to $1.2 billion from $2.6 billion registered in the prior half year period ended 30 June 2019.

For the entire first six (6) months of the year 2020 De Beers Rough diamonds sales fell drastically to $1.0 billion from $2.3 billion in the prior H1 period ended 30 June 2019. Sales volumes decreased by 45% to 8.5 million carats compared to 15.5 million carats registered in the prior period.

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Gov’t coffers depleting to record low levels 

13th January 2021
Dr Matsheka

Next month Minister of Finance & Economic Development, Dr Thapelo Matsheka will face the nation to deliver Botswana‘s first budget speech since COVID-19 pandemic put the world on devastating economic trajectory.

The pandemic that broke out in late 2019 in China has put the entire world on unprecedented chaos ,killing over P1 million people across the globe , shattering economies and almost rendering  the year 2020 – a 12 months stretch of complete setback.

The 2021/22 budget speech will come at time when Botswana’s economy is still trying to emerge out of this.

National lockdowns and local travel restrictions have hit small medium enterprises hard, while international travel restrictions halted movement of both good and people, delivering by far some of the heaviest and worst catastrophic blows on the diamond industry and tourism sector, the likes of which this country has never seen before on its largest economic sectors.

As Minister Matsheka faces parliament next month, the reality on the ground is that Botswana’s national current cash resource, the Government Investment Account (GIA) is depleting at lightning speed.

On the other hand the COVID-19 economic mess is  prevailing,  the virus is reported to have taken a new dangerous shape of a deadly variant, spreading like fueled veld fire and causing some of the world’s super powers back to tough restrictions of lockdown.

According official figures released by Bank of Botswana, in October 2020 the GIA was running at P6 billion compared to the P18.3 billion held in the account in October 2019.

However reports indicate that the account could be currently holding just about P3 billion.  The draw down from the GIA has been by exacerbated by declining diamond revenue, the country‘s largest cash cow. The sector was experiencing significant revenue decline even before COVID-19 struck.

 

When the National Development Plan (NDP) 11 commenced three (3) financial years ago, government announced that the first half of the NDP would run at a 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.

Taking into account the COVID-19 economic mess in 2020/21 financial year, the budget deficit could add up to P20 billion after revised figures.

Drawing down from government cash balances to finance these budget deficits meant significant withdrawals from the Government Investment Account, hence the near depletion of this buffer.

Meanwhile  should Botswana’s revenue streams completely dry up to zero levels; the country would only have 11 months, before calling out for humanitarian  aids and international donors, because  foreign reserves are also on slow down.

During 2019, the foreign exchange reserves declined by 8.7 percent, from Seventy One Billion, Four Hundred Million Pula (P71.4 billion) in December 2018 to Sixty Five Billion, Three Hundred Million Pula (P65.3 billion) in December 2019.

The reserves declined further in 2020, falling by 2.3 percent to Sixty Three Billion, Seven Hundred Million Pula (P63.7 billion) in July 2020.  This was revealed by President Masisi during State of the Nation Address in November last year.

The decrease was mainly due to foreign exchange outflows associated with Government obligations and economy-wide import requirements.

However latest statistics(October 2020)  from Bank of Botswana reveal that Botswana’s foreign reserves are estimated at P58.4 billion, with  government’s share of these funds significantly low.

Government has since introduced several measures to contain costs and control expenditure with the most recent intervention being the halting of recruitment in government departments and parastatals.

Furthermore, Value Added Tax has been signaled to go up  from 12% to 14% in April this year with more hikes and service fees anticipated as government embarks on unprecedented domestic revenue mobilization.

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Cresta signs lease agreement for Phakalane golf estate hotel. continues with growth agenda despite covid-19 impact

13th January 2021

Botswana Stock Exchange listed hotel group Cresta Marakanelo Limited (“CML” or “the Company”) announced the signing of a lease agreement for Phakalane Golf Estate Hotel & Convention Centre, which will see CML extend its footprint by adding the 4 star Gaborone property to its already impressive portfolio.  The agreement is subject to regulatory approvals therefore the effective date of the transaction is expected to be 1 February 2021.

 

CML brings a wealth of expertise to the lease and despite the difficult year for the tourism and hospitality industry, due to the impact of the COVID-19 pandemic, CML remains confident in the recovery of the sector and the need to invest in expanding the Company’s footprint.

CML Managing Director, Mr Mokwena Morulane commented: “Our continued efforts to improve our offerings, understand the market dynamics and modern day trends in the face of global challenges, means we are ready for the changing face of tourism and international travel, and this addition to the Cresta portfolio signals our confidence in the future.  

 

“Despite the headwinds faced in 2020, Management has continued to focus on projects that enhance CML’s product offering such as the refurbishments at Cresta Mowana Safari Resort & Spa in the tourism capital Kasane and the ongoing refurbishment of Cresta Marang Residency in Francistown. The signing of the lease for the 4 star Phakalane Golf Estate Hotel & Conference Centre is a great addition to the Cresta portfolio and will unlock shareholder value in the future.

 

“We remain vigilant to value-enhancing opportunities including acquisitions or leases, after having reconsidered our pipeline against current and expected market conditions.”  

 

Commenting on the lease agreement, the Chief Executive Officer, Mr S Parthiban, speaking on behalf of Phakalane  noted; “No hotel chain holds as much expertise in the region, understands our local culture and tastes and what hospitality is about better than Cresta Marakanelo Limited. We believe that the renovations done to the property has made Phakalane Hotel and Convention Centre a unique product in Botswana and at par with international facilities.  We believe that this lease will benefit not only us as Phakalane , but the market in general as Cresta has run hotels successfully in Botswana for over 30 years and is therefore expected to bring new offerings that appeal to the local and international markets as well as the residents and visitors to the Golf Estate. We look forward to a long mutually beneficial relationship with Cresta.” 

 

CML like the rest of the tourism and hospitality industry and the entire value chain was hard hit by lockdowns  with the surge of COVID-19. By investing during the low period, the company hopes to realise the future value of spending time in preparing for the new consumer dynamics and behaviour.  Despite business interruptions as a result of a six-month long state of emergency and several lock-down periods declared by the Government of Botswana to limit the spread of COVID-19, the Company is starting to record an increase in occupancies, which bodes well for the recovery of the industry and the Company’s future prospects.

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