The Chief Executive Officer (CEO) of First National Bank Botswana (FNBB), the country’s largest commercial bank by market share and profitability, Steven Bogatsu says post COVID-19, Botswana must intensify her economic diversification efforts or else face the catastrophic effects of global uncertainties and world economic shocks.
Botswana’s economy is largely dependent on the diamond industry as the largest single foreign income earner and biggest contributor to GDP. Botswana’s flagship diamond business, Debswana is alone, by far the largest single private sector employer.
The diamond industry is however one of the most vulnerable industries in the world. When uncertainties engulf global economies the diamond industry is always one of the first to catch flu, resulting in serious cash flow disruptions.
This vulnerability of Botswana’s economic engine according to FNBB CEO call for serious transformation of the economy. Speaking at press briefing addressed by the banking industry this week Bagatsu said the economy has to generate other sources of revenue and income.
“It is apparent now that diversification is going to be very key, given the slowing down of diamonds sales, that is obviously going to have negative impact on mineral revenue, and subsequently the entire economy,” said Bogatsu.
During 2008/09 global financial crisis the diamond industry was heavily hit, so much that Botswana went for a month without sale of a single diamond.
Miner Debswana had to halt operations for three (3) months. In 2019, nearly a decade later in the wake of heightened geo-political tensions between the world’s two biggest economies, the industry received a heavy blow, suppressing sales by 25 %.
The economic uncertainty generated by unstable geopolitical climate arising from this Washington –Beijing tensions led to widespread uncertainty triggering a global downturn in the industry during the first half of 2019 spilling over to the entire year.
This emanated from an increased sense of caution among the banks that finance the trade, as well as diamond brokers and consumers of luxury goods, leading to significant decline in commerce across all segments.
During the last quarter of 2019, the industry showed signs of slight recovery with holiday season in China and United States thanksgiving opening up the market a bit. Positive sentiment and upward trajectory bolstered first sales of the year 2020, with leading producers, Alrosa and De Beers registering an impressive upswing.
But that was short lived, thanks to outbreak of Corona virus in December 2019 which intensified in February this year. De Beers’ second sight fell by about 36 % from the first sales of the year and 25 % when gauged against the same sight in 2019.
Other sights were cancelled due to travel restrictions and global lockdown which halted trade activity and operations across the value chain worldwide. This was mainly due to slow business in China where corona virus broke in the city of Wuhan. After the United States, most of De Beers’s rough diamonds end up in China.
At the Press briefing Bogatsu said COVID-19 has presented Botswana with a clear opportunity to develop other industries “Some of the industries that we are going to start see emerging after this crisis are health and pharmaceutical industry as well the technology industry,” he said.
Bogatsu added that some of the positives of COVID-19 are increased uptake and use of technology across industries. “In the banking industry we are seeing more of our customers using more of our technology services and offerings ,not only in the banking ,the insurance and other industries as well , so we are going to need people who are going to support this digital transformation from technology perspective to occasion this transformation,” he said.
Owing to the steep downturn in the diamond market during the 2008/09 Global financial crises mineral revenue accounted for only 30 % of Government revenue in the 2009/10 financial year with SACU revenue accounting for about 26 % and Non mineral economic sectors revenue going in at 19% while VAT contributed in 13 %.
Against all efforts to diversify the economy the Mineral revenue rose through the years to account for about 37 % of government total budget in 2015 until dropping down a bit to just over 35 % for 2019/20 financial year.
However total revenues and grants for the 2019/2020 Financial Year were revised to P60.71 billion with the main revenue contributor being Mineral revenue at P18.43 billion; Customs and Excise at P13.79 billion; and VAT at P7.92 billion. This still placed mineral revenue at just above 30 % of total revenue and grants.
Experts say as long as Mineral revenue still accounts for over 30 % of Botswana’s total revenue, zigzagging up and down through the years to over 35 %, the country’s revenue profile presents a serious risk. Botswana customs and excise revenue has remained below 25 % for some time signaling trade stagnancy and little improvement on the export sector.
Within the Foreign income earning basket Mineral revenue controls the channel, sitting at almost 90 %.In Africa Botswana and Angola’s foreign earnings are single commodity anchored with Angola relying on Oil and Botswana pivoted by diamonds, this according to experts signals that Botswana ‘s diversification efforts have failed to bear fruits over the years.
For his part Chief Executive Officer of Banc ABC, Kgotso Bannabotlhe reiterated Bogatsu’s sentiment, citing projections by International Monetary Fund (IMF) that undiversified and resource based economies like Botswana will be heavily affected by COVID-19 pandemic.
“We may see some layoffs in the economy because our government has been running at a deficit, so this calls for intensified efforts on economic diversification and citizen economic drive , we need to start developing local industries and creating massive and sustainable jobs locally,” said Bannabotlhe.
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.
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”