Inside the blurry vision of local firms hangs a cloud of uncertainty, Covid-19 disruptions and an obstruction of view into any positive projection with regards to the future of economic activity, a fresh survey by the central bank alludes.
The Business Expectations Survey which focused on the second quarter of 2020 — the time when Botswana was on lockdown and a lot of businesses faced business activity halts and disruptions — says COVID-19 containment measures have negatively affected business operations in the second quarter of 2020.
“The most affected firms are largely in the trade, hotels, restaurants, transport and communications; mining and quarrying; finance and business services, and the construction sectors. In general, firms anticipate that it will take a year from June 2020, for their businesses to recover from the impact of COVID-19,” said Bank of Botswana, presenting gloomy results from a survey on local firms.
According to the Business Expectations Survey, firms are less optimistic about economic activity in the second quarter of 2020 compared to the previous quarter. Businesses also expect a deterioration in all business conditions. According to the survey, access to credit was anticipated to be much tighter in the domestic market compared to other markets.
However, firms expect cost pressures to fall significantly in the third quarter of 2020, reflecting the anticipated reduction in costs of wages, transport, rent and materials, according to the Business Expectations Survey. The research further stated that businesses also expect inflation to remain stable and within the Bank’s medium-term objective range of 3 – 6 percent, in 2020 and 2021.
Firms were also moderate in projection of the general economy according to the central bank survey. While Ministry of Finance and Economic Development projected a larger contraction of 8.9 percent, firms despite their pessimism on business conditions which are expected to recover after a year, saw an overall output to contract marginally by a meagre 0.2 percent. This is also lower than the 3% growth in 2019.
“On quarterly basis, firms expect the GDP to contract in the second quarter of 2020, consistent with the anticipated decline in production, sales, profitability, exports and imports of goods and services and investment in buildings, vehicles and equipment, plant and machinery, and ‘other’ investments,” said Bank of Botswana in their latest survey.
Furthermore, firms with an expectation of the economy to have contracted by 1.1 percent in the second quarter of 2020 contradicts the 3% growth reported by Statistics Botswana for the second quarter of 2019.
Firms envision the hazy performance because of perceptions of lower economic growth in the mining and quarrying, the trade, hotels and restaurants and the transport and communications sectors, as well as the finance and business services sectors between the first and second quarters of 2020.
The mining sector particularly, with its businesses mostly being of exporting market oriented nature, was the most pessimistic of all the sectors about economic growth prospects in the second quarter of 2020 compared to an expected stagnation in the first quarter. According to the survey on firms, there has always been the US-China trade war as an impediment for exports like diamonds before Covid-19 came in the ring to wipe out humanity.
This was symptomized by mostly weaker global demand for Botswana rough diamonds. Even though after national lockdown mining was immediately declared as an essential act, the Business Expectations Survey talked about the interruption of trading due to recent outbreak of the Covid-19 pandemic.
“This is followed by the finance and business services sector, which expects poor economic performance consistent with firms’ predicted decline in production and investment during the second quarter of 2020. For the third quarter of 2020, the mining, manufacturing, water and electricity sectors are optimistic about economic performance, while the rest of the sectors are pessimistic.
However, firms across all sectors are optimistic about economic recovery in the twelve-month period to June 2021, led by the mining and quarrying sector,” furthered the survey. The cataract sight suffered by firms under the survey was not all negative, there were glimpses of blurred optimism albeit being hyperopic. A lot of improvement is seen from at the far end which is to June 2021 from June 2020. And according to the Business Expectations Survey, this is in line with the anticipated economic recovery in 2021.
The survey further explains: “Confidence in the domestic market-oriented firms is mainly driven by firms in the manufacturing, water and electricity sectors. Similarly, export market-oriented firms are optimistic about business conditions in the third quarter of 2020 and the year to June 2021. These firms are predominantly in the mining and quarrying business, which is expected to increase output in the third quarter of 2020 and the next 12-month period, as trade conditions improve.”
Firms’ expectations on credit
There has been a worldwide worry that companies might collapse or fail to pay back credit facilities offered to them by banks and lending institutions. However, the central bank has not been fazed by the Non-Performing Loans reported by the banking sector, saying it is a reasonable percentage of the GDP.
In his speech when announcing lockdown, President Mokgweetsi Masisi said to “stabilize businesses” government will “guarantee loans by commercial banks to businesses mostly affected by the pandemic.” Furthermore, the President said, “give eligible businesses affected by Covid-19 access to credit to support operations in conditions where credit becomes more difficult to obtain.”
Last month Bank of Botswana Governor Moses Pelaelo reiterated what Masisi said and encouraged that access to credit would be helpful in the current economic situation. This was after the central bank reduced the Bank rate on April 2020 as one of the monetary response to Covid-19.
According to Business Expectations Survey, firms expect the cost of credit (lending rates) to decrease across all markets, with companies citing the need for affordable credit to stimulate economic activity in the wake of the adverse impact of COVID-19 pandemic, as the main reason. A few other firms based their expectation of lower lending rates on the recent policy rate cut by the Bank, according to the survey.
When looking at borrowing volumes, firms broadly expect an increase in domestic credit, and a reduction in credit from South Africa and elsewhere in the twelve-month period to June 2021, according to the central bank research.
However, firms, domestic and market oriented, perceived access to credit to be tight in the second quarter of 2020. This, according to the banking survey, is despite businesses expecting interest rates to be lower than in the previous quarter. Firms see credit accessibility determined by how the interest rate is, most prefer to borrow when lending rates are lower.
There is another startling discovery by the central bank’s latest survey: “All firms which predominantly target the domestic market, prefer to borrow from the domestic market in 2020 and have no plans to borrow from other markets. Conversely, export-oriented firms prefer to borrow from all markets, with more preference given to the domestic market.”
Botswana has made improvements on preventing and ending arbitrary deprivation of liberty, but significant challenges remain in further developing and implementing a legal framework, the UN Working Group on Arbitrary Detention said at the end of a visit recently.
Head of the delegation, Elina Steinerte, appreciated the transparency of Botswana for opening her doors to them. Having had full and unimpeded access and visited 19 places of deprivation of liberty and confidentiality interviewing over 100 persons deprived of their liberty.
She mentioned “We commend Botswana for its openness in inviting the Working Group to conduct this visit which is the first visit of the Working Group to the Southern African region in over a decade. This is a further extension of the commitment to uphold international human rights obligations undertaken by Botswana through its ratification of international human rights treaties.”
Another good act Botswana has been praised for is the remission of sentences. Steinerte echoed that the Prisons Act grants remission of one third of the sentence to anyone who has been imprisoned for more than one month unless the person has been sentenced to life imprisonment or detained at the President’s Pleasure or if the remission would result in the discharge of any prisoner before serving a term of imprisonment of one month.
On the other side; The Group received testimonies about the police using excessive force, including beatings, electrocution, and suffocation of suspects to extract confessions. Of which when the suspects raised the matter with the magistrates, medical examinations would be ordered but often not carried out and the consideration of cases would proceed.
“The Group recall that any such treatment may amount to torture and ill-treatment absolutely prohibited in international law and also lead to arbitrary detention. Judicial authorities must ensure that the Government has met its obligation of demonstrating that confessions were given without coercion, including through any direct or indirect physical or undue psychological pressure. Judges should consider inadmissible any statement obtained through torture or ill-treatment and should order prompt and effective investigations into such allegations,” said Steinerte.
One of the group’s main concern was the DIS held suspects for over 48 hours for interviews. Established under the Intelligence and Security Service Act, the Directorate of Intelligence and Security (DIS) has powers to arrest with or without a warrant.
The group said the “DIS usually requests individuals to come in for an interview and has no powers to detain anyone beyond 48 hours; any overnight detention would take place in regular police stations.”
The Group was able to visit the DIS facilities in Sebele and received numerous testimonies from persons who have been taken there for interviewing, making it evident that individuals can be detained in the facility even if the detention does not last more than few hours.
Moreover, while arrest without a warrant is permissible only when there is a reasonable suspicion of a crime being committed, the evidence received indicates that arrests without a warrant are a rule rather than an exception, in contravention to article 9 of the Covenant.
Even short periods of detention constitute deprivation of liberty when a person is not free to leave at will and in all those instances when safeguards against arbitrary detention are violated, also such short periods may amount to arbitrary deprivation of liberty.
The group also learned of instances when persons were taken to DIS for interviewing without being given the possibility to notify their next of kin and that while individuals are allowed to consult their lawyers prior to being interviewed, lawyers are not allowed to be present during the interviews.
The UN Working Group on Arbitrary Detention mentioned they will continue engaging in the constructive dialogue with the Government of Botswana over the following months while they determine their final conclusions in relation to the country visit.
Standard Chartered Bank Botswana (SCBB) has informed the government that it will not be accepting new loan applications for the Government Employees Motor Vehicle and Residential Property Advance Scheme (GEMVAS and LAMVAS) facility.
This emerges in a correspondence between Acting Permanent Secretary in the Ministry of Finance Boniface Mphetlhe and some government departments. In a letter he wrote recently to government departments informing them of the decision, Mphetlhe indicated that the Ministry received a request from the Bank to consider reviewing GEMVAS and LAMVAS agreement.
He said: “In summary SCBB requested the following; Government should consider reviewing GEMVAS and LAMVAS interest rate from prime plus 0.5% to prime plus 2%.” The Bank indicated that the review should be both for existing GEMVAS and LAMVAS clients and potential customers going forward.
Mphetlhe said the Bank informed the Ministry that the current GEMVAS and LAMVAS interest rate structure results into them making losses, “as the cost of loa disbursements is higher that their end collections.”
He said it also requested that the loan tenure for the residential property loans to be increased from 20 to 25 years and the loan tenure for new motor vehicles loans to be increased from 60 months to 72 months.
Mphetlhe indicated that the Bank’s request has been duly forwarded to the Directorate of Public Service Management for consideration, since GEMVAS and LAMVAS is a Condition of Service Scheme. He saidthe Bank did also inform the Ministry that if the matter is not resolved by the 6th June, 2022, they would cease receipt of new GEMVAS and LAMVAS loan applications.
“A follow up virtual meeting was held to discuss their resolution and SCB did confirm that they will not be accepting any new loans from GEMVAS and LAMVAS. The decision includes top-up advances,” said Mphetlhe. He advised civil servants to consider applying for loans from other banks.
In a letter addressed to the Ministry, SCBB Chief Executive Officer Mpho Masupe informed theministry that, “Reference is made to your letter dated 18th March 2022 wherein the Ministry had indicated that feedback to our proposal on the above subject is being sought.”
In thesame letter dated 10 May 2022, Masupe stated that the Bank was requesting for an update on the Ministry’s engagements with the relevant stakeholder (Directorate of Public Service Management) and provide an indicative timeline for conclusion.
He said the “SCBB informs the Ministry of its intention to cease issuance of new loans to applicants from 6th June 2022 in absence of any feedback on the matter and closure of the discussions between the two parties.” Previously, Masupe had also had requested the Ministry to consider a review of clause 3 of the agreement which speaks to the interest rate charged on the facilities.
Masupe indicated in the letter dated 21 December 2021 that although all the Banks in the market had signed a similar agreement, subject to amendments that each may have requested. “We would like to suggest that our review be considered individually as opposed to being an industry position as we are cognisant of the requirements of section 25 of the Competition Act of 2018 which discourages fixing of pricing set for consumers,” he said.
He added that,“In this way,clients would still have the opportunity to shop around for more favourable pricing and the other Banks, may if they wish to, similarly, individually approach your office for a review of their pricing to the extent that they deem suitable for their respective organisations.”
Masupe also stated that: “On the issue of our request for the revision of the Interest Rate, we kindly request for an increase from the current rate of prime plus 0.5% to prime plus 2%, with no other increases during the loan period.” The Bank CEO said the rationale for the request to review pricing is due to the current construct of the GEMVAS scheme which is currently structured in a way that is resulting in the Bank making a loss.
“The greater part of the GEMVAS portfolio is the mortgage boo which constitutes 40% of the Bank’s total mortgage portfolio,” said Masupe. He saidthe losses that the Bank is incurring are as a result of the legacy pricing of prime plus 0% as the 1995 agreement which a slight increase in the August 2018 agreement to prime plus 0.5%.
“With this pricing, the GEMVAS portfolio has not been profitable to the Bank, causing distress and impeding its ability to continue to support government employees to buy houses and cars. The portfolio is currently priced at 5.25%,” he said. Masupe said the performance of both the GEMVAS home loan and auto loan portfolios in terms of profitability have become unsustainable for the Bank.
Healso said, when the agreement was signed in August 2018, the prime lending rate was 6.75% which made the pricing in effect at the time sufficient from a profitable perspective. “It has since dropped by a total 1.5%. The funds that are loaned to customers are sourced at a high rate, which now leaves the Bank with marginal profits on the portfolio before factoring in other operational expenses associated with administration of the scheme and after sales care of the portfolio,” said the CEO.