During the first quarter of 2020 the dark era of Botswana’s perpetual trade deficit – because the local economy depends only on diamond exports or has less to sell but more to buy outside borders- light was seen flickering at the end of the tunnel as January saw Botswana recording a surplus.
That light came with a sparkle of heavy diamond exports as Botswana posted a surplus of P3.34 billion after a dark spell of seven months. Botswana’s last trade surplus was June 2019 when exports swelled 8.2 percent, boasted by glittering diamond sales by 7 percent.
Albeit Botswana still in a dark hole of trade deficit, investment manager Kgori Capital, this week, in its market watch demonstrated that diamonds helped in a “slowdown in trade balance deterioration.” Kgori Capital further acknowledged that the easing of trade balance weakening was “due to pick up in diamond activity.”
Trade deficit narrowed by almost 39 percent from August to September and this was because of a proverbial shine of diamond exports with 93.0 percent contribution of total exports, P6.36 billion in monetary terms. As lockdowns were eased across economies in the world, diamond sales have been improving, just last month diamond exports helped shrink the dogging trade deficit moving from P1.9 billion in July to P2.12 billion in August.
Machinery & Electrical Equipment are the second after diamonds when it comes to raking money into Botswana; it accounted 2.5 percent of total export which is P1.72 billion. According to Statistics Botswana trade statistics released recently, Botswana’s overall exports amounted to P6. 83 billion, a rise of more than 100 percent (P3, 650.2 million) compared to the revised August 2020 value of P3, 181.6 million.
Destination of Botswana’s exports was mostly to Asia, with a market share of 54.7 percent according to the period under review. Botswana’s money in the account came from the United Arab Emirates (UAE) with India receiving exports representing 26.4 percent and 22.2 percent of Botswana’s exports respectively, during the month under review.
India was the biggest spender of Botswana diamonds. UAE trade deals with Botswana were in regard to diamonds only. Belgium received 27.5 percent of exports which also were mainly diamonds from Botswana mines. Air transport mode was mostly used to transport exports which were predominantly diamonds. Exports transported by air accounted for 94.5 percent of total exports while those by road and rail represented 5.4 percent and 0.2 percent respectively.
While rough diamonds mined in Botswana boosts this country’s exports, they mostly end up in other countries, then returned as imports for cutting and polishing. This could be the reason why diamonds are pulling down both the export and import simultaneously. This appears to be the diamond aggregation activity which was moved from London to Gaborone few years ago, but this is mostly missing in the national statistics according to observers.
When total imports were valued at P8, 037.9 million in September, an increase of 39.5 percent (P2.28 billion) compared to the revised August 2020 import figure of P5.76, the increase in diamond imports was over 100 percent (P2, 114.1 million). This shows Botswana is predominantly a diamond economy, contributing 100 percent pull in weight from both the import and export scales.
Professor Roman Grynberg explained this phenomena in 2013: “The reason is that we import diamonds for cutting and polishing here in Botswana and it is now the country’s biggest manufacturing export activity by far; although it is not adequately recorded in national statistics. What also has happened is that Botswana signed a Marketing Agreement with De Beers, which sees the diamond aggregation activity brought from London to Gaborone. This started in the middle of last year and is to be fully implemented by the end of 2013. What this means is that Botswana now imports rough diamonds from Namibia, South Africa, Canada and the EU.”
Diamonds contributed the most to total imports at 47.9 percent (P3, 848.5 million), followed by Food, Beverages & Tobacco with 11.3 percent (P908.1 million). South Africa is a major contributor of Botswana imports with a contribution of 46.7 percent to the country’s total imports. South Africa fed Botswana Food, Beverages & Tobacco which contributed 22.6 percent (P8.50 billion) while Fuel, Machinery & Electrical Equipment and Chemicals & Rubber Products contributed 14.0 percent (P5.25.0 million), 13.4 percent (P503.3 million) and 13.3 percent (P500.7 million), of total imports from the country, respectively.
SACU supplied 48.6 percent (P3, 906.7 million) of Botswana’s total imports during September according to Stats Bots. The top most imported commodity group from the SACU region was Food, Beverages & Tobacco, with a contribution of 22.3 percent (P869.5 million) of total imports from the region. Fuel, Chemicals & Rubber Products and Machinery & Electrical Equipment followed with contributions of 15.5 percent (P607.5 million), 13.4 percent (P521.7 million) and 12.9 percent (P505.8 million), respectively.
Namibia contributes P108.7 million or 1.4 percent of this country’s imports with 75.8 percent (P82.4 million) of that total attributable to Fuel imports. As part of diamond transaction UAE and Belgium are mentioned in Botswana’s import bill having contributed 21.3 percent and 14.8 percent respectively, to total imports during September. Regionally SACU was the major source of imports in September with a contribution of 48.6 percent followed by Asia and the EU accounted for 33.0 percent and 16.6 percent respectively.
Apart from importing diamonds, weighing 47.9 of the imports, Food, Beverages and Tobacco were also the things that were imported to Botswana in September with contributions to the import bill of 47.9 percent and 11.3 percent. As goods came from Namibia and South Africa they were mostly transported by road and the imports accounted for 44 percent of all commodities brought to this country. Some good entering the country were flown by airplanes (34.percent of the goods) and some which were in large quantities, in the same SADC, were transported by rail transport.
The partnership between Debswana and Botswana Oil Limited (BOL) which was announced a fortnight ago will create under 100 direct jobs, and scores of job opportunities for citizens in the value chain activities.
In a major milestone, Debswana and BOL jointly announced that the fuel supply to Debswana, which was in the past serviced by foreign companies, will now be reserved for citizen companies. The total value of the project is P8 billion, spanning a period of five years.
“About 88 direct jobs will be created through the partnership. These include some jobs which will be transferred from the current supplier to the new partnership,” Matida Mmipi, Head of Stakeholder Relations at Botswana Oil, told BusinessPost.
“We believe this partnership will become a blueprint for other citizen initiatives, even in other sectors of the economy. Furthermore, this partnership has succeeded in unlocking opportunities that never existed for ordinary citizens who aspire to grow and do business with big companies like Debswana.”
Mmipi said through this partnership, BOL and Debswana intend to impact citizen owned companies in the fuel supply value chain that include transportation, supply, facilities maintenance, engineering, customs clearance, trucks stops and its support activities such as workshop / maintenance, tyre services, truck wash bays among others.
“The number of companies to be on-boarded will be determined by the economics at the time of engagement,” she said. BOL will play a facilitatory role of handholding and assisting emerging citizen-owned fuel supply and fuel transportation companies to supply Debswana’s Jwaneng and Orapa Letlhakane Damtshaa (OLDM) mines with diesel and petrol for their operations.
“BOL expects to increase citizen companies’ market share in the fuel supply and transportation industries, which have over the years been dominated by foreign-owned suppliers. Consequently, the agreement will also ensure security of supply for Debswana operations, which are a mainstay of the Botswana economy,” Mmipi said.
“Furthermore, BOL will, under this agreement, transfer skills to citizen suppliers and transporters during the contract period and ensure delivery of competent and skilled citizen suppliers and transport companies upon completion of the agreement.”
Mmipi said the capacitating by BOL is limited to providing citizen companies oil industry technical capability and capacity to deliver on the requirements of the contract, when asked on helping citizen companies to access funding.
“BOL’s mandate does not include financing citizen empowerment initiatives. Securing funding will remain the responsibility of the beneficiaries. This could be through government financing entities including CEDA or through commercial banks. Further to this, there are financial institutions that have already signed up to support the Debswana Citizen Economic Empowerment Programme (CEEP),” Mmipi indicated.
While BOL is established by government as company limited by guarantee, it will not benefit financially from the partnership with Debswana, as citizen empowerment in the petroleum value chain is core to BOL’s mandate.
“BOL does not pursue citizen facilitation for financial benefit, but rather we engage in citizen facilitation as a social aspect of our mandate. Citizen facilitation comes at a cost, but it is the right thing to do for the country to develop the oil and gas industry,” she said.
Mmipi said supplying fuel to Debswana comes with commercial benefits such as supply margins. These have traditionally been made outside the country when supply was done by multi-nationals for a period spanning over 50 years. With BOL anchoring supply for Debswana, this benefit will accrue locally, and BOL will be able to pay taxes and dividends to the shareholders in Botswana.
PwC Africa has presented the eighth edition of the VAT in Africa Guide – Africa re-emerging. This backdrop of renewal informs on the re-emergence of African economies and societies which have been affected by the COVID-19 pandemic.
In this edition, which has been compiled by PwC Africa’s indirect tax experts, covers a total of 41 African countries. It is geared towards sharing insight with our clients based on the constantly changing tax environments that can have a significant impact on business operations.
Within Africa, governments continue to focus on expanding the tax net by improving revenue collection through efficient compliance systems and procedures. PwC Africa has observed that revenue authorities also continue to take a keen interest in indirect taxes as part of revenue mobilisation initiatives.
Maturing VAT system and upskilling SARS
“In South Africa, VAT is becoming more relevant as a revenue source for the government,” says Matthew Besanko, PwC South Africa’s Indirect Tax Leader. “Strides have been made to upskill South African Revenue Service (SARS) staff and identify VAT revenue leakages, particularly in respect of foreign suppliers of electronic services to people and businesses in South Africa.”
Broadening the tax base and digital economy
In the past year, South Africa, Mozambique and Zimbabwe saw updates to their VAT legislation, or introduced specific legislation targeting electronically supplied services (ESS), which is in line with the global trend of attempting to tax the digital economy. “The expectation is that Botswana will also introduce VAT legislation in due course, while the National Treasury in South Africa has also made mention of revising the rules to account for further developments in the digital economy,” Besanko says.
South Africa’s National Treasury has also drafted legislation with the intention to introduce a reverse charge on gold, which is expected to come into effect later in 2022. While in Zimbabwe, revenue authorities have introduced a tax on the export of raw medicinal cannabis ranging between 10% and 20%, which came into effect on 1 January 2021.
ESG and carbon tax
Key strides have also been made within the Environmental, Social and Governance (ESG) space. “ESG leadership, strategising and reporting is essential now for organisations that wish to flourish and remain relevant,” Kabochi says. He adds that companies need to consider how ESG and tax intersect, since tax is a significant value driver when businesses need to deliver on their ESG goals.
In South Africa, a carbon tax regime, which is being implemented in three phases, has been adopted. The second phase was scheduled to start in January 2023, however phase one was extended by three years until 31 December 2025.
Until then, taxpayers will enjoy substantial tax-free allowances which reduce their carbon tax liability. At the beginning of 2022, the South African government increased the carbon tax rate to R144 (about US$9), which is expected to increase annually to enable South Africa to uphold its COP26 commitments.
With effect from 1 January 2023, carbon tax payers in South Africa will also be required to submit carbon budgets and adhere to the provisions of the carbon budgeting system which will be governed by the Climate Change Bill. Where set carbon budgets are exceeded, the government plans to impose penalties. “At PwC, we are continuously focused on our renewed global strategy, ” The New Equation,” Kabochi says. “Through this strategy, a key focus area for PwC Africa is to support clients in adding value to their ESG ambitions and building trust through sustained outcomes.”
The New Equation is also an acknowledgement of the fundamental changes in the business environment in which PwC’s clients and other stakeholders operate. PwC continues to reinvent and adapt to these changes as a community of problem solvers, combining knowledge and human-led technology to deliver quality services and value.
Local and international economists have lowered their projections on Botswana’s economic growth for 2022 and 2023, saying the country is highly likely to fail to maintain high growth rate recorded in 2021 hence will not reach initial forecasts.
Economists this week lowered 2022 forecasts for Botswana’s economic growth rate, from the initial 5.3% to 4.8% and added that in 2023 growth could further decline to 4.0%. The lower projections come on the backdrop of an annual economic growth that recovered sharply in 2021 with figures showing that year-on-year real Gross Domestic Product (GDP) growth increased to 11.4%, up from a contraction of 8.7% in 2020.
Economists from the local research entity, E-consult, this week stated that the 2021 double digit growth that exceeded projections made at the time of the 2022 budget may be short lived due to other developments taking place in the global economy. E-consult Economist Sethunya Kegakgametse stated that the war in Ukraine has worsened supply problems in the global economy and added that before the war, macroeconomic indicators were seen as improving and returning to pre-COVID levels.
According to the economist the global economy was projected to improve in 2022 and 2023. Recent figures show that global growth projections have been revised downwards from the initial forecast of 4.9% in 2022 with the World Bank’s new estimate for global growth in 2022 at 3.2%.
The statistics also shows that International Monetary Fund revised their growth projections for 2022 and 2023 down by 0.8% and 0.2% respectively, falling to 3.6% for both years. “The outbreak of war has severely dampened the global recovery that was under way following the COVID-19 pandemic,” said the economist.
She stated that despite Botswana being geographically removed from the conflict, the country has not and will not be exempt from the disruptions in the global economy. “The disruptions to global supply chains resulting from the war will have a negative effect on both Botswana’s growth and trade activities.
The economic sanctions against diamonds from Russia will add uncertainty to the market which will have knock on effects to Botswana’s growth, exports, and government revenues,” said the economists who added that the disruptions are driving prices up and result with very high inflation in the local economy.
Kegakgametse projected that in an attempt to limit inflation Bank of Botswana will be forced to raise interest rate “Should the sharp increase in both global and local inflation persist, Bank of Botswana much like other central banks around the world will be forced to raise interest rates in a bid to control rising prices. This would mean an end to the expansionary monetary policy stance that had been adopted post COVID-19 to aid economic growth,” she said.
In the latest projections, the UK based economic research entity Fitch Solutions lowered 2022 real GDP growth forecast for Botswana from 5.3% to 4.8% “In 2023, we see economic growth rate decelerating to 4.0%,” said Fitch Solutions economists who also noted that the 2022 and 2023 economic growth projections may come out lower than the current forecasts, as it is possible that new vaccine-resistant virus variants may be identified, which could result in the re-implementation of restrictions. “In such circumstances, we cannot rule out that Botswana’s economy may post weaker growth than our baseline scenario currently assumes,” said the economists.
According to the projections, Fitch Solution stated that there is limited scope for Botswana government to increase diamond production and exports, following the economic sanctions imposed on Russian diamond mining companies operating in Botswana. The research entity added that De Beers is unlikely to scale up diamond output from Botswana in order to prop up diamond prices.