This week, The Business Weekly & Review sent a set of detailed questions to Dr Wilfred Mandlebe, Permanent Secretary (PS) in the Ministry of Finance. The questions sought to understand exactly what informed the ministry’s 9.7 percent GDP growth projections. They also sought to understand to what extent revving up the economy depends on government funding, especially as the government struggles to raise funds for its Economic Recovery and Transformation Plan (ERTP) on the domestic market.
While it is still not clear how government will fund its Economic Recovery and Transformation Plan (ERTP), around P30 billion is needed to finance it so as to achieve its desired growth. Given these dynamics, The Business Weekly & Review wanted to know how the challenges in raising funds would affect economic recovery from COVID-19 devastations.
The response of the Permanent Secretary of the Ministry of Finance and Economic Planning, Dr. Wifred Mandlebe, was that government spending, including the recurrent budget, wages and salaries of public sector workers, ERTP initiatives and other development programmes play a critical role in economic activity.
“This is one reason why government undertakes counter-cyclical fiscal policy to boost the economy when necessary, including during the COVID-19 pandemic, and during the global financial crisis a decade earlier,” Dr. Mandlebe said. “However, this is a short-term intervention to offset a reduction in aggregate demand coming from elsewhere, and it is not sustainable in the long term for government to continuously increase spending above the growth of revenues.”
Nevertheless, Dr Mandlebe said government investment, through the projects identified in the ERTP and the Mid-Term Review of NDP 11, obviously plays a critical role in building the productive capacity of the economy to support future growth and diversification. However, this must be done within the context of available fiscal resources. “Hence it is necessary to mobilise additional revenues through the tax system and by raising fees and charges for public services in order to finance these critical projects,” he added.
By contrast, there are local economists who believe that while the economy will see growth, 9 percent is too ambitious. Said one: “I don’t think we will reach the target, given the vulnerability of our economy to external economic shocks, which can easily derail, or at the very least, delay the process. Furthermore, the slow vaccine rollout remains a risk to full economic recovery. Having said that, a lot will depend on whether strong demand for diamonds from China and the US persists in the medium term.”
But at Kgori Capital, Portfolio Manager Kwabena Antwi says the current 2021 forecast is achievable for two reasons. The first is base effects and the second the rebasing of GDP accounts. “Economic growth was severely depressed in 2020 due to hard lockdowns instituted in 2Q20 and 3Q20,” Antwi points out. “Even after the lockdowns ended, restrictions imposed to guard against the spread of COVID-19 hampered business activity. This resulted in GDP contracting by 26 percent year-on-year (y/y) in 2Q20, 4.4 percent y/y in 3Q20 and 4.6 percent y/y in 4Q20. In 2021, COVID-19 related restrictions have been more accommodative than in 2020 and more sectors of the economy have been allowed to open. Accordingly, we would expect much stronger growth in 2021 compared to 2020.”
With regards to the rebasing of GDP accounts, Antwi says the base year for GDP accounts was rebased to 2016 from 2006 in 1Q21. He adds that the main change is that mining now accounts for 19.3 percent of GDP from 7.9 percent previously when GDP accounts used 2006 as a reference year. He points out that the main contributor to the mining sector is diamonds, accounting for 93.5 percent of the sector in 1Q21 and that diamond mining is expected to expand extensively in 2021 following a 26.5 percent contraction in 2020. Debswana has stated that it expects output to increase by 38 percent in 2021 and Statistics Botswana has reported that diamond production is up 17.5 percent q/q in 1Q21 while overall mining production is up 16.3 percent q/q in 1Q21.
“Taken together, these factors place the economy on a strong growth path in 2021,” says Antwi. “However, growth should normalise from 2022 going forward.
But another economist has commented: “I believe it is rather disappointing that after so many years, we still rely heavily on diamond sales to drive the economy.”
Considering that the monetary policy mechanism tools (low rates and generous prudential requirements for banks, among others) are just about exhausted, a lot rides on fiscal interventions like the ERTP. However, government funding in itself won’t be enough. Experts believe Botswana needs to have structures in place which ensure that ERTP money flows in an efficient manner to sectors and programmes that will drive the most recovery. They refer to sectors like tourism, a major contributor to the GDP which is currently closed. According to this economist who asked to remain anonymous, diamonds alone cannot be the reason for such high growth projections.
Of interest, President Mokgweetsi Masisi has announced that the State of Emergency (SOE), which has been a barrier to attracting tourists, will come to an end this month (September). But economists at E-Consult argue that a lot will need to be done to revive the sector and bring it back to “normality”. “This entails regaining customer’s trust, promoting domestic tourism to cushion the interruptions in international tourism especially during pandemics like the coronavirus, and providing government support,” Sethunya Kegakgametse and Kitso Mokhurutshe of E-consult have said.
They observed that the accommodation and food services sector has had the deepest and most prolonged contraction of all economic sectors. “Continued domestic travel restrictions will inhibit the extent to which domestic tourism can compensate for the loss of international tourists,” they wrote in a quarterly report.
Economists agree that a lot will depend on how soon the economy can fully re-open, which itself depends on the speed and scale of vaccine rollout. They believe the 9.7 percent target is on the optimistic side, and that at best it will take a couple of more quarters for Botswana to get there.
On a positive note, considering the first quarter of 2021, the encouraging result was that GDP was marginally higher (by 0.7 percent) than it had been in Q1 of 2020, notwithstanding the continuing impact of COVID-19. Growth in many services sectors, including diamond trading, offset the weak performance of diamond mining, tourism and manufacturing. But for the country to average 9.7 percent, the next three quarters would arguably have to register 9 percent each or some grow more than that to mitigate the slack of others.
One economist argues that rebasing essentially shifts the starting point of the race. In this case, Botswana is starting from a low base, which in a way accentuates the projected growth rate for 2021. “A clearer picture arises when we consider absolute numbers,” says the pundit.
Further, the lifting of the SOE will result in massive job losses because companies which were hardly hit by COVID-19 could not retrench under it. “This will result in reduction of taxes like PAYE as well as reduction of household incomes, which is taxable. The quarterly labour market survey that had been providing useful information on critical labour market trends has only published one set of results recently (for Q4 2020), and, perhaps surprisingly, there is no indication of when more results can be expected. Kegakgametse and Mokhurutshe of E-Consult fear that household budgets are under increasing stress due to reduced incomes, job losses and healthcare expenses, which will only mount over time with no clear end in sight.
At Kgori Capital, Antwi agrees that the ERTP is important to supporting economic growth as it was envisioned that it would provide a stimulus to weaker sectors of the economy and drive economic transformation. “P7 billion was earmarked for the 2021/22 financial year focused on the agriculture, tourism, the creative industry and manufacturing sectors,” he says. “Development in these sectors will be stifled if government does not raise enough funds to support its targeted projects for these sectors.”
But government has been struggling to raise funds on the domestic market, which are needed to finance the ERTP as well as to finance the fight against COVID-19. According to Antwi, based on the results of the bonds auctions held thus far in 2021, the struggle to raise funds appears to be a matter of pricing. He says government generally receives enough bids to issue all the debt securities it has on offer. However, he points out, the government ends up under-allocating auctions due to rejecting bids that it believes are too expensive.
Other economists believe that the struggle to raise funds further complicates recovery, especially in sectors which need government support to resuscitate. Furthermore, they say the inability to raise funding might undermine government’s efforts in calming anxieties about its position as an attractive issuer.
According to Antwi, government planned to finance the ERTP predominantly from the domestic market. Unless government finds alternative sources of finance, he says, the timelines will have to be pushed further, which would dampen recovery from the pandemic.
Another independent economist has commented: “I believe Botswana still has a bit of good credit in terms of borrowing internationally even as it might be a bit expensive now. But all in all, Botswana’s credit remains credible. However, a lot depends on how much investors read into the Moody’s downgrade, and if they do, whether they think the Government of Botswana has the will and capabilities to address some of the issues raised in the statement, especially in the medium term.”
Despite struggling to raise funds in Botswana, Antwi believes that borrowing domestically is generally easier than borrowing externally. He says the government already has a domestic bond programme in place and once the limit was increased, government immediately had the ability to borrow more from the local market.
“The process of borrowing externally is usually longer and more drawn out as external debt is usually secured on a bilateral basis, which requires negotiations,” Antwi observes. “Borrowing domestically also has no foreign exchange issues as the debt is denominated in Pula while external debt is usually denominated in a hard currency, e.g. the US Dollar or the Euro.”
On July 9, the IMF’s Managing Director and the executive board agreed to provide USD650 billion worth of reserve assets. This allocation will help to shore up economies’ external positions by boosting their foreign reserves. It will also free up existing reserves, which can be used to fund imports, particularly of vaccines and other medical supplies. The IMF has done this before, notably USD233billion in 2009, but this latest allocation is significantly larger. The allocation was officially approved on August 2 and was to be distributed later on 23 August.
According to Fitch Solutions, the funding will come in the form of allocations of Special Drawing Rights (SDRs), a special reserve asset issued by the IMF and pegged to a basket of major currencies. Member states can either hold the SDRs at their central banks as a reserve – potentially freeing up US dollars and other more liquid assets for immediate use – or use voluntary agreements to trade the SDRs for liquid currencies. Since SDRs are created by the IMF itself, they allow for more funding to be disbursed than would be possible if the Fund had to raise money from its member states.
Under IMF rules the new SDRs will be allocated to members in proportion to their IMF quotas, which broadly match the size of their economies, says Fitch, adding that this means that the overwhelming majority of the allocation will go to wealthy countries which do not need new funding. Based on the current IMF quotas, Fitch says just USD20.8 billion of the allocation will go to low-income developing countries (LIDCs).
IMF has already passed the reserves onto the Bank of Botswana (about P3billion) and it is up to the government to decide what to do within the law. They can get a loan from BoB against the SDR allocation, exchange the SDR allocation with another country for a hard currency, or just leave them as they are being recorded as a better reserves position.
There is a criticism about them because the IMF can never know what countries will do with their allocations. But experts agree the additional allocations are great for economies because in effect it is a very low “loan” when you convert them to hard currency and you get to set your “repayment” period.
Fitch stressed that EMs – particularly LIDCS – will have a slower and more painful economic recovery, which is partially due to their governments’ lack of fiscal space and constraints on funding. “The impact of the allocation on LIDCs will be higher if DMs – which do not need new reserve assets – agree to transfer them to needier countries.”