The International Monetary Fund (IMF) recently released its World Economic Outlook report on growth forecast up to 2027 for every country and for the world economy. In its projections, the institution slightly reduced the outlook for Botswana for 2022 to around 4.3 percent from its initial 4.7 percent, with mining growth expected to register 2 percent versus 4.5 percent of the non-mining sector.
While 4 percent envisaged by the IMF is ‘reasonable’, Senior Policy Advisor at the finance ministry, Dr. Keith Jefferis, says it is “not great”. Critically, the renowned economist has cautioned that “it is not enough to reach the agenda of high income status by 2036”. His words, during a presentation at the Absa Economic Forum recently, corroborated views previously aired by the Bank of Botswana (BoB): structural changes and transformation programmes are not gaining traction.
Jefferis also worried that the sluggish growth is not “enough to reduce rapid unemployment” growth. Unemployment has fluctuated between 17 percent and 19 percent throughout the NDP 10. Several solutions, such as tackling the skills and opportunity mismatch problem and the impact of minimum wage modifications on employment levels, were put in place. Another strategy put in place was to develop a National Employment Policy. By 2013, unemployment was on the verge of crossing the 20 percent mark. The rate broke the 24 percent ceiling, rising to 24.5 percent by Q4 2021 with youth unemployment spiralling out of control, from 31 percent to 33 percent. This generated heated debate about how unemployment, poverty and income inequality are to be reduced.
To achieve high income status and reduce unemployment, Jefferis argued that Botswana’s overall growth would need to be at least 6 percent. In his presentation, the economist showed that increasing GDP growth from 4 percent to 6 percent would lead to a doubling of per capita income growth (with population growth of 2 percent). It is quite a significant jump that he feels is needed and “that is not going to happen under business as usual”. Hence, like other economists, he emphasised the need for structural transformation of growth patterns and drivers.
Despite the strong growth recovery experienced in 2021 (11.4 percent), Econsult economists noticed that evidence of serious structural problems within Botswana’s economy remain. In their quarterly report, Sethunya Kegakgametse and Kitso Mokhurutshe have observed that the economy has continued to run “twin deficits”, i.e. internal (fiscal deficits) and external (balance of payments) deficits, which indicate persistent macroeconomic imbalances, implying a desperate need for a change of course in terms of policies to correct them. “Whilst the emergence of the COVID-19 pandemic exasperated these problems, it did not cause them, as the twin deficits existed prior to 2020,” Kegakgametse and Mokhurutshe noted.
The consensus is that economic development in 2020 had deviated considerably from previous patterns due to the pandemic. Even so, between financial crisis and COVID, Jefferis’ slides show that overall GDP averaged 4 percent for Botswana. Interestingly, a wide range of sectors were growing faster than the average (GDP as a whole). These include tourism, accommodation, government, education, transport, ICT, real estate, health and mostly wholesaling of diamonds. The structural weakness that Jefferis stressed is that almost all of them are focused on the domestic economy, otherwise known as “non-tradable”. Mostly, the services are not exportable products. Meanwhile, the leading exporting sectors were lagging; agriculture, manufacturing, mining (where most of exports are generated) had been slow growing sectors. “I think this highlights what I would say is structural weakness, which is the slow pace of export diversification,” Jefferis said at the forum.
Trade is obviously a big driver of what happens in the Botswana economy. After several years of declining, there was export recovery in 2021, especially for diamonds. A key factor that informs Jefferis’ lack of diversification observation is that export commodities are still diamonds that can go up to 90 percent. Diamonds are also Botswana’s largest import, accounting for about a quarter, according to Jefferis’ slides. This is why the renowned economist observed that the dynamics of the diamond industry affect both sides of balance of payments. “Export-led growth is necessary not just to fill in gaps in the balance of payments but one of the good things about exports is that you can only export if you are productive,” Jefferis said, adding that focusing on exports naturally drives productivity.
The fundamental driver requirement for high income status is raising productivity, he noted. “You do not raise incomes unless you raise productivity,” Jefferis said. “High incomes depend on high productivity.” There is a lot of ways that he advised Botswana to do in that regard, including investments in the parts of the economy with high productivity. He noted a very big variation in productivity across economic activities, arguing that Botswana needs to boost infrastructure, particularly the infrastructure that supports productive activity.
First National Bank of Botswana’s (FNBB) Quant Gomolemo Basele expects Botswana’s economy to benefit from increased developmental spend over his forecast horizon. He said this week that the improvement in government revenue over 2020 will allow for the delivery of key infrastructural projects, which will improve the local operating environment.
Luckily, Jefferis noted, Botswana does have the type of electricity problems that South Africa has but the expert has observed that “we lack reliability in our power suppliers”. Clearly, Jefferis argued, that calls for much more investment. Digital transformation is a big deal everywhere, but if done well, Jefferis argued that it is one way productivity could be increased in the public sector (rationalisation of SOEs should drive productivity).
“Further, as part of the diversification agenda, several measures have been planned to support the development of the agricultural and manufacturing sectors,” Basele noted in a daily report issued by RMB, a unit of FNBB. FNBB expects Botswana’s growth to average 4.1 percent through to 2024.
Over the last decade, Botswana’s trade account has been in deficit, which is one of the reasons the foreign exchange reserves have been declining. Econsult illustrates that the government’s savings at the BoB have declined from a peak of approximately P45.5 billion in April 2015 to about P4.9 billion in September 2021. This, according to economists Kegakgametse and Mokhurutshe, shows that historical savings have been almost entirely depleted over the past few years. Jefferis warned that because government savings have been depleted, exacerbated by the scourge of the pandemic, Botswana does not have shock absorbers. “Our weakness is the slow progress of diversifying exports,” Jefferis emphasised, showing that in 2021, rough diamonds and polished diamonds accounted for nearly 80 percent of exports.
Other minerals have also been booming, especially copper since Khoemacau opened. However, the bottom line is that exports still highly depend on diamonds (rough and polished). In Jefferis’ view, slow progress with export diversification creates potential external imbalances given little or no growth for diamonds. “Debswana cannot easily increase production even if there is demand,” he cautioned. “They are looking at prospects for output. Prospects are about maintaining current levels rather than increasing.” His concern is also that “our mines are very mature, these are not mines that can produce easily”.
Jefferis has indicated that Botswana has a huge non-diamond trade deficit. Non-diamond exports are declining as a share of GDP (lack of diversification/export growth). Infact, Jefferis discovered that non-diamond export can only pay for a small portion of Botswana’s imports a potential “crisis in 10 years’ time unless we deal with this”.
In his presentation, he indicated that the downward trend for revenues is faster than the downward trend for spending. “This is not due to shocks,” he pointed out. Revenue is on a structural downward trend (due to mature diamond industry), according to Jefferis, calling for spending to be reduced and fiscal sustainability. Currently, he noted, the pace of reduction is insufficient (relative reductions to GDP rather than actual spending).
The finance ministry revealed that it aims to reverse these trends by increasing revenues as a share of GDP, decrease spending as a share of GDP, reduce budget deficits and eventually return to surplus. NDP 12 will be the test of what can be achieved. “We would like to see spending rebalanced,” said Jefferis. “The biggest chunk goes to wages and salaries. Fiscal rule is being considered which will determine statutory limits on spending/deficits.”
While the government does not want to increase taxes, he said, some taxes are underused. He pointed to property tax as an area where more taxes should be raised. One of the good things of this tax he pointed out is that the rich pay more. Newly introduced taxes include carbon taxes. But this is more for price incentives than for revenue. The government wants to encourage the use of green energy.
There is also talk about reducing imports through import substitutions. Jefferis’ slides indicated that Botswana has actually done a lot to reduce non-diamond imports, which were 40 percent of GDP in 2012. By 2017, this was down to about 25 percent of GDP. But despite the talk about import substitution, Jefferis warned that the scope for reducing imports further is fairly limited for all kinds of reasons.
