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How Botswana can escape the middle-income trap

Botswana’s economy is at a critical juncture where mineral led and public sector-led growth model can no longer generate sufficient growth; at least an average of 8 percent per annum over the next 15 years, to address the current development imperatives.

mm by Staff Writer
October 5, 2021
in News
Reading Time: 3 mins read
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How Botswana can escape the middle-income trap
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Key driver of economic and welfare prospects for Botswana, namely, the export potential has, over the last few years, faltered and shrunk as a proportion of GDP. While launching giving an economic briefing this week, Moses Pelaelo, Bank of Botswana governor said there is an urgent need to diversify sources of growth, including redesigning the country’s industrial and trade policies to promote exports in non-traditional sectors, attraction of foreign direct investment specifically targeted and linked to integration into regional and global production value chains; and strengthening export and investment promotion agencies.

“This requires a transition towards sufficient scale of industrialisation to generate diversified economic base and exports as well as better articulation of import substitution with performance incentives, the goal being to enhance international competitiveness of domestic firms and fostering productivity gains,” he said adding that comparative country studies and experiences suggest that deliberate promotion of largescale industries and dedicated implementation of industrialisation policies are instrumental to a successful escape from the middle-income trap and transition to high-income status.

The second aspect relates to prospective transition to structural fiscal deficits and depletion of the official foreign exchange reserves. In this regard, and with an eye on slowing the depletion of external and fiscal buffers, Pelaelo says there is need to enhance domestic resource mobilisation, by broadening the tax base and coverage, streamlining incentives and rationalisation of distortionary subsidies. “The country needs to grow a vibrant middle-class; and have more tax-paying citizens by investing more on innovation, empowerment and home ownership.”

The third aspect relates to financial deepening and inclusion. Pelaelo says this requires sustained financial sector focus and dedication to the transformation and development agenda involving both the private and development finance institutions in financing infrastructure, green economy, digital and outward-looking industrialisation. “This also requires clarity of roles of development finance institutions, namely, BDC, NDB, CEDA and BSB, with respect to alignment of their respective mandates to strategic sectors,” he said. Furthermore, he said a sustained focus on the development of the domestic capital market, underpinned by the right governance architecture and macroeconomic stability, is critical to internally orientate and tap into resources accumulated by pension funds, annuity providers and other institutional funds, the bulk of which are currently invested offshore in search of yield.

As at February 2021, pension funds assets amounted to P106.1 billion, of which P68.3 billion or 64.4 percent of the total were invested offshore. As at that date, this was more than the official foreign exchange reserves at P55.8 billion.

In this regard, Pelaelo said the “reset agenda” needs to continue to prioritise sufficient and diversified mobilisation of financial resources by Government for funding infrastructure and cost-effective and, increasingly digital provision of services while ensuring budget sustainability and rebuilding of fiscal and external buffers which, hitherto, anchored the country’s economic resilience. “The Bank is fully aligned to, and agrees with the multi-pronged financing strategy adopted by the Ministry of Finance and Economic Development for financing National Development Plan 11,” he said adding that “given the prevailing low interest rates environment and relatively low public debt matrices, it is indeed propitious to access global credit markets for funding growth-friendly and capacity building infrastructure, health eco-systems and rebuilding of the external buffers in readiness for the next negative external shocks including droughts”.

With respect to the Vision 2036 aspirations, notably to achieve high-income status and inclusive diversified growth, Pelaelo viewed that a sustained focus on structural and economic transformation remains necessary. He said this requires harnessing opportunities offered by ICT as a singular sectoral growth area as well as an effective and influencer of economic activity. “The country will need to continue to upscale investment on digital infrastructure to improve availability and affordability of IT equipment, internet and development of a critical mass of digital skills,” he said.

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