“The Government Invests in Wrong Areas”

The target that is laid down in Vision 2036 is that growth should reach 5.7 percent to achieve high-income status. The IMF projects growth to settle at 4 percent, similar to the government’s projections in the Transitional National Development Plan (TNDP). “Obviously that growth is not enough to reach high-income status,” said Jefferis. “Growth is determined by a combination of three factors.” One, he said, is population (labour force) growth in that the more workers you have the more output. Other factors are capital investment and productivity growth. [ihc-hide-content ihc_mb_type="show" ihc_mb_who="1,2,3,4" ihc_mb_template="1" ] Jefferis said the most important thing to look at as to why the country is not going to grow at a 5.7 percent growth rate is investment trends. “First is looking at the level of fixed investments. This is the proportion of GDP that is devoted to fixed capital formation,” said Jefferis. “General investment has been on a declining trend, and if you go 10 years back, it was 30 percent of the GDP and it is now below 25 percent.” Jefferis, however, believes that even at 25 percent it is still reasonably high compared to many other countries in sub-Saharan Africa, but noted that it is not high by the standards of fast-growing Asian economies like China or past fast-growing economies like Taiwan. “It is okay but it is not great,” he said, “We would like to see investments on the rise rather than going down. I think that’s one reason why our growth is not quite where we would like it to be.” Another issue, according to Jefferis, is the type of investments. Gross Fixed Capital Formation (GFCF) data reported in national accounts is divided into four types of assets - Buildings/Structures, Transport Equipment, Plant, Machinery and Equipment, and Mineral Prospecting. “But what we see is that the majority of investment is devoted to buildings and structures, which include roads,” Jefferis said. “In 2022, 80 percent of investments were devoted to buildings and this share has been rising over time.” He expressed concern that the share devoted to machinery and equipment has been declining from 30 percent to 16 percent while the share for transport equipment has also more than halved over this period. “While all investments are good, I do think the type of investment matters because you could imagine investment in machinery and equipment directly produces output,” Jefferis noted, adding that investment in buildings only indirectly produces output. “If you build a road, yes it supports economic activity but it doesn’t directly lead to economic output,” he said. “So it worries me that we aren’t investing in the right kind of things that would increase economic output.” Inflow of Foreign Direct Investment (FDI), which he said is declining, is also an important factor to look at. Jefferis believes FDI inflows are a critical component of overall investment and have particular advantages such as bringing access to technology, skills, and markets. “It also supports integration into global value chains as well as in the balance of payments,” he asserted. “While it jumps around a lot, its share of the GDP has been low.” Even at its peak, Jefferis said, FDI inflow to GDP reached 3 percent compared to Vietnam, which is one the most successful countries in attracting FDI, which manages 6 percent of GDP. Accordingly, he said the country is really not doing well in FDI. But while prospects of growth that will push the country to a top-notch income status may remain blurry, the domestic economy has nonetheless registered some positives in the past few months. “The overall GDP growth remains quite robust as at Q1 2023,” said Jefferis. Over the last 12 months to March 2023, economic growth was 5.4 percent compared to 5.8 in 2022. “What is quite interesting about the current growth is that it is fairly even across all the sectors with mining registering 5 percent growth and non-mining private recording 6 percent growth,” he noted. “We still expect growth to trend downwards, to around 4 percent. For the 12 months to the end of Q1 2023, all sectors grew at a positive rate while agriculture was the only lowest growing. “Water and electricity, diamond trading, manufacturing, wholesale and retail, and ICT are relatively fast-growing sectors,” Jefferis said. “Manufacturing did quite well which is welcome growing by 6 percent.” A range of sectors posted growth of between 2 percent and 4 percent which he described as positive for diversification. This growth was buttressed by Kgori Capital at a macroeconomic update to the media on Wednesday this week. Kitso Mokhurutshe, an Investment Analyst at Kgori, explained that the 5.4 percent GDP growth registered in the Q1 2023 was due to mining sector growth, which slowed down to about 5 percent, down from 7.5 percent. He said this was mainly due to global recession fears and the challenging macroeconomic environment that have made diamond consumer demand weaken during the Q1 2023 “The non-mining private sector recorded growth of 6 percent, stronger than what we recorded in the year 2022, which is 5.5 percent,” said Mokhurutshe. “If you take a look at the government budget outturn, there was a significant amount spent in the development budget expenditure during the Q1 2023.” Mokhurutshe said this expenditure amount was about P4.4 billion, which he described as a high quarterly expenditure by the government. “This is what drove the non-mining private sector growth,” he stated. Kgori, like the IMF and the government, expects growth for 2023 to be between 3.8 percent and 4 percent. According to Mokhurutshe, another point that is intriguingly connected with growth is the government budget. “Government revenues came in at about P74.1 billion, this is from the outturn budget for March that was released, outperforming what was mentioned at the budget speech by about 3.6 percent,” he stated. “As far as expenditure goes, it came in at P74.1 billion as well. The government actually ended up spending less by about 3.04 percent.” He added that this was driven both in the recurrent and development budgets. “Overall, we initially expected a budget deficit of about P4.88 billion, but it looks like a surplus of P9 million is what ended up being achieved.” Mokhurutshe noted that the problem with persistent underspending by the government is that it becomes difficult to trust what the government says it is going spend in terms of the budget. “We see that for the next year, expenditure is expected to be P87.4 billion,” he said. “It makes one wonder if this amount will actually be spent if the government underspent by 3 percent.” Falling inflation Mokhurutshe asserted that the reason inflation fell so aggressively this year after peaking at over 14 percent last year the strong base effects as the fuel price increases that took place last year this time are now falling out of inflation calculations. “This was exacerbated by fuel price decreases that took place this year,” he said. Going forward, Kgori Capital expects inflation to creep below the Bank of Botswana’s 3 – 6 percent medium-term objective range in July and estimates it at about 2 percent. But as the year progresses, Mokhurutse said they expect inflation to start picking up again as the base effect starts to dissipate. “Most bodies like the Bank of Botswana believe inflation would not rise beyond the 6 percent mark, but at Kgori we think there is a strong chance of it rising beyond that mainly because the risks on inflation are on the upside down,” he said. Biggest challenge Mokhurutshe believes the biggest challenge that the country faces to achieve high economic growth that will propel it to high-income status is execution. “All our budgets are very well thought out, he said. “But until we reach a level of execution where everything we have on paper translates into proper action, we will not reach high-income status.” [/ihc-hide-content]

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“The Government Invests in Wrong Areas”

At the recent annual Botswana Insurance Fund Management (BIFM) breakfast seminar, renowned economist Dr. Keith Jefferis expressed concerns that while Botswana continues to make large investments, it invests in the wrong areas and will delay the country from achieving a high-income status.

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“The Government Invests in Wrong Areas”

At the recent annual Botswana Insurance Fund Management (BIFM) breakfast seminar, renowned economist Dr. Keith Jefferis expressed concerns that while Botswana continues to make large investments, it invests in the wrong areas and will delay the country from achieving a high-income status.

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