Rags to riches and back to rags : How the Botswana economy hit a brick wall

• Diamonds stagnant • Government revenues to GDP drop by a quarter • FX falls 55 percentage points • Government size downsizing urgent – experts warn • Education, Health sector inefficient

Rags to riches and back to rags : How the Botswana economy hit a brick wall

In the first 25 years following independence, Botswana had a fast-growing economy with double digit growth, earning its status as one of the fastest growing economy in the world, according to Econsult Managing Director Keith Jefferis. But since that time, the economist observed that average economic growth had been about 4 percent which he argues is not a transformative growth rate. Presenting at this week’s First National Bank of Botswana (FNBB) budget review, Jefferis, the former Bank of Botswana Deputy Governer argued that 4 percent does not give much economic growth. He is of the opinion that if the economy is growing at 4 percent a year and the population is growing at 2 percent, it would take 35 years to double per capita real income, hence the need to raise the growth rate.

Despite that growing at a snail’s pace, Botswana has arguably had some success in diversification given that the economy is no longer dominated by the mining sector. Mining sector’s share to the Gross Domestic Product (GDP) declined from 25 percent in 2008 to 18 percent in 2018, while the contribution of non-mining sectors increased from 75 percent to 82 percent over the same period, according to available economic data. Effectively this highlights that the role of mining has diminished. But in terms of exports mining still dominates with diamond making over 70 percent of exports. In essence, it is the GDP which is diversified while exports remained undiversified. This has provided the basis for an argument for export-led growth, as emphasized by Minster of Finance Dr. Thapelo Matsheka during his first budget speech on Monday.  The main reason for this being that diamonds are finite resources. On the basis of what is in place at Debswana, the investment in Cut 9 in Jwaneng and in Cut 3 in Orapa, current production of diamond will come to the end in 2034, Jefferis warned during his presentation.  He worries that there may be other investments in Cut 10 but at the moment that big segment will disappear in 14 years’ time. “That’s quite chilling. That’s why we need export led growth.”

Government revenues are in a long-term decline. Jefferis says this is because the highly taxed diamond sector (taxed 84 percent) is not growing and the sectors that are growing, the sectors that are growing are taxed at 25 percent. “As the 84 percent tax rate sector declines and the other sectors grow, the average takes decline. For those structural reason, government revenues are in long term decline,” Jefferis says.  About 15 years ago, Jefferis revealed that government was earning about 40 percent of GDP in revenue. But when he looked at the NDP figures, revenue figures were about 28 percent of GDP. “That’s a huge reduction showing a quarter decline in economic terms. If government doesn’t want a blow up of deficits” he states. Jefferis argues that spending has to shrink by 25 percent, not in absolute terms but in relative terms. “The alternative is that if we don’t cut size of government, the deficit will blow out. The important thing to note is this is a structural not cyclical. We get those too if diamond market performs badly. But structural circumstance driving the decline. Spending has to be maintained.”
It turns out that last deficit was 3.9 percent of GDP. Jefferis says Botswana needs to get spending in line.

The NDP has emphasised on efficient government spending and financing, delivering more with constrained resources focusing on priorities.
Historically government revenues have been high due to diamonds, SACU receipts while domestic revenues are very low. To put it bluntly, Jefferis says Batswana are undertaxed. “Our domestic revenues only covers 35 percent of what government spends on us,” he says adding that domestic revenues only amount to 11 percent of GDP. “It’s pretty low and that is quite a worrying illustration of how much revenue is raised domestically.”

“We need look at source of revenue, alternative sources of funding projects. Focusing on high return projects. Reducing deficits will be a tough challenge in the next couple of years,” Jefferis said.
Matsheka has highlighted PPP, which involves sharing funding mechanism.
But for Jefferis, the essential principles of reform is that government has to get smaller, relative to the size of the economy not in absolute terms. “What that means in practical terms is that government activity has to grow more slowly than GDP. And if we do that year after year the share of government would decline. Size of government has to be broadly in line with government revenues,” Jefferis says arguing,“the fact that government can borrow doesn’t change that need to adjust. We need to mobilise for domestic revenues, efficient tax collection. We don’t raise much VAT as we should be. There are a lot of gaps and holes”.  

Matsheka revealed that government will be reviewing some levies, fees and some charges of services provided by government. Although there is need to increase taxes, he disclosed that government would not be doing that.But given the low domestic revenues, Jefferis still argues that there is a need for high taxes and there may be need for new taxes. In fact, a BURS official who was part of the conversation at the budget review revealed that should main streams of government revenues decline, they will have no choice but to raise taxes.
Experts argue that the reason why government’s spending is so high is because government is very inefficient. Economists are calling for management of government spending to become efficient with better prioritisation. In the past because government has had high revenues trying to make priorities was avoided, opines Jefferis.  “Prioritisation is tricky, you need information on which to be able to prioritise. Prioritisation means you say no to some. That’s where government has found it difficult.”During his speech, Matsheka said there will be evaluation of policies and programs of institutions and the government felt was not delivering which may result in some being discontinued. In the agriculture sector, government said it will be reviewing the ISPAAD and LIMID programs.

Jefferis says the cost of ISPAAD every year, is substantially greater than the value of crop production. “This will be the test of the next government doing the evaluation, if it tells you ISPAAD is not delivering, what will you do. It will be a real test of whether government can take those decisions.”
Matsheka also revealed that government will review the role of the SOEs in the transformation process. There are about 60 SOEs and government spends substantial resources on these parastatal organisations in the form of subventions or grants. For instance, Matsheka revealed that an amount of P4.9 billion is proposed as subventions to various state-owned enterprises for the Financial Year 2020/2021.Jefferis says the true test will come when government has to take decisions on SOEs. For example, a company will be engaged to manage the BMC. Jefferis argues that where they say the workforce of BMC is twice as it should be, will test the government. “Will government accept such a political decision?”
On the Education sector, Botswana has amongst the highest level of education spending in the world. It’s about 8 percent to GDP with unsatisfactory results. The Ministry of Basic Education is allocated the largest share of the proposed Ministerial recurrent budget amounting to P9.01 billion. Matsheka says the significant budget allocation demonstrates Government’s commitment to deliver on the human capital development priority, which is a prerequisite for the transition to a knowledge-based economy.

Botswana’s education system is famed for being highly academic, an assessment that gauges only the memory of an individual not the creativity given that student apply their minds. This has caused a mismatch in the supply and demand of labor in Botswana as both the Junior Certificate Education (JCE) and the Botswana General Certificate on Secondary Education (BGCSE) level witnessed steady decline of pass rates. There has also been concern at teacher-pupil ratio which in government sector (on paper) is 12:1 on average, according to Jefferis.
He says this is exactly the same as Maruapula. “They have the same 12:1 but contrasting results. The poor results in government is not for lack of teachers, it because of the way we manage teachers in the education system. We have people teacher ratio of 12:1 and classes of 30 or 40. That’s just inefficient.”In the health care system, the proposed Ministerial recurrent budget for the Ministry of Health and Wellness is P7.73 billion, making it the third largest recommended Ministerial Recurrent Budget allocation. This allocation, according to Matsheka is consistent with Government’s commitment to invest adequately in health care as an integral part of human capital development, which is necessary for economic growth. “The budget mainly covers the cost for the provision of drugs, dressings and vaccines and anti-retroviral therapy.”Jefferis observed that Botswana spends 10 times as much as Malawi, per capita on health care. “But roughly we have the same infant mortality rate as Malawi. We spend about the same as Mauritius but their infant mortality is one third of ours. Everyone knows about medicine stock outs, expiries not because there no money but inefficiency,” Jefferis says adding that the whole point is that none of them are a result of shortage of money. They all result from poor management and lack of accountability”.

Rwanda as a case study

Rwanda came from genocide in the early 90s, it was particularly a difficult time because in a short period of 2 3 months they lost over a million people. And very quickly they had to introduce policies and strategies to insure that they could rebound from that situation and become global contenders. The country grew by about 8 percent. Daniel Kavishe, RMB Global Markets Research says the Rwandan example had lot to do with the focus they had in 2 years, on the people who understood where it is they were going.
Kavishe argues that in terms of currency perspective, Rwanda is pretty much the same as Botswana. They have a currency that is depreciating pretty much at the same rate Botswana has seen in the past ten years. So it’s really no big distinction.”  On the other side, he says the debt has been ramping up to about 45 percent to GDP and nearing 50 percent which is much higher than what you will finds in other countries. Also, he says, they have managed to contain inflation to level hovering at about 4 to 6 percent and Botswana seems to be doing fairly better targeting lower inflation verses Rwanda.

So the question now becomes that given that their economy is pretty much the same as that of Botswana, yet they are growing at a much faster rate, what are some of he things they managed to do?

Rwanda is the size of half of Botswana economy. Kavishe says part of their growth rate, one could argue is coming from low base.“Transformation strategy looks like what Botswana has similar to NDP 11 in Botswana and NDP 5 in Namibia. It has a lot of points that suggest what it is we should be doing in our country in order for us to move from one point to another. But there is a specific distinction.”Kavishe added that the core focus is to ensure they generate as much capacity from people so that they are contenders in the region in all forms. “Education, health is secure. But at the same time they created an environment which is open for business. 57 percent of their budget goes into this,” he said adding that if you move to their infrastructure you find a long set of different policies to ensure they create governance structures. “The level of operation you find in a private company is the same you get in government. That is a switch of how you govern your economy.”
He revealed that it takes smaller portion of the budget which is about 16 percent. “What we found in jurisdictions like Botswana and Namibia is we balloon budget towards social projects because it became popular and get governments elected”, he revealed. Kavishe says a point comes when you need to focus on that which will allow you to consistently preserve growth of what you have of foreign reserves but at the same time preserve level of growth you are targeting.In 2008 during the global financial crisis Foreign Exchanges were 90 percent of GDP, according to Jefferis. Now he says they are 40 percent of GDP and Botswana is not as comfortable as it were with big savings. In 2015, former President Ian Khama reportedly funded his controversial Economic Stimulus Package (ESP) by tapping into the foreign reserves. They are currently standing at P70 billion, according to Matsheka.

“It is good to see that Botswana targeting growth. If you are going to grow you, there must be a sense of direction in the manner of approach,” Kavishe said.
He says Rwanda associates itself with 2 specific targets of vision 2036. They needed to ensure that unemployment is down to zero which is your traditional 4 percent in economics. And secondly, to ensure that any international company that operates is there to maximize most of export earnings because they were concerned about current account deficits. “We convolute our discussions by having too many targets, and it can be a destruction, over several years you go from process where you are not sure you focusing on tourism, the following year we focusing on mining. The alternative is to make it simplistic so people can buy into it.”In a span of over 15 years, Kavishe says concentration of export earnings specifically in minerals, they had net earnings from minerals from the rest of the regions. “You tend to have a lot of earning from your re-exported items. Since they realised they don’t have their own minerals, they diversified. Over a very short period of time they transformed to focus on purely services. Retail, transport and logistics, IT.”But he is worried that Botswana still has the same concentration of export earnings. “If that doesn’t change it will cause problems, you could start to see crack in the wall.”