Friday, April 10, 2020

BoB challenges citizen empowerment

The Central Bank has come in full force to join the Botswana Economic Advisory Council (BEAC) in castigating government’s citizen economic empowerment schemes. In its latest annual report of 2006, the bank is worried by the exclusion of non-citizens from some sectors of the economy.
The report says by excluding foreigners from some aspects of the country’s economic activity, “there is a potential danger that Botswana will miss the opportunities to benefit from foreign expertise and finance, as well as the global production and marketing linkages that are increasingly a common characteristic of enterprises”.

A more comprehensive and durable approach to private sector development, the report indicates that it would better to recognize the benefits of encouraging migration of entrepreneurs from other parts of the world. The recognition should even extend to those businesses that operate in the small scale and low-tech activities that are covered by the reservation policies. Some of such activities that are covered by the reservation policy include butchery and fresh produce, general trading, petrol filling stations, supermarkets (excluding chain stores and franchise operations), bars (other than those related to hotel establishments), as well as a variety of small scale tourist related operations.

The report notes that whilst it is the intension of government to broaden economic opportunities for citizens by reserving certain economic activities, “any benefits are likely to be short term. The report does not take kindly to financial assistance schemes aimed at boosting citizen enterprises. The soft loans and grants offered by the government under various schemes are not a panacea to increased private sector activity in the economy. The bank believes that government’s financial policies that require minimal collateral or equity contributions are partly influenced by the availability of substantial government financial resources and the “perception that commercial interest rates are too high”. The subsidized loans, the central bank argues, have a tendency to inhibit proper costing and appraisal by prospective entrepreneurs and lenders as well as indiscipline in financial management.

“As shown by the experience of Financial Assistance Policy (FAP), provision of subsidized capital fosters low return projects that will not be viable when the subsidies are no longer available,” reads the report in part.

The report did not even spare a better model of FAP ÔÇô Citizen Economic Development Agency (CEDA) which encourages borrowers to make an equity contribution to their projects. Under CEDA, the bank warns of inherent moral hazard. It says the absence of equity contribution might indirectly act as a disincentive for entrepreneurs to strive for the success of their businesses as there is no financial risk linked to the ultimate collapse of the business.

“The provision of loans on generous terms using government funds may also result in crowding out of the private financial sector in the credit market,” reads the report. This is because if the borrowing terms from government supported institutions are both easier and expose the lender to greater risk relative to the borrower, the latter would have more incentive to borrow from government. The bank warns that institutions such as commercial banks and non-governmental financial institutions have the potential to lose their potential customer base to government supported institutions. The bank further argues that private lenders are more profit oriented and are likely to have better skills and greater motivation to fully monitor projects in an effort to minimize default risk than it is with government sponsored institutions.

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