Saturday, May 30, 2020

Botswana headed for the worst economic downturn in history

The Botswana economy is headed for its worst economic performance in history, with the Finance ministry officials anticipating an economic contraction in a magnitude unseen before, complicated by staggering budget deficits, as the coronavirus pandemic inflicts damage on the diamond dependent economy. 

Last week Friday, Dr. Thapelo Matsheka, the country’s finance minister, struck a sombre look, forced to make wide ranging changes to the budget proposals he presented just two months back. Not only did the former University of Botswana economics lecturer revise the projections, he also revealed that the economy will contract in an unprecedented rate. 

The economic downturn fuelled by Covid-19, the disease caused by the coronavirus, will be bigger than the damage inflicted by the 2008 financial crisis. For Botswana, though the two events might be separate, but bear similar hallmarks that saw the country reeling from strained revenues and widening budget deficits, forcing the government to postpone some developments. More than a decade later, the same script plays itself, this time amplified by the country’s already weakened fiscal position and economic challenges such as rising unemployment. 

In February, when presenting budget proposals for the 2020/21 financial – which began in April – the minister projected government revenue to top P62.4 billion, but that figure has since been revised down to P48.8 billion on the wake of weakened diamond market. The revenue from minerals has been slashed from the forecasted P20 billion to now P6.7 billion, while minerals royalties and taxes will also drop from the anticipated P14 billion to P12 billion, and the value added tax(VAT), which was anticipated to increase to P8.6 billion has been revised to P7.6 billion.

The almost 22 percent reduction in expected government earnings arm twisted the finance ministry officials to also tweak government spending from the planned P67.6 billion expenditure to P59.6 billion, a nearly 12 percent adjustment. Matsheka said government expenditure had to be changed since revised revenue projections against the original budget expenditure would have caused an P18.8 billion budget deficit, almost four times the initially projected budget deficit of P5.2 billion he mentioned in February. 

The budget shortfall for the 2020/21 is now estimated to be P10.8 billion, making it the country’s largest budget deficit in history, surpassing the record P9.5 billion shortfall recorded in 2009/2010 as the country revenues recoiled due to waning demand from global markets that were hardest hit by the 2008 financial crisis, leading to a depressed diamonds market.  

The looming large deficit is on the heels of another P7.9 billion over expenditure from 2019/20 financial year, which was a slight reduction from 2018/2019’s massive P8.8 billion budget shortage. The government has been running budget deficits since 2017/2018, with that year’s deficit recorded at P1.9 billion. Another shortfall of P4.4 billion is expected in 2021/22 but will likely be revised too in the coming months.

The budget revisions were not only the grim news the finance minister delivered. Matsheka, in a televised address, disclosed that real gross domestic product (GDP), which measures the total output of goods and services in the country, will sharply contract by 13.1 percent, down from the projected growth of 4.4 percent. This will be the worst annual contraction since 2008, when the economy shrunk by 7.65 percent, according to data compiled by Bank of Botswana. 

Matsheka’s ominous report on the health of the economy came two weeks after Statistics Botswana’s most recent gross domestic product (GDP) showed that growth was subdued in the last quarter of 2019, registering a 1.6 percent growth, the lowest quarterly growth since 2017. Overall, the country’s annual real GDP grew by 3 percent to P99.4 billion, a decrease from the previous year’s 4.5 percent growth. Nominal GDP, which uses current prices, advanced by 3.6 percent to P197.3 million, yet still lower than 2018’s 5.7 percent growth.

The sluggish economic growth last year was attributed to the US-China trade wars, and the distress in the diamond industry, the country’s top revenue earner, which had its most challenging year since the 2008 financial crisis. The crisis in the diamond industry saw sales volume decline, resulting in lower revenues, and the developments have put a strain on Botswana government which has been running consecutive budget deficits since 2017.

The ministry officials’ revised economic growth for the current financial year is a clear demonstration of the economic damage caused the coronavirus outbreak which has infected over 2 million people and killed hundreds of people, forcing many countries to enforce stringent measures such as lockdowns and restriction in movements that have battered economies worldwide.

Though Botswana has recorded 23 confirmed cases of the virus so far, President Mokgweetsi Masisi took an aggressive approach in early April, enforcing a nationwide lockdown, and closing down businesses that are considered non-essential. The government has further banned travellers from entering the country, especially from high risk countries, affecting major economic activities that contribute to the economy. 

The sectors that have been hit the most include rough diamond sales and tourism. Global mining giant De Beers was last month forced to cancel its third sales cycle of the year, citing global movement restrictions imposed by various countries. This was a serious setback for the company that was still reeling from a disappointing second sales sight in February, which plunged by 36 percent from the year’s first sale. Matsheka says the minerals sector’s contribution to GDP will fall by as much as 33.6 percent.

The lucrative tourism sector which targets wealthy tourists from USA, European and Asian countries also found itself devastated by coronavirus containment measures, as tourists cancelled all their bookings. The sector, which is the second largest contributor to GDP, is feared to bleed thousands of jobs should the situation not improve. The minister said they expect the trade, hotels and restaurant sector, which includes tourism. To slide down by 32.2 percent.

Other GDP contributing sectors expected to take a knock include the country’s fledgling manufacturing sector to contract by 10 percent, while the transport sector will experience a 4.1 percent decline. Projections for the finance and business services were not provided, but it is expected to follow the similar downward trajectory.

In response to the economic impact caused by coronavirus pandemic, the Mokgweetsi Masisi administration has unveiled a P2 billion stimulus package, aimed at stalling retrenchments through offering support to businesses, some in the form of wage subsidies. However, economists have signalled that should the situation persist for months, the government, which is running massive budget deficits, might find itself with a damaged economy that will take years to fix.

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