Thursday, May 6, 2021

Botswana would be ‘worst impacted’ by price shocks

A World Bank simulation designed to illustrate vulnerability to commodity price shocks shows Botswana emerging among Sub-Saharan African economies that could be “worst impacted” by these shocks this year. The other economies are the Democratic Republic of Congo, Ghana, Mozambique, and South Africa.

To avoid such eventuality, the World Bank advises at-risk economies to avoid a sharp adjustment by creating an appropriate policy space and diversification of economies before any steeper decline in commodity prices takes place.

“Indeed, as observed in 2009, when commodity prices plunged, real GDP growth in Sub-Saharan Africa (excluding South Africa) expanded by 4.1 percent, with the relatively economically diversified economies being hit less hard. For example, oil exporter Nigeria, grew by seven percent in 2009 thanks to expansion in its services sector, in contrast to Gabon, which saw GDP contract by 2.9 percent. However, one issue of concern is that unlike in 2008, when fiscal balances in the region were in a relatively stronger position, fiscal buffers for several countries in the region are yet to be rebuilt, thereby limiting the ability of governments in the region to respond in a countercyclical way,” says the Bank, adding that while economic prospects for Sub-Saharan Africa remain strong, growth is vulnerable to a sharp decline in commodity prices.

“The region’s progress on reducing poverty has been slow, hindered by high inequality. Faster reduction in poverty will require growth with equity.”

The latter would be particularly true of Botswana which the bank says is the third most unequal country in the world with a Gini index of 60.5. The Gini index, which measures income or wealth inequality, was developed by Italian statistician Corrado Gini in 1912. A Gini index of 0 represents perfect equality while an index of 100 implies perfect inequality. The World Bank report shows that now, as in the recent past, Southern Africa remains the global epicentre of income inequality and Botswana is maintaining a solidly negative score. Botswana has also not been successful in diversifying its economy away from diamond mining.

The Bank carried out two separate simulations (an oil and a metal price shock) to quantify the impact of commodity price declines on Sub-Saharan African economies. Each simulation was carried out by introducing a one-standard deviation decline in commodity prices from those envisaged under the baseline in 2014. Both simulations were carried out using the Bank’s global macro-econometric model. The Bank’s analysis shows that GDP growth in Sub-Saharan Africa continues to be supported by robust domestic demand.

“Domestic demand has grown faster than GDP, thanks to strong growth in both investment in the productive capacity of the region’s economies and household consumption,” it says.

The expansion of commodity exports remains an important part of the region’s growth dynamics, although the contribution of net exportsÔÇöexports minus importsÔÇöto GDP growth is overall negative. Government spending is generally expansionary, and fiscal buffers in the region are yet to be restored to their pre-crisis levels. The expansionary fiscal policy in the region is reflected in the 0.3 percentage point deterioration in the cyclically adjusted fiscal balances in 2012.

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