Tuesday, August 9, 2022

Botswana’s Import cover on the decline

Botswana’s import cover has declined from an average of 18.3 months in 2015 to only 9 months by July 2022, historical ‘Balance of Payments’ (BoP) figures shared by the central bank this past week show.

In the world of trade economics, Import Cover measures the number of months of imports that can be covered with foreign exchange reserves available with the central bank of the country. 

In Botswana, the number of these months has been on decline due to trade deficits which now weigh heavily on the country’s foreign reserves and the local currency – the Pula.

Given the numerous trade deficits, the BoP – made up of the current, capital, and financial accounts – have deteriorated at the fastest pace in the last seven years, mostly due to the underperformance of the diamond sector.

A surplus overall BoP generally increases a nation’s net foreign assets, and vice versa for a deficit. Since 2015, Botswana’s overall BoP has recorded consecutive deficits from P4.1 billion in 2015 to P20.1 billion in 2020 and now a provisional P2.9 billion for 2021.

This week executives at the central said the 2021 deficit was partially offset by the increase in export receipts and SDR inflows amounting to nearly P3 billion paid to the Government by the IMF, coupled with interest and dividend incomes. Despite the offset, official figures show that the foreign exchange reserves have progressively declined over the years, from the equivalent of 18.3 months (P85.9 billion) in 2015 to 9 months of import cover of goods and services as at July 22, 2022. As of July 2022, the amount of Botswana’s official foreign exchange reserves was P58.3 billion or USD 4.6 billion.

So what’s next…..?

Dr Lesedi Senatla, Director of Research and Financial Stability at BoB says the central bank’s objective is to maintain a stable real effective exchange rate. The ultimate goal is to support the competitiveness of domestic industry in the international and domestic markets. In late 2021 the central bank announced that it is maintaining the Pula’s downward rate of crawl of 2.87 percent for 2022 which was first implemented in May 2020. Pula basket weights were also maintained at 55 percent (IMF SDR) and 45 percent South African Rand.

“Rate of crawl and basket weights contribute to moderation in Pula exchange rate movements and support competitiveness of domestic industry in response to the adverse impact of Covid 19 pandemic on the economy”, Dr Senatla told journalists at an economic brief this past week at the bank’s head office in the capital Gaborone.

He however cautioned that exchange rate alone is not sufficient for sustainable competitiveness of local producers.

“Sustained improvement in productivity is required”, he said.

According to the Botswana National Productivity Centre (BNPC), there has been a broad-based stagnation and sometimes slowdown in global productivity growth for over a decade and this has been exacerbated by the outbreak of the COVID-19 pandemic in 2020.

The central bank on the other hand says during 2010 to 2019, Botswana’s productivity growth performance averaged -1.11 percent, compared to peers in the region, South Africa, Namibia, Rwanda and Mauritius with average growth of -1.15 percent, -1.27 percent, 1.12 percent and 0.86 percent, respectively.

As part of its policy recommendations, the central bank says digital technologies have the potential to enhance the country’s economic resilience, and productivity. The sector, the bank says, will expand access to global markets, widen the derivation of economic value from natural and other national endowments, improve public service delivery, promote transparency and accountability, expand skills development and learning prospects, engender better health and wellness outcomes and, overall, lead to the creation of new and better prospects for sustainable and inclusive economic growth.

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