Thursday, August 13, 2020

Botswana’s response to Covid-19 economic impact: the opportunity to do more

The Botswana Government’s response to Covid-19 has been satisfactory, including the proactive national lockdown and economic stimulus plan launch. The P5Bn package features government expenditure, loan guarantees, tax concessions, monetary policy and a food program. Last week, Bank of Botswana (BoB) augmented the stimulus by increasing banking sector liquidity. The stimulus package is designed to stabilize business and safeguard employment. It is, however, meaningfully smaller than the expected scale of the economic fallout Covid-19; and it does not fully address the needs of the informal sector and SMEs. The government will need to remedy these gaps while simultaneously charting a recovery path for the wide wider economy. This will require a departure from government’s laissez-faire approach to sector development, to much more hands-on tactics to that ensure the country recovers with a wider economic and employment base.  

The Covid-19 economic impact will far exceed the 2008 Global Financial Crisis that shrank Botswana’s economy by 8%. Globally, the impact is already significant: United States unemployment jumped from 4% to 15% in April. The current financial crisis will be more complex than preceding financial crises in two ways. First, we cannot simply stimulate demand because supply is also constrained by the public health crisis. Second, it is hard to predict how the pandemic will evolve and influence both consumer behaviour and financial markets. Therefore, it is critical for Botswana to continue its progress in controlling the pandemic outbreak locally. This includes the managed return to workplaces, in which some companies restarted activities on 8 May albeit with twenty-five percent of their work force. What is clear is that the slowdown will have profound impact on the economy, both formal and informal.

The economy requires a larger stimulus….

At P5Bn, the stimulus is only 2,5% of 2019 GDP, considerably smaller than the 13,1% GDP decline predicted by the Ministry of Finance and Economic Development (MFED) on 24 April 2020. This leaves a gap of 14%. Relative to the previously forecast economic growth of 4%. In response to ensuing mineral revenue reductions, MFED has trimmed the budget by P8Bn, reinforcing the gap.

The Ministry’s forecast contraction in Trade, Hotels, and Tourism sector alone of 32,2% amounting to P12,4Bn, will dwarf the stimulus package. Tourism is particularly vulnerable to business closure and layoffs. It contributes about 5% of Botswana’s total GDP and employs 25,000 workers. The World Travel & Tourism Council (WTTC) expects a reduction in global travel equivalent to three months of flights due to lockdowns. This and local social distancing will suppress the entire value chain including transport, accommodation, restaurants, conferencing and travel agencies. MFED’s proposed austerity measures will further dampen spending on domestic tourism. An important concern related to Trade, Hotels and Tourism is that women comprise two-thirds of its workforce. Women will be particularly vulnerable as they tend to be in lower-paying jobs and are likely to play a lead role in taking care of family members affected by Covid-19.  

Botswana should direct an amount closer to the overall scale of economic risk, as several other middle-and-high income countries have done. G7 countries like United Kingdom (18% of GDP), United States of America (14%) and middle-income countries like South Africa (10%) and Brazil (6,5%) have employed larger stimuli than developing countries that are typically fiscally constrained. These more developed countries have larger direct government spending portions of the stimulus ranging from 3% to 9% of GDP versus the 1,2% Botswana set aside for the COVID Relief Fund and purchases of grain, water, medical and counselling services. Direct government spending is more helpful when it is larger, is injected early as the economy is opening up, and targeted at companies and people who can spend it to create economic momentum.

To secure additional finance, government can weigh the cost and conditions of multilaterals such as the World Bank and IMF versus domestic institutional investors. Local markets have significant liquidity but would require government to raise domestic borrowing limits. Multilateral loans might require conditions on economic reforms. Although funding will increase debt in the short term, this will help maintain fiscal buffers while preventing long-term damage that business failures and unemployment can cause.

… and more focus on SMEs

The extent to which the stimulus covers SMEs and the informal sector is limited, although both are important components of the national economy. There are currently over a quarter of a million informal workers and the last government SME survey in 1999 estimated their contribution to GDP then at 35%.  The primary vehicle for reaching businesses via the stimulus is banks, with a limited P40m earmarked for Citizen Entrepreneurial Development Agency (CEDA). A Local Enterprise Agency (LEA) study in 2018 found that while 80% of SME owners have banking services, only 8% had taken a bank loan in the prior 3 years. Half struggled with cash-flow management. The loan guarantee program administered via the commercial banking system will not fully cover SMEs as banks are not traditional channels and unlikely to extend substantial financing.

We can increase SME access to financing by using the channels that they favour. As per the LEA study, one third of SMEs have raised funding through either government agencies or development finance agencies. To reach SMEs, we will need to quickly know who they are. To this end, the Ministry of Trade announced plans to work on an SME registry to help improve data. To encourage registration, the Ministry should explore various incentives. For example, it can coordinate with LEA to provide training on financial management. It can also

partner with telecoms operators to develop mobile money platforms to direct funding to SMEs. The advantage of using mobile money platforms is that they have broader reach and lower operating costs than traditional channels. Mobile money can also help reduce the need to handle money, helping limit Covid-10 transmission during transactions.

A targeted plan will accelerate recovery

A major challenge facing government will be arresting economic decline while simultaneously planning a rapid economic uplift. Given the potential scenario of slow ramp-up in the global economy and the associated delayed contribution to mining export earnings, it is critical to bolster the economy with additional drivers. The country’s economic recovery plan should include both enablers for growth and investment in sectors that can expand GDP and employment. Potential focus areas include ICT (Information and Communications Technology), tourism, and agriculture.  This should be part of work on a long-term economic growth strategy that addresses long-standing issues of unemployment, poverty, inequality and evasive diversification.

ICT will be a key enabler for productivity growth across sectors. In the 2019 Economist Intelligence Unit’s Inclusive Internet Index, Botswana was ranked 67th out of 100 countries on quality of Internet speed, and 71st on network infrastructure coverage.  As Batswana have relocated to their homes, they have experienced difficulty working and learning remotely in recent weeks due to slow, unreliable and expensive networks. This highlights the need to improve capacity and access on both fixed and mobile networks. The government should also motivate usage through device and connectivity programs to ensure that workers and students are online. Additionally, we should invest in training including basic ICT literacy for all adults, and targeted courses in high growth areas like big data and artificial intelligence. The lockdown has highlighted that digital access is a burning platform if Botswana is to advance.

Tourism holds substantial untapped potential and can provide near-term upside. According to the UN, worldwide employment in tourism grew 3 times faster than all other sectors in the decade following the 2008 Global Financial Crisis.  A 2018 IMF report stated that Botswana could double tourism’s economic contribution, in line with regional leaders like Kenya and Tanzania. Other African countries led by Seychelles, Rwanda and Gabon have accelerated their tourism sectors by building new infrastructure and promoting foreign investment. Botswana can emulate them as per the Tourism Value Chain and Analysis Action Plan of 2015. In the short-run, the government can stimulate volumes by encouraging domestic tourism; and improving accessibility via lower airport taxes, more extensive visa-free access, and targeted marketing.

Although 7% of the population is involved in agriculture, most are informal, and the sector contributes only 2% of GDP. While this largely subsistence agriculture is important for supporting livelihoods, there is immediate potential to scale up – for example, in beef. Herds are down 30% from peak and Botswana contributes only 0,2% of total African production. As per the CDE Project on Beef Value Chains in 2014, we can increase beef export value through easy-to-implement programs that raise productivity of citizen farmers, expand capacity through investment, diversify the product mix, and enhance marketing efforts abroad.

As government considers capital markets to fund recovery, it will be vital that it has bankable business cases and strong project delivery. This presents an opening to employ the best project management professionals in the country to plan, measure performance, and implement. It is a great opportunity for the country to prove that it can deliver high impact projects during a difficult time. Getting ahead of the recovery will position the country well to maximize economic growth in the next two years. Conversely, if Botswana does not inject sufficient funding to support jobs and livelihoods and prop up business then the country will lose valuable momentum.  

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