Tuesday, April 20, 2021

How an Economist perceives the state of the economy

It is easy to be swayed by political posturing when discussing economic matters, especially because perception based on politics often blurs the economic reality. While it is much appreciated that Botswana’s political landscape has evolved, it is also worth mentioning that caution must be taken in how the state of the economy is discussed in relation to the political situation. One might ask whether the national economy cannot speak for itself, in terms of demonstrating the economic state of affairs.

Ideally, Economists want the economy to be balanced, neither expanding too rapidly nor plunging into a financial meltdown. This is a situation whereby economic output is at its peak, but being sustainably held off. Looking at the economy as a whole, one can pick three important factors that influence its performance and behaviour. These are inflation, unemployment and the rate of growth.

Inflation

Inflation hit a record low of 2.8 percent over a period of 15 years due to a sharp drop in oil prices. This plunge is in contrast to what the trend has been over the last decade, when inflation averaged 8.5 percent between 1999 and 2010. According to a 2013 working paper on inflation dynamics by Botswana Institute of Development Policy Analysis (BIDPA), it seemed highly unlikely over the last 10 years that Bank of Botswana would be able to push down inflation to its target range of 3 ÔÇô 6 percent.

“Central banks don’t directly control inflation, nor does their policy action have effects on real economic activities that are always easy to determine,” reads the working paper.
The paper asserts that the origin and movement of inflation is influenced by Botswana’s skewed economic structure as depicted by heavy reliance on exports for income generation and imports for consumption. This is because Botswana, with its small open economy is a price taker that has insignificant effect on external prices (example food and fuel). By extension, this means that the prices of Botswana’s trade partners (example South Africa) directly influence local prices. At 3.1 percent, the current inflation falls within BoB’s target range, as did the rate in May and April which stood at three percent and 3.1 percent respectively. Using inflation as a measure, it can be concluded that the economy is in good form.

Unemployment

This is a hot topic in Botswana because jobs inject productive output into the economy, which is necessary for growth and development. However, the government of Botswana has over the years not been able to address the problem of unemployment. In fact, the national economy was unable to stem job losses last year and in the first quarter of 2015. The manufacturing sector has particularly failed to retain jobs because of its tough operating conditions. The nation observed helplessly as people were sent to their homes to live in hopelessness and dejection.

Official figures record unemployment at 20 percent, but economics think tanks believe the figures have been underestimated and could be as high as 30 percent. Irrespective of what the real figure is, the fact remains that economic opportunities in Botswana fall crudely short of sustaining the number of graduates that enter the labour force on a year to year basis. The 2006 Botswana demographic survey indicates that persons aged between 15 and 64 years make up more than half of the population. This should pose a real threat to social cohesion. Again, water and electricity shortfalls derail attempts to create jobs, as it has become evident that the crises take priority over any real attempts at impactful employment creation. With high unemployment, the health of the economy will remain questionable.

Rate of growth

Over the past decade economic growth has defied Botswana. While the 2008/09 economic crunch knocked the national economy, its impact was greatly reduced by the foundation of prudent and efficient management of resources that had been laid. Botswana’s grip however appears to be tottering. The impressive economic growth that had become synonymous with the country, which was regarded as one of the world’s highest, is slowly fading and leaving behind pale streaks of growth. According to figures by Trading Economics, Gross Domestic Product (GDP) shrunk by 1.3 percent in the first quarter of 2015. The contraction is a reversal of growth of 2.6 percent recorded in the last quarter of 2014. Over a period of 21 years starting from 1994 to date, GDP growth rate averaged 1.24 percent. It is this downward trend that dampens the health of the economy.

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