Monday, October 26, 2020

Reconfigure the economy, so says Treasury

It has been said many times that Botswana’s economy needs to be weaned from diamonds,  but this time around, the intensifying pressure to diversify is coming from within government, with officials from finance ministry warning of a narrowing time horizon to fix the economy before its late.

The country’s economic vulnerabilities have once again been laid bare by disruptions caused by Covid-19 pandemic containment measures, affecting Botswana’s main revenue earners, diamond exports and tourism. This added to the already distressed economy, dragged by diminishing growth rate, soaring unemployment and huge budget deficits.

Now, policymakers at the Finance and Economic Development through the newly introduced policy briefs  say there is need to increase productive capacity within the economy, by promoting growth of the secondary and tertiary sector.

“The economy of Botswana remains dependent on natural resources and raw materials, particularly agriculture and mining, which make up the primary/extraction sector of the economy. Over the years, this has subjected the domestic economy to considerable volatility, as the primary sector tends to fluctuate more often than the secondary and tertiary sectors.,” the officials said in the first issue of the policy briefs.

The vulnerability of the economy to fluctuations in the primary sector has been noticeable over the years, starting in 2015 with a 1.7 percent contraction in gross domestic product (GDP) following the impact of the commodity price decline on the economy. In 2019, growth slowed to 3 percent, down from 4.5 percent recorded in 2018. The slowdown was driven mainly by the weak performance of the agriculture sector and lower mining output, reflecting adverse weather conditions and weak global demand for rough diamonds.

Growth in the economy further weakened in the first quarter of 2020, growing by 2.6 percent compared to 4.2 percent recorded in the same period in 2019. Not surprisingly, the slowdown in growth was due to a contraction in mining and agriculture.

Given the deterioration of the economy, the finance ministry officials say  there is an urgent need to advance structural reforms in order to reduce dependency on the extractive sector to ensure resilience of the economy. Though the contribution of mining and agriculture to the GDP has declined over the years, it might add a false sense of success, duping the government to think it has achieved diversification in the economy.

“Diversification of GDP is not in itself sufficient for sustainable growth as the structure of the economy remains dominated by sectors serving the domestic market, suggesting that growth has been biased towards non-tradables and less towards tradable goods and services,” the officials said in the brief.

The secondary sector, made up of manufacturing, construction and utilities, has been operating below potential, with the sector’s share of GDP remaining constant, suggesting low beneficiation of primary products to the rest of the economy, the officials said. Moreover, with global trends where economies are now largely geared towards the secondary sector, especially manufacturing, Botswana is lagging behind, an implication that that the domestic economy is losing out on the potential gains from trade that can come with turning primary products into manufactured goods for exporting into the global value chain.

The policymakers believe that the country can claw its way back up by making the secondary sector to grow in size and promote growth towards more tradable commodities that can be exported. To achieve the promote export-led growth that is sustainable in the long term, there is need to promote and ensure competitiveness of exportable goods and services, the officials said before warning of protectionist policies that can upset trade.

“At the same time, from a resilience point of view, growth needs to focus in attaining self-sufficiency in other commodities, particularly those of strategic importance. However, it is imperative to balance the trade-off, ensuring that self-sufficiency in certain commodities does not lead to closed borders and that the production patterns are determined by comparative advantage.”

The tertiary sector, comprising of finance & business, transport & communication and trade, hotels and restaurant, accounts for the largest share of GDP but there remains room to promote growth given the sector’s weakening contribution to the GDP over the years, suggesting that there is scope to promote growth.

The finance ministry officials have also warned of limited tie to bolster these sectors, citing the possibility of worsening economic conditions associated with COVID-19 could weigh down on demand for rough diamonds and tourism, and coupled with trade restrictions,  this could have a negative impact on both the primary and tertiary sectors of the economy, in turn limiting the extent and speed of economic recovery.

“In this respect, it is imperative that the ERTP adopted by Government over the next three years takes advantage of the growing trade in services globally, by lending support towards boosting growth of and reinforcing the resilience in some of the subdued service sectors. Essentially, reducing dependency on the resource-intensive sectors and facilitating growth of communications, household businesses and wholesale could ensure a more diversified economy, thereby minimising future risks to growth, especially those associated with currently vulnerable sectors,” concluded the report.

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