Thursday, July 18, 2024

Services sector contribution to the overall GDP surges

In 2020, according to official statistics, the agricultural sector contributed a paltry 2.14 percent to the GDP of Botswana, 25.03 percent came from the industry and 63.04 percent came from the service sector.

The trade, hotels and restaurants as well as the banks, insurance and business services are among the four major sectors in terms of their contributions to the economy’s gross domestic product (GDP).

The share of trade, hotels, and restaurants to GDP increased from 11.8 percent in the National Development Plan (NDP) 9 to 24.6 percent in NDP 10, while the banks, insurance and business services share increased from 12 percent in NDP 9 to 24.6 percent in NDP 10, according to the Government of Botswana 2017 official statistics.

A 2018 Botswana Institute for Development Policy Analysis (BIDPA) research study titled “Determinants of Service Sector Growth in Botswana” undertaken by Mpho Raboloko using annual time series data from 1980 to 2015 found that “gross national expenditure, domestic credit to the private sector and gross fixed capital formation are important for the growth of the services sector.”

The study results further revealed that “trade openness negatively impacts the growth of the services sector” and the implication of the findings implored “government to focus on factors that augment the growth of services sector in the formulation of service-oriented policies.

“Such factors include gross national expenditure, domestic credit to the private sector and gross fixed capital formation. Government should increase spending on the service sector and its sub-sectors. It is also important for the banking sector to avail credit to the private sector as this is essential for the growth of the services sector. This can be achieved through a well-functioning and developed financial system”.  

According to the research study, the importance of the services sector to the economy lies in the fact that many services provide inputs to the production process particularly mining and to the other sectors.

Thus, “their growth has wider productivity and efficiency outcomes for activities outside of the services sector. One of Botswana’s key challenges has been that its rapid economic growth has not been broad based as growth in the non-mining sectors has been slow.”

It is observed by the study that the service sector contribution to the overall GDP has been increasing over the years and the increase could be due to the drop in the mining sector contribution or overall increase in services output growth. This trend shows that the economy has considerably diversified overtime.

According to the study, excluding mining, the service sector outperformed other sectors in terms of average contribution to GDP growth during the NDP 10 period. The trade, hotels, and restaurants contributed 24.6 percent while general government, banks, insurance and business services recorded 22.5 percent and 21.1 percent of the total value-added growth respectively.

Clearly, the three service sub-sectors; trade, hotels and restaurants, general government and banks, insurance and business services were the most important sectors after mining in terms of contribution to the GDP.

The study further observes that the growth of the services sector comes at a time when real value added from mining has been declining due to weak global demand for luxury goods, particularly diamonds.

However, the downside of the services sector is that even though its overall contribution to the GDP is at 64 percent, its contribution to exports is only seven percent while diamonds make up 70 percent of exports.

It is also reckoned by the research study that “the service sector also contributes significantly to employment. One of Botswana’s key challenges over the years has been high levels of unemployment. The high growth rates over the years have not translated to reduction in unemployment”

The research also recognizes that the mining sector which has been the main driver of the country’s economic growth contributes very little to employment despite its high contribution to GDP.

This is mainly because mining is capital intensive in nature and employs too few people per unit of output. The other reason is that Botswana operates at the base of the mining value chain. The country exports its mining output without much value addition, and therefore losses on job creation opportunities from downstream processing of its output.

According to the research study, “the contribution of commerce in total employment has shown steady growth in the last few years. This underscores the importance of the services sector in terms of employment creation.”

The study also reckons that in view of the growing importance of the services sector in the economy, it is important to find out the factors that affect services sector output growth by identifying the determinants of service sector output growth in Botswana. The study is important for policy as the country continues to seek to diversify the economy away from the mining sector.

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