Saturday, September 19, 2020

The economy in 2018 and beyond…

By Portia Nkani

Although Botswana’s economy is still picking up, it is at the same time facing some setbacks. This is despite the commodity prices positive changes experienced this year. Pundits maintain that ggrowth prospects remain upbeat, buoyed by higher diamond production and improvements in the non-mining sector. Growth in advanced and emerging market economies will spur demand for Botswana’s rough diamonds in the short to medium term, boosting economic activity. Outside the mining sector, the services sector, improved water and electricity stability, growth in government expenditure and other economic diversification initiatives under promotion by the government should further stimulate the economy.

The underlying driver for the improved performance in trade, hotels and restaurants sector appears to be stronger consumer demand, particularly after relatively flat growth in household consumption in 2016 and 2017 due to restrained income growth. The country’s total debt is expected to fall 23 percent of GDP in FY 2018/19 from 25 percent in the previous fiscal year, mainly due to lower external debt. Although financing of the deficit is expected to come from both domestic and external sources, external sources are restricted to concessional borrowing from development partners to avoid incurring an excessive debt burden and ensure future fiscal sustainability. This is very commendable and in line with IMF’s emphasis on economies to manage their debts and cutting government expenditures. Not much has been done on job creation, diversification and land distribution.

The GDP growth rate performance

However, local economist expressed their variations with regards to the real Gross Domestic Product (GDP) for this year. Dr Keith Jefferis at E-consult, analyses that growth for 2018 will reach 4.5 percent, whilst at Barclays, Naledi Madala projects a slightly higher to Jefferis’s at 4.6 percent. On the other hand Motswedi Securities, Garry Juma weighed below at 3 percent+.

Juma shares that, “quarterly GDP numbers on their own are volatile and cannot be uses in isolation to predict the y/y GDP numbers.  Overall we expect FY2018 GDP numbers to come between 3.1 percent and 3.9 percent, slightly below most forecast.  The economy although it’s picking up is still facing some challenges although a rebound in commodity prices is encouraging.” The 2017 GDP was sitting at 2.7 percent.

PULA vs. RAND

The local currency – Pula recovered from the impact of the emerging market currency fallout on the South African Rand (ZAR) in the last few months, and the BWP is expected to strengthen further by year end.

Translating to the end consumer/household, firmer BWP vs the ZAR reduces imported inflation given that the country imports the bulk of the goods from SA. In this instance, Juma explains that it will help somehow stabilize prices of goods imported products from SA.  However, a firmer BWP he says “encourages imports and if unchecked may worsen the trade balance between BW & ZAR.  Exporters into SA market may suffer and their products might end up being uncompetitive in SA market.” From the economist point of view, for some business it’s the best time to import machinery from SA for productive purposes as it will be cheaper in BWP terms.

Madala also affirms that when the Pula strengthens, Botswana exports lose competitiveness against the rest of the world while imports become cheap, thus importing more than what is being exported.

Foreign exchange reserves are used to pay for imports and are therefore dented by a large import bill. In South Africa, higher and rising real interest rates may support investor risk sentiment and as a result remain supportive of the ZAR unit over the near term, in the absence of external shocks. However, we believe that the Rand will probably depreciate gradually over the medium term as a result of external risks.

On the contrary, Dr Jefferies’ does not share the same sentiments as he points out that, the BWP has not and will not strengthen as it is a fixed peg with a slight downward crawl. “Hence any strengthening against the ZAR is offset by a weakening against other currencies in the basket such as the USD. Overall it is unchanged.”

Household lending

Household arrears have been significantly lower in the first six months of the year, suggesting a much healthier balance sheet for consumers.

According to Juma, as the decline could be attributable to banks being more stringent in their lending criteria which can be supported by the consistent decline in overall credit extension by banks.  He highlights that this does not necessarily imply an improvements in consumer’s balance sheet.

As from Dr Jefferis, it is likely that the banks will be very cautious in extending credit to households given the very high level of indebtedness relative to incomes.

Bank of Botswana’s September Business Expectation Survey that overall business confidence increased and sentiment about easy access to domestic credit has improved. These sentiments are most likely to lead to increasing credit demand from resident businesses. Secondly, an expansionary fiscal policy is expected to improve the asset quality of Botswana’s banks, which will boost lending in the medium term. “We expect that an uptick in demand will support credit growth going forward,” says Madala.

Commodity prices and the fiscal strain

Lower commodity prices are adding on fiscal strain while oil prices are being welcomed in countries such as Nigeria and Angola. Fuel prices are becoming more on expensive for the importing countries, such as Botswana, South Africa.

After several years of gradual easing, the BoB maintained policy rate at 5.0 percent in 2018, domestic fuel prices are a concern and should push inflation slightly higher in the short term. However, Madala’s observation is that several downside risks are expected to cushion inflation going forward, allowing it to remain modest over the medium term. It therefore appears unlikely that the current policy stance will be altered in 2019.

Dr Jefferis also maintains that, inflation is likely to rise slightly due to fuel prices but will remain in the lower half of the BoB’s inflation objective range (3-6%) and it is unlikely that there will be a need to raise policy rates in the next year.

Employment and diversification

In recent years, sizable buffers and prudent policies have kept the economy stable despite diamond market weakness and volatility. Nevertheless, the diamond cum public sector-led development model has shown its limits with slower growth and sluggish job creation, while the implementation of structural reforms has been challenging because of limited capacity, insufficient coordination among government entities, and political constraints.

The 2017 National Development Plan aims at addressing these issues, with emphasis on private sector development and economic diversification, but more focused time-bound plans with concrete reforms and revised investment priorities need to be formulated and implemented.

On this note, Dr Jefferies highly emphasizes that, government needs to do much more to improve the business environment, reduce costs for business and facilitate improved export competitiveness which will support job creation by the private sector.

For Botswana to go the right direction, he also indicates that much more focus is needed on supporting exporters, and less attention paid to substituting for imports. “Government also needs to do more to improve the quality of policy making, and ensure that it is based on evidence, high quality data, and analysis of potential impacts.” Finally, he suggest for the government to dramatically improve its own efficiency with regard to administration, implementation and the delivery of public services.

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