Monday, October 26, 2020

The economy resting on Gov’t shoulders

Newly released figures show that Botswana’s economy would have fared much worse had the government not stepped intervened to pump billions of Pulas into the ailing economy.

In 1936, English economist John Maynard Keynes shook the foundations of economics through the publication of “The General Theory of Employment, Interest and Money”, going against the theories held by classical economists who maintained that economies are self-correcting, dismissing the need for state intervention. However, the central idea of Keynes’s economics places responsibility on the government to step in during an economic recession to stimulate aggregate demand, and by extension,  boost economic output.

Like other countries battling the coronavirus pandemic that erupted in late January, the Botswana government implemented a 49 days nationwide lockdown in early April. This hampered economic activities, with businesses shuttered and consumer movements restricted. The gross domestic product (GDP) figures released on Monday reveal that the economy recorded its biggest contract on record, with the GDP falling by 27.3 percent in the second quarter of the year, the biggest fall on record.

On a yearly basis, the economy shrunk by 24 percent compared to 3 percent growth in the same period last year. The contractions are the country’s largest since 1960s when the country started keeping economic records. However, it could have been worse had the government not intervened with some fiscal stimulus to keep the economic engines humming.

According to the GDP data for the second quarter, the steep reduction in the domestic economy was observed across all sectors except government, agriculture and water and electricity. Between June and August, government became the major contributor to GDP for the first time in many years, contributing 19.7 percent of the P36.8 billion nominal GDP, moving from the usual third place to replace the usual frontrunner trade, hotels and restaurants which contributed 16.5 percent to GDP. The finance and business sector retained its second spot as the main contributor to output at 16.7 percent.

“Botswana Government instigated robust fiscal policy responses in order to influence macroeconomic conditions, including aggregate demand of goods and services, employment, inflation and economic growth,” said Dr. Burton Mguni, the statistician general in GDP second quarter report.

“These policies are intended to increase aggregate demand, although contributing to deficits or drawing down of budget surpluses,” he said.

On Monday, president Mokgweetsi Masisi told parliament that his administration has spent over P1.8 billion to pad the economy in the last six months. The bulk of the funds or P831 million was spent on the wage subsidy given to distressed companies, about P350 million on food packages to household, P396 million on health supplies, with the remainder spent on recruitment of safety health officers, psychological services as well as the evacuation and financial assistance to Batswana outside the country.

The government in September received authorisation from lawmakers to increase the budget by an additional P3.7 billion, of which P1.3 billion will be disbursed through the soon to be established Industry Support Facility (ISF) under the Finance and Economic Development ministry, which had made the request for supplementary budget. The ISF will be used to support the trade, tourism and agriculture sectors which remain under pressure. However, the government might have to dig more to prop the economy as most sectors experienced severe contractions.

In the latest GDP figures, the government sector advanced by 2.1 percent while agriculture industry increased by 3 percent. On the extreme side, mining sector contracted by 60.2, while  trade, hotels and restaurants declined by 40.3 percent. The Manufacturing industry fell by 31.3  during the quarter, construction contracted by 36 percent, the transport and communications cluster was down 16.9 percent and the finance and business Services industry retreated by 11.9 percent.

The Covid-19 outbreak has been another reminder to the country’s vulnerabilities to external shocks. While Botswana has recorded below 2000 confirmed coronavirus cases, the containment measures implemented the country and others affected diamond supply value chain and disrupted tourism, effectively strangling the country’s main foreign exchange earners.

Part of efforts to jumpstart the sluggish economy include the Economic Recovery and Transformation Plan (ERTP) which requires P20 billion to implement. The government has indicated it will raise at least P40 billion in the next three years, with half of that going to the ERTP and the remainder used to smooth the country’s widening budget deficits.

Botswana’s national budget for the 2020/21 financial year, which began in April, pegs government expenditure at P59.6 billion against projected revenues of P48.8 billion. With the latest change to the budget through supplementary requests, the budget deficit from the current financial year is projected at P15 billion, ballooning from the P7.9 billion deficit registered in 2019/20 financial year, which was a slight reduction from 2018/2019’s massive P8.8 billion budget shortage.

The government has been running budget deficits since 2017/2018, with that year’s deficit recorded at P1.9 billion. The government’s cumulative budget deficits in the last three years is hovering near P20 billion, nearly 10 percent of the country’s 2019 GDP of P200 billion . Besides the projected P15 billion budget outrun in the current financial year, another shortfall of  more than P4.4 billion is expected in 2021/22 but will likely be revised too in the coming months.

To raise the billions of pula needed for the economic recovery plan, the government economic advisors have warned against drawing money from the dwindling government’s portion of the foreign reserves, and suggested that government takes more on debts, increasing domestic borrowing, while also disposing some government properties, including privatisation of some institutions. The government also plans to raise revenue generation through increased taxes and other levy charges.

Botswana’s bond issuance program was last month raised from P15 billion to P30 billion, enabling the country to borrow more money locally.  Botswana’s total public debt  limit is capped at 40 percent of GDP; 20 percent which is domestic borrowing and 20 percent external loans. The country’s total debts amount to P39 billion, where P30 .6 billion in government debt split between P15 billion in domestic loans and P15.5 billion in external loans. The remainder is the P8.6 billion government guaranteed loans, mostly taken for the state struggling enterprises.

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