|
Economy: More Policy Focus Required |
|
|
|
Can the volatility of growth be reduced?
Standard Chartered Bank Research Unit has released its Global Focus – a monthly Analysis of Asian, African, and Middle Eastern Economies.
The Botswana section, written by Razia Khan, Regional Head of Research, Africa, notes that “ in many respects 2008 will be a pivotal year for Botswana.”
“Botswana is now only 8 years away from its 50th anniversary of independence. Economic planning has long been focused on 'Vision 2016', with Botswana aiming for a trebling of per capita income in the 20 years to 2016. Although it has done well, in order to remain on track, much more policy focus will be required. The question that needs to be asked is whether the model that has served Botswana so well since independence is sufficient for the task. In particular, can the volatility of growth be reduced?” observed Khan.
There are certainly challenges ahead. “As the leading producer of gem diamonds globally, revenue has - in the past - been susceptible to global economic downturns. Mining remains the largest contributor to GDP, with some estimates suggesting that it contributes just over 40%, although the country has seen a more positive record of economic diversification in recent years.”
According to Khan a serious, prolonged recession in the US would impact on Botswana's fiscal revenue although there is a comfortable enough built-up surplus to allow the country to weather any short-term slowdown.
“Also untested is the ability of new global economic powerhouses to compensate for any fall in US demand. Although theoretically possible, there is little empirical evidence to date that suggests Botswana's dependence on US demand for gem diamonds has lessened significantly. There are still testing times ahead,” Khan says.
One of the country's key challenges is that the diversification that has occurred has largely taken place within mining rather than other sectors of the economy. “The significance? Diversification is underway, but the dependence of the wider economy on government distribution of mining revenue remains in place.”
Khan adds that recent months have seen a proliferation of new private-sector operators in diamond mining and plans to establish the Diamond Trading Company in Botswana in 2008 should take the country further up the value chain in terms of extracting value from this sector.
While data for 2007 indicates a 19% rise in diamond exports (despite production dropping 1mn carats from 2006 highs of 34.4mn carats), copper-nickel exports rose 50% (albeit off a lower base). Production of other commodities - salt, soda ash and gold also rose significantly. The sharp increase in the import of machinery, electrical and transport equipment indicates the strength of investment plans (and potentially favourable growth ahead) despite the likelihood of a global economic slowdown, the Focus says.
“The test of course is likely to lie in how long this can be sustained. There is also a catch. In the current fiscal year a 3% decline in mineral revenue has been forecast, largely because of a substantial increase in capital expenditure planned by Debswana. The challenge for the authorities will be not to allow this to translate into much weaker spending.”
Khan says other economic threats are more local. The power crisis that has hit the South African economy has affected Botswana as well, with Botswana sharing the regional grid and importing a significant amount of its power from Eskom, the state-owned South African utility.
“Given the strong correlation between electricity consumption and GDP growth (for some time now, electricity consumption has provided one of the best proxies for GDP growth - with consumption data available in advance of GDP data, it is also a useful 'lead' indicator), some impact on growth is inevitable. A key question therefore revolves around the mitigants that the government has in place. This is where a focus on government spending is useful.”
For the Financial Year 08/09 a small fiscal deficit of -0.4% of GDP is in fact forecast - a departure from the norm, although the government's capacity to fulfill its spending plans will have to be monitored. Significantly, no rise in public sector salaries was budgeted as additional expenditure might tip the government beyond its self-imposed fiscal rule of limiting spending to 40% of GDP. If revenue slows more than projected and spending slows, the economy will soon feel the effect. Botswana needs to emerge more independent from this cycle of volatility.
“What can be done? Part of the problem stems from the preference for financing potential deficits from cash deposits. While the authorities certainly do have comfortable accumulated reserves, there has long been a need to do more to develop the domestic yield curve. Greater depth in the domestic market would facilitate a smoothing of government spending plans. There are several additional benefits. Foremost is the need to do whatever it takes to accelerate private sector development. A deeper official bond market would establish a useful benchmark for greater private sector issuance,” writes Khan.
Given the scaling up of public and private sector projects in the country – whether in mining, or plans for the construction of a power station equivalent to 50% of GDP, the need for greater financial depth to provide financing alternatives is imperative.
“It cannot happen too soon. Second, a point we have long alluded to in our research - more needs to be done to mop up domestic liquidity. Existing issuance of Bank of Botswana certificates, limited to investment by commercial banks, is not adequate.
“Thus the move outlined in the 2008 Budget to replace maturing bonds with new issuance across the length of the yield curve, is positive. But it is only the tip of what may be required.”
 |
Subscribe to this comment's feed
