Still in the tunnel: Is there light?

Mbongeni Mguni | Tuesday October 8, 2024 12:42

Those who enjoy numbers will turn over every digit of the recently released Gross Domestic Product (GDP) figures for the second quarter, analysing the trends, making projections and forming opinions.

The figures were eagerly anticipated as the country is in the midst of a protracted downturn of its primary economic commodity – diamonds. The International Monetary Fund now expects the economy to grow by just one percent this year, while the Finance Ministry is due to reduce its original projection of 4.2 percent growth this year when it releases its Budget Strategy Paper this month.

What ordinary citizens know is that opportunities are tightening in the economy and generally, from an employment perspective, prospects have been bleak even before the pandemic.

The unemployment rate for those aged 18 and above increased to 27.1 percent at the end of March this year, from 25.3 percent at the end of September last year, while youth unemployment over the same period increased from 34.4 percent to 38.2 percent.

The only ‘good’ news for ordinary citizens is that inflation has slowed down significantly from its 14-year highs in 2022 to the lower single digits. However, unless it turns negative, the slowdown is exactly that – decreased acceleration.

Batswana generally understand that the economy is under strain and the need for diversification and transformation are more urgent than ever before.

Statistics Botswana’s figures show that in the second quarter, the contribution of mining and quarrying activities contracted by 16.5 percent, weighed down by base metals as well as diamonds.

Non-mining GDP increased by 4.2 percent in the second quarter of 2024 compared to 3.8 percent registered in the same quarter of the previous year.

Key sectors recording growth included manufacturing which rose 2.8%, construction which increased 3.4%, accommodation and food services (4.5%) as well as finance, insurance and pension funding (3.8%), all underpinned by stable electricity and water supply. Real value added by the electricity sector rose increased by 48.2 percent in the second quarter, as opposed to a decrease of 57.4 percent registered in the corresponding quarter of 2023, while the water sector recorded 2.2% growth in real value added in the second quarter of 2024.

Even the agriculture sector, which is traditionally a weak performer, registered 0.3% growth in the second quarter.

In terms of understanding the second quarter GDP figures, however, Mmegi deferred to economist, Dr Lovemore Taonezvi, an economics lecturer at BA ISAGO University who holds a Ph.D. in Economics.

Here is his take on the questions were put to him this week:

Mmegi: From the second quarter GDP figures, has Botswana experienced a mild technical recession?

Taonezvi: No, Botswana has not experienced a technical recession. A technical recession is generally defined as two consecutive quarters of negative growth in real GDP on a quarter-on-quarter basis.

In our case, while the first quarter of 2024 saw a contraction of -1.8% in real GDP, the second quarter showed a recovery with a 1.4% positive growth. Although the year-on-year figures indicate that the economy contracted by 0.5% in the second quarter compared to the same period in 2023, the quarter-on-quarter growth signals that the economy is not in a recession. Rather, the situation can be characterised as an economic slowdown, driven largely by the contraction in the mining and quarrying sectors, particularly diamonds, copper, and nickel.

Mmegi: How bad is the situation considering broad mining and diamonds in particular pulled growth down, but other sectors were mainly positive?

Taonezvi: The situation presents a mixed picture. On the one hand, the mining sector, especially diamonds, copper, and nickel, significantly pulled down growth in the second quarter. Diamond production decreased by 18.7%, and the real value added from the mining sector as a whole contracted by 16.5%, which is a substantial hit to the economy given the importance of the sector. The global diamond market's weak appetite and plant refurbishments in copper and nickel production further worsened the situation.

However, other sectors showed resilience, with most industries recording positive growths of over 0.3%. This suggests that while the economy is facing challenges, particularly in the mining sector, other parts of the economy are holding up relatively well and could help cushion the broader economic impact.

The overall contraction of 0.5% on a year-on-year basis in the second quarter indicates that while the economy is struggling, especially compared to 2023, it is not in a dire state. The diversified growth in non-mining sectors provides some hope that the economy can stabilise, though the heavy reliance on mining makes the situation precarious if the downturn in commodity markets persists.

The further highlights the urgent need to diversify the economy and cushion it from external shocks related to the mining sector.

Mmegi: Where can we see ourselves ending up this year in terms of growth if the first half has already performed this way?

Taonezvi: Given the performance in the first half of 2024, with a contraction in the first quarter and mild growth in the second quarter, the country's overall growth for the year will likely be modest at best. If the positive growth seen in non-mining sectors continues, and if the global diamond market stabilises, we could see moderate growth for the remainder of the year.

However, if the mining sector continues to face challenges, especially with weak demand for diamonds and production issues in copper and nickel, growth could remain subdued or even stagnate.

Assuming non-mining sectors continue to grow and there is no further major contraction in mining, Botswana could end the year with slight positive growth or flat growth. If the mining sector recovers more strongly in the second half, we might see GDP growth of around 1-2% for the year.

However, if the mining sector continues to underperform, overall growth could end up closer to zero or slightly negative. Much depends on external factors, especially the recovery of the global commodity markets and demand for diamonds.