Economy wobbles in bittersweet 2013
Brian Benza | Friday December 20, 2013 12:08
With all economic indicators painting a gloomy picture, in parallel with international trends, it was not all despair for the economy as milestone events such as the relocation of De Beers’ P50 billion sales business to Gaborone point to healthier prospects.
Announcing the 2013/14 budgets at the beginning of the year, Finance Minister Kenneth Matambo predicted the economy would grow by an optimistic 5.9 percent. But on the back of slower increase in output from both the mineral and non-mining sectors government has since cut down the forecast to 4.4 percent.
According to the latest available statistics, in the 12 months to June, economic activity as measured by the Gross Domestic Product (GDP) grew by 4.6 percent, a slight improvement from the 3.6 percent growth experienced in the year up to March 2013. This was largely due to a recovery in the mining output, which weakened marginally by 0.7 percent during the year to June, an improvement from the 6.1 percent contraction in the previous period. This year Debswana says it expects a “cautious improvement” in production of about 10 percent, compared to the 20.2 million carats produced last year.
In February again, Matambo predicted government’s revenues were going to marginally better expenditure to post a modest surplus P779 million.
But an unbudgeted P1,2 billion government outlay to BPC following the delay in generation of electricity from Morupule B Power Station has seen the budget forecast falling in the red, with a deficit of P1,2 billion now forecast for the 2013/14 financial year. While the mining sector recovered marginally on the back of improving global economic activity, weak domestic demand pulled down the non-mining sector from 6.4 percent in the year to March to 5.3 percent during the year to June. Despite inflation falling to historic low levels, demand remained sluggish in the year as government, the biggest player in the domestic market, cut down spending while personal incomes remained static leading to the erosion of disposable incomes.
In an effort to inject some life into the economy, the Bank of Botswana, backed by a favourably low inflation rate, cut interest rates by a cumulative two percentage points this year. Worldwide, rates are cut to spur economic growth with the growth coming through increased consumer demand for goods financed by cheaper personal loans while businesses increase supply to meet the demand by resorting to cheaper business and manufacturing loans.
However analysts feel the rate cuts alone are not sufficient to reignite the flagging economy, arguing that such reviews are usually effective in countries like the USA where a big part of the demand comes from consumers.
“The main expenditure in Botswana was coming from government all along. Now the expenditure has been significantly reduced and no further fiscal measures have been initiated.
“The rate cuts in Botswana have not been successful to increase credit for productive purposes because the producers are not finding effective demand. “Consumer demand is not sufficient for the producers who have all along been seeing large demand from government and consequently have set up facilities which are now underutilised due to lack of demand. There have been several rate cuts from 15 percent in February 2009 to 7.5 percent now. How much economic activity has increased?” quizzed one analyst. However University of Botswana economics lecturer Emmanuel Botlhale feels macroeconomic policies take time to effect, hence more time is needed to fully realise the impact of this year’s rate cuts.
“Four months is too short a period to gauge the effectiveness of the stimulus in the form of reduced rates. However, the reduced rates would be of meaningful effect if the credit is used for productive purposes (investment) and not unproductive purposes (consumption). Given the high marginal propensity to consume by a majority of Batswana, it is probable that some may take advantage of the reduced lending rates and engage in unproductive consumption,” he said.
While Botswana is celebrating the lowest inflation levels in over four decades, which has given room for bank rate cuts, another school of thought is that the prevailing inflation levels is a symptom of a stagnating economy. Some analysts reckon that the current low inflation levels in Botswana are not a result of any policy interventions but rather a reflection of a weak economy characterised by low aggregate demand.
Normally the rate cuts trigger the demand for goods and services and this in turn causes demand for borrowings by productive sectors, pushing up inflation.
“As demand for credit from productive sectors has not increased due to weak demand for goods and services, inflation is low,” said the analyst.
While the rate cuts carry the noble aim of spurring economic growth, households have been the biggest beneficiaries of the lower borrowing costs. Consumer credit, which constitutes 60 percent of credit from banks, is increasing presumably through refinancing of existing debt.
Consumer credit from commercial banks stands at P21 billion and if another P6 billion from micro-lenders is added, total household debt stands at a staggering P 27 billion.
With sluggish economic trends this year largely a reflection of international patterns and an improvement expected in the coming years, Botswana’s economic landscape achieved a milestone event this year with the relocation of De Beers sales operation from London to Gaborone.
The relocation of De Beers Global Sightholder Sales, formerly DTC International, is expected to pump colossal direct and indirect benefits into an economy that has been grappling with diversification within and outside the diamond sector.
Not only will this $6 billion (P50 billion) pass through Botswana’s banking system, but also more importantly, direct employment, as well as economic activity from ancillary services supporting this business should sooner and later precipitate down to the ordinary Motswana.
Relocation of DTC sales functions from London to Gaborone will be key in facilitating the establishment of activities, which will drive Botswana’s mineral policy objectives of encouraging linkages with the rest of the economy to expand value addition activities. The relocation could be just what the country’s service sector has needed to become a major contributor to growth. While services such as finance, business, tourism and hospitality are fast increasing their contributions to Botswana’s economic growth, mining still considerably dwarfs them.
While the relocation will not actually increase mining production in Botswana, the impact on GDP output will come indirectly through the contributions of services such as tourism, hospitality, transport, financial services, gemological functions, laboratories and others.