Botswana needs structural reforms-World Bank
Isaac Pinielo | Friday April 22, 2016 10:55
It also advised the country to address labour market distortions to spur private sector job creation. “Investments are needed in infrastructure and human capital, as well as establishment of trade, business environment, and immigration policies that encourage competition,” said the bank.
The World Bank stated that continuing electricity and water supply disruptions have impacted manufacturing, whereas the negative effects of a regional drought adversely affected agriculture. In contrast, it said, service and retail sectors led the non-mining sectors to overall growth of above three percent.
The bank also warned that Botswana will remain heavily exposed to external shocks for as long as its growth is heavily dependent on commodity exports and public sector activity.
It said the slowdown in China and falling global prices for commodities caused the mining sector to contract sharply in the third and fourth quarters of 2015, with the mining gross domestic product (GDP) having contracted by 21 percent for the year. “Slowdown in major economies, particularly China, would further constrain diamond and other commodity production, with follow-on impacts across government revenues, and the retail and service sectors,” the bank said.
In addition, the bank said slowing revenue growth over coming years, partly reflecting declining Southern African Customs Union (SACU) receipts, requires careful management of expenditure pressures, especially in relation to the wage bill. The bank further states that continued delays in upgrading electricity and water infrastructure will dampen non-mining activity, especially in the manufacturing sector.
“Over the medium-term, diversification of the economy and exports away from mining is a priority,” it said. According to the World Bank, weakening global demand for rough diamonds, combined with falling prices of metals led to a deterioration in the near term growth outlook.
Real growth is estimated to have contracted slightly in 2015 by 0.3 percent, down from a gain of 3.2 percent in 2014 on the back of poor outcomes in the diamond sector.
The bank stated that the fiscal position moved into deficit in 2015/16 after three years of consecutive surpluses, adding that the fiscal balance swung from a surplus of 3.8 percent of GDP in 2014/15 to an estimated deficit of 2.9 percent of GDP in 2015/16, as revenues fell and spending increased. On the revenue side, the bank said government relies mainly on two volatile sources of inflows, mineral revenues, which accounts for almost 40 percent of total revenue, and SACU customs revenues that account for 27 percent of total revenue.
“Both have declined, the former from weak global demand and the latter from the decline in South Africa’s economic growth,” said the World Bank.
The bank further stated that government has substantial fiscal savings from diamond revenues, adding that international reserves stand at about 11 months of imports, which provides Botswana ample space to gradually adjust expenditures to the SACU shock in the long run, and to provide counter-cyclical stimulus in the near term.
It added that weak performance across the mining sector will narrow the current account surplus, noting that in 2014, Botswana achieved a current account surplus of 15.7 percent of GDP. The bank however pointed out that the economy is expected to rebound to 4.4 percent real growth by 2018, driven mainly by an expected improvement in diamond prices as developed economies stabilise and continued fiscal stimulus that will propel non-mining activity.
Lower fuel and commodity prices, slower credit growth and weakening economic activity will keep Consumer Price Index (CPI) inflation at the lower end of the Central Bank’s policy band of 3-6 percent.
The fall in mining revenue is expected to gradually recover as developed economies stabilise. However, SACU transfers are expected to remain soft mainly due to a weak economic outlook for South African growth to near 1 percent through 2017.
The combination of expenditure growth and lower revenue is expected to push the fiscal balance further into the red in 2016, to a deficit of 3.9 percent of GDP, before a gradual return to balance by 2019 with deficits of 3.0 percent of GDP in 2017 and 1.5 percent in 2018.
The current account will continue narrowing further in 2016 on continued weakness in the mining sector before gradual improvement, according to the World Bank.