Impact of External Factors on Botswana

PESA Editorial - Botswana - 1Q2017/18

Botswana has extensive trade relations with multiple countries. The most prominent trade agreements are the Southern African Customs Union (SACU), the Interim Economic Partnership Agreement (IEPA) with the European Union, and the Southern African Development Community (SADC) trade agreement.

 

SACU was first established in 1910 and comprises five Southern Africa countries: Botswana, Lesotho, Namibia, South Africa and Swaziland. The founding aim of the union was to foster economic development through regional coordination of trade. Some of the agreements of the customs union include: a common external tariff (CET) on all the goods imported into the Union from the rest of the world; free movement of products manufactured within SACU; as well as a revenue-sharing formula (RSF) used to determine the distribution of customs and excise revenues collected by the union1.

 

In light of recent economic events in South Africa, SACU member states are likely to be faced with increasing risks. South Africa’s investment rating was downgraded to “junk” status, implying a lack of credit worthiness and an environment unconducive to investment. The downgrade is likely to turn investors away from the region. The Rand is being closely monitored by its trading partners, in Southern Africa, where it dominates trade. Over the past few weeks, the Rand has performed poorly relative to its emerging market counterparts. Furthermore, both South Africa and Botswana have been adversely affected by the El-Nino induced drought in the region2. If South Africa’s economy continues to perform poorly, the impact on trade in Southern Africa will be decidedly negative, with knock-on effects for SACU receipts and ultimately the Batswana economy.

 

The EU is one of Botswana’s leading trading partners. On 10 June 2016, an EPA was signed between the EU and the SADC EPA group which is made up of Botswana, Lesotho, Mozambique, Namibia, South Africa and Swaziland. The SADC EPA countries have a strong diamond export sector. In Botswana particularly, diamonds account for a dominant share of its exports to the EU. On the other hand, the EU exports a wide variety of goods to the SADC EPA countries, such as motor vehicles, pharmaceuticals and processed foods3. Figures released on indices of the physical volume of mining production for Q4 2016 by Statistics Botswana (SB), revealed an expectation of some growth in Botswana’s economy. These figures show that diamonds are rebounding on the international market, after an almost decade long slump.

Botswana Government Debt Position
Figure 1: Botswana Government Debt Position (FY2007/08 – FY2017/18)4

 

The corresponding figure shows the trends in the debt position of the government of Botswana. The total debt still continues to be within the statutory debt-to-GDP limit of 40%. The total external debt is projected to fall by 2.78% from P25.1 billion (approx. USD 2.4 billion) in 2016/17 to P24.4 billion in 2017/18. On the other hand, the total internal debt is expected to increase by 6.81% from P9.7 billion (approx. USD 930 million) in 2016/17 to P10.4 billion in 2017/18. The Botswana Financial Statistics published in June 2016 showed that monthly, the Pula depreciated against the Rand by 3.2% but then it appreciated against other currencies. As of March 2016, the Pula appreciated against the US dollar by 4.9%. Quarterly, the Pula appreciated against the Rand by 4.1% and depreciated against the US dollar by 3.5%5.

 

The primary balance of payments forecast for 2016 expects a surplus of P5 billion as compared to a deficit of P57 million (approx. USD 5.5 million) experienced in 2015. This large surplus is due to a positive current account balance, which increased from P10.5 billion in 2015 to P25.7 billion in 2016, underpinned by trade surplus6. Global growth is forecast to increase from 3.1% in 2016 to 3.4% in 2017. A slight increase in the domestic economy is expected from 1.7% in 2015 to 2.9% in 2016 but this is lower than the SADC regional growth of 3.1%7. Despite these positive projections by the IMF, one cannot ignore the uncertainties which come with the recent South African investment downgrade and the subsequent depreciation of the rand and how this will affect the rest of the SADC region.

 

Overall, we can expect a slight improvement in the economy of Botswana due to the rebound of diamonds on the international market. However, due to the volatility of the global markets’ demand for mineral resources, and the global decline in diamond demand in 2015, Botswana needs to diversify its economy. There is a marked risk in Botswana’s dependence on only two volatile revenue inflows, there is a need to diversify the revenue base of the country toward more sustainable and reliable resources. However, given the negative outlook for South African growth, we can expect Botswana to also be negatively affected, given that Botswana receives 30-45% of its revenue from SACU.

 

Current Affairs Update

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Improvement in Botswana’s Diamond Sector

If the latest statistics brief, released by Statistics Botswana (SB), on the physical volume of mining production for 4Q2016 is anything to go by, then we can expect some growth in Botswana’s economy. Figures show that diamonds, which happen to be Botswana’s primary source of income, are bouncing back on the international market after about a decade long slump. There was a 20.8% increase in the production of diamonds quarter-on-quarter in 4Q20168. This increase can be attributed to improved trading conditions. Botswana’s economy is characterized by its dependency on two volatile revenue flows: mineral revenues and Southern African Customs Union (SACU) revenues. A rebound in the market for diamonds means that Botswana’s economy will experience some growth from diamond sales. However, due to the volatility of global markets for mineral resources, Botswana needs to diversify its economy9. It poses a significant risk to be dependent on only two volatile revenue inflows, there is a need to diversify the revenue base of the country towards more sustainable and reliable resources.

 

Rising Public Debt in Botswana

The Emergency Water Security and Efficiency Project which was proposed by the Minister of Finance, Mr. Kenneth Matambo, was passed by Parliament. The main aim of the project is to address issues with the adequate supply of water, as well as the improvement of wastewater and sludge management. The loan for this project comes from the International Bank for Reconstruction and Development (IBRD), through the World Bank, and amounts to about US$145mn (R1,96bn) and the remaining balance of US$14.5mn (R196mn) will be contributed by the government from domestic resources10. The country has also borrowed a total of P10bn (R12.7bn) from the African Development Bank (AfDB), for the purpose of stimulating the economy. A lot of other projects such as the Morupule B, North-South Water Carrier Projects and the Kazungula Bridge, were also financed by loans from the AfDB11. Even though it is normal for government to borrow for the purposes of socioeconomic development, the consequences of repaying the debt may be too high – especially after the recent US interest rate hike, therefore the government must re-prioritize resources for the greater good of the economy. Borrowing should be seen as a last resort, rather than taking advantage of the country’s good credit profile.

 

Eskom Signs a Deal with Botswana Power Corporation

Botswana Power Corporation (BPC) and Eskom have signed a three-year firm power supply agreement – in line with Eskom’s plan to rapidly increase its electricity exports to South Africa’s neighbors12. This further strengthens the trading relationship between South Africa and Botswana. Eskom is also in the process of investigating a number of strategic transmission projects to further strengthen the interconnection with BPC and other interested Southern African Power Pool (SAPP) members. These interconnections will provide much needed support in regional integration, offering relatively reliable transmission of power as a means of growing the regional economy, and also providing mitigation measures for drought risk through improving the connection between the thermal and hydro systems in the region.

 

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1-2 Southern African Customs Union
3 European Commission
4-5 Batswana Ministry of Finance and Economic Development
6-7 Batswana Ministry of Finance and Economic Development
8 Statistics Botswana
9 Batswana Ministry of Finance and Economic Development
10 The World Bank
11 African Development Bank
12 Botswana Power Corporation


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