Constraints on Botswana’s 2017 Growth

The focus for this quarter (1Q2017/18) is slow economic growth i

The SADC region experienced decline in growth rates in 2015 and 2016. When delivering his 2017/18 budget speech, Motswana Finance Minister, Kenneth Matambo, highlighted that the region is expected to record a real GDP growth rate of 3.1% in 2016, representing a decline of 0.4%, compared to 3.5% in 2015. The decline in growth rates can primarily be attributed to the recent El-Nino drought which severely affected the region.

 

Botswana’s economy contracted by 1.7% in 2015, as compared to a positive growth rate of 4.1% in 2014. This low growth is attributed to the weak performance of the mining sector, in which the production of diamonds decreased by 15.6% and copper by 35%. Disruptions in water and electricity also led to a significant decline of 3.2% in the growth of non-mining sectors, from 4.9% in 2014 to 1.7% in 2015. However, it is forecast that the domestic economy will experience growth of 4.2% in 2017, which is a significant improvement from the previously estimated 2.9% for 20161. This positive forecast can be attributed to expected improvements in both the mining and non-mining sectors. However, downward risks, such as the subdued global economy, and low commodity prices, have to be taken into consideration.

 

Since January 2016, the SADC region experienced sharp rises in inflationary pressure, largely as a result of the drought and subsequent food shortages, as well as the appreciation of the USA dollar against many of the currencies in the region. On average, inflation increased from 7% in September 2015, to a significant 12% in September 2016. Increases in inflation lead to price instability and negatively affect the pocket of the average citizen2.

 

Price stability is one of the most crucial factors required to achieve macroeconomic stability in a country. In Botswana, domestic inflation declined slightly to 3% in December 2016, from 3.1% in December 20153, remaining within the Bank of Botswana’s target band of 3 – 6% and well below the regional average. It is projected that inflation will remain within this range in the medium term, with the upside risks being an upward adjustment in the administered prices and government levies and/or taxes. However, the downside risks of subdued global economic growth and the potential decline in commodity prices cannot be discounted4.

 

Because of the positive inflationary outlook, the Bank of Botswana has continued to maintain an accommodative monetary policy stance over the past year. This has led to a decline of the Bank Rate by 0.5% (50 basis points) from 6% in July 2016 to 5.5% in August 20165, as shown by the corresponding chart, this is for the sole purpose of bolstering economic activity. The kind of policy stance chosen by Botswana is expected to encourage borrowing for the purposes of investment. Maintaining low inflation is important to ensure that domestic industries are competitive internationally, and support economic development needed to create employment.

 

The main aim of the management of the pula exchange rate mechanism is to maintain a stable real effective exchange rate by regularly adjusting the basket weights in line with the trade patterns of the country, and the rate of crawl that is based on the inflation differential between Botswana and its trading partners6. From the end of 2013, up until March 2017, the Pula depreciated against the US dollar by 17.18% and the Japanese Yen by 11.79%. However, it appreciated against the South African rand by 6.84% and against the Euro by 6.85%7.

 

Global growth is forecast at 3.4% in 2017, but is subject to economic uncertainty and geopolitical tensions, as well as subdued commodity prices. External and domestic inflationary pressures are expected to be harmless, and domestic inflation is expected to remain within the target range of 3 – 6% in the medium term, and financial stability is expected in the short-term, however in the longer term, inflation is expected to rise sharply.

 

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Pending Crisis in Botswana’s Mining Industry

Most of Botswana’s revenue largely comes from the mining sector, more specifically the diamond sector. Experts all over the world have been criticising this dependency on only one source of revenue saying that the country needs to start diversifying its economy so as to shield its economy from the volatility of commodity prices. According to a report by the World Bank titled the “Botswana Mining Investment & Governance Review report” has also shared the same sentiments saying that this country needs to up its speed and look for other sources of revenue and income generation so as to revive its economy that could be lifeless in a decade or two8. Botswana needs to look way beyond mining, diversification of its economy is no longer a choice but an obligation because in a few years to come mining of diamonds will come to an end and the fluctuation in the commodity prices also pose a risk for the economy of the country. This review report by the World Bank is expected to assist government to improve the sector’s performance and to attract more foreign investment, because the mining sector is poorly managed in Botswana. The World Bank has also observed that foreign owned enterprises are the ones that mainly benefit from the revenue from the mining sector and they collect these millions and invest them across the borders or in their native countries.

 

Falling Fertility Could be a Lifeline for Botswana’s Economy

According to the World Bank’s Forever Young report, the rapid decline in Botswana’s fertility rates since the 1980s has positioned the country at the edge of a window of demographic opportunity, decades before the rest of the Sub-Saharan Africa. During the year 1980 the total fertility rate (TFR) was 6.2 children per woman and in 2015 it was 2.7 children per woman, this being the greatest fertility decline in Africa in the last three decades. Due to this, the proportion of child dependents is rapidly decreasing, while on the other hand the working-age population is expected to increase by 29% between now and 20509. Botswana needs to start investing in labour-intensive sectors as a way of taking advantage in the increase in the workforce. Shifting to a more labor intensive sector might be needed to create employment for the new entrants. By 2050 Botswana needs to have created 340 00 jobs as a way of holding the current unemployment rates at steady levels. If they do not fulfill this it could lead to high unemployment rates and possibly into social unrest.

 

Botswana Introduces a Tourism Levy

The Botswana Ministry of Environment, Natural Resources, Conservation and Tourism has introduced a mandatory Tourism Development Levy (TDL) as a way of raising funds for conservation and national tourism development, support the growth of the industry, broaden the tourism base, and improve the lives of the people of Botswana. Starting from June this year, all tourists who are not from the SADC states who wish to visit Botswana will now have to pay a levy of USD 3010. This levy is very much important for the economy of Botswana due to the fact that it will generate the much needed extra revenue for the country, due to its dependency on the diamond sector for a large part of its revenue. Charging levies is not a new thing and should not be looked at a negative manner, there are levies such as that of carbon emissions. This tourism levy will also assist the government to maintain the facilities that are used by tourists when they visit the country.

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1-2 Batswana Ministry of Finance and Economic Development
3-4 Bank of Botswana
5-6 Batswana Ministry of Finance and Economic Development
7 Bank of Botswana
8 World Bank Group
9 World Bank Group
10 Batswana Tourism Organisation


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