Botswana’s National Assembly on Wednesday endorsed the doubling of the southern African country’s domestic borrowing to 30 billion pula (about 2.9 billion U.S. dollars). Thapelo Matsheka, the Minister of Finance and Economic Development had approached parliament seeking the approval of lawmakers to increase the bond program ceiling from 15 billion pula (about 1.45 billion dollars).
Against the backdrop of an economic slowdown caused by the COVID-19 pandemic, Matsheka told parliament that increasing the limit for domestic borrowing was one of the fundamental options to fund the national budget. Botswana, which boasts one of the highest sovereign credit ratings in Africa, is conventionally unenthusiastic about external funders for loans before exhausting all the available options domestically, hence increasing the bond program ceiling.
“The development would cultivate more activity in the local capital market, which in turn would reduce the risks of drawing down from reserves and the risk of borrowing externally at exorbitant interest and foreign exchange rates,” Matsheka said after the parliamentary approval.
Moses Pelaelo, Governor of the Bank of Botswana, said borrowing more local capital market offers the government a viable avenue for cost-effective domestic resource mobilisation for long-term investment and funding of government projects.
“This will result in a more frequent issuance of a sufficient quantum of domestic government securities in a predictable arrangement that hopefully will attract a larger pool of participants and support deficit financing with lower risks,” Pelaelo said in a telephone interview with Xinhua.
Reconfigure the economy, the Treasury says
It has been said many times that Botswana’s economy needs to be weaned off diamonds. This time around, the intensifying pressure to diversify is coming from within the government, with officials from the finance ministry warning of a narrowing time horizon to fix the economy before its too late. The country’s economic vulnerabilities have once again been laid bare by disruptions caused by COVID19 pandemic containment measures, affecting Botswana’s main revenue earners, diamond exports and tourism. This added to the already distressed economy dragged down by a diminishing growth rate, soaring unemployment and huge budget deficits.
Now, policymakers at the Finance and Economic Development Ministry through the newly introduced policy briefs say there is the need to increase productive capacity within the economy by promoting growth of the secondary and tertiary sector.
“The economy of Botswana remains dependent on natural resources and raw materials, particularly agriculture and mining, which make up the primary/extraction sector of the economy.
Over the years, this has subjected the domestic economy to considerable volatility, as the primary sector tends to fluctuate more often than the secondary and tertiary sectors,” the officials said in the first issue of the policy briefs.
The vulnerability of the economy to fluctuations in the primary sector has been noticeable over the years, starting in 2015 with a 1.7% contraction in Gross Domestic Product (GDP) following the impact of the commodity price decline on the economy. In 2019, growth slowed to 3%, down from 4.5% recorded in 2018. The slowdown was driven mainly by the weak performance of the agriculture sector and lower mining output, reflecting adverse weather conditions and weak global demand for rough diamonds.
Growth in the economy further weakened in the first quarter of 2020, growing by 2.6% compared to 4.2% recorded in the same period in 2019. Not surprisingly, the slowdown in growth was due to a contraction in mining and agriculture. Given the deterioration of the economy, the Finance Ministry officials say there is an urgent need to advance structural reforms to reduce dependency on the mining sector to ensure a resilient economy. Although the contribution of mining and agriculture to the GDP has declined over the years, it might add a false sense of success, misleading the government into thinking it has successfully diversified the economy.
“The diversification of GDP is not in itself sufficient for sustainable growth as the structure of the economy remains dominated by sectors serving the domestic market, suggesting that growth has been biased towards non-tradables and less towards tradable goods and services,” the officials said in the brief.
The secondary sector comprising manufacturing, construction and utilities, has been operating below its potential. The sector’s share of the GDP has remained constant, suggesting low beneficiation of primary products to the rest of the economy, the officials said. Moreover, where global trends are now largely geared towards the secondary sector, especially manufacturing, Botswana is lagging behind. This implies that the domestic economy is losing out on the potential gains from trade that can come with turning primary products into manufactured goods for exporting into the global value chain.
Policymakers believe that Botswana can claw its way back up by growing the secondary sector and promoting growth towards more tradable commodities that can be exported. To achieve this sustainably, there is the need to promote and ensure the competitiveness of exportable goods and services, the officials said. They, however, warned against protectionist policies that can upset trade.
“From a resilience point of view, growth needs to focus on attaining self-sufficiency in other commodities, particularly those of strategic importance.
However, it is imperative to balance the trade-off, ensuring that self-sufficiency in certain commodities does not lead to closed borders and that the production patterns are determined by comparative advantage.”
The tertiary sector, comprising finance & business, transport & communication and trade, hotels and restaurant, accounts for the largest share of GDP but there remains room to promote growth given the sector’s weakening contribution to the GDP over the years, suggesting that there is scope for the promotion of growth.
Finance Ministry officials have also cautioned against limitations to bolstering these sectors, saying economic conditions associated with COVID-19 could weigh down on the demand for rough diamonds and tourism. Moreover; with trade restrictions in place, this could hurt both the primary and tertiary sectors of the economy, in turn limiting the extent and speed of economic recovery.
“In this respect, it is imperative that the ERTP adopted by the Government over the next three years takes advantage of the growing trade in services globally, by lending support towards boosting the growth of and reinforcing the resilience in some of the subdued service sectors.
Essentially, reducing dependency on the resource-intensive sectors and facilitating communications, household businesses and wholesale growth could ensure a more diversified economy, thereby minimising future risks to growth, especially those associated with currently vulnerable sectors,” concluded the report.