There are tantalising signs of recovery in Botswana’s diamond led economy and some experts are already convinced that Botswana is mounting a robust recovery. Some firms are hiring and, thanks to a declining interest rate, consumers are spending more.
Household disposable mean income is on a marginal increase according to Statistics Botswana’s poverty report. From an average of P2 400 in 2003/04 to an average of P5 300 in 2009/10, consumers are beginning to have more access to income as their cash earnings increase. Both inflation and the bank rate are on a historic decline and this means good news to consumers and growth.
A proper working relationship between fiscal and monetary policy drivers holds the key to the country’s sustainable recovery from the battering 2008 recession. Finance and Development Planning ministry is tasked with ensuring fiscal policies are tight to support the economy while BoB deals with monetary instruments that complement them. But currently ‘the link’ between them is missing, economic pundits polled by Botswana Guardian this week said. Their comments come on the wake of declining inflation and a spate of bank rate cuts by Bank of Botswana (BoB). Inflation which opened the year at a high of 7,5 percent has now retreated to a year low to date (yld) of 5,7 percent, a decline of 1,8 percent. On the other side, MPC has been on overdrive cutting the bank rate thrice in successive meetings in a desperate bid to spur economic growth, which appear struggling.
The central bank did not signal any further rate cuts in the Medium Term Review (2013) released on Wednesday, but said inflation would remain within the 3-6 percent range for the rest of the year. Declining inflation basically means consumables such as food and fuel will become cheap, in the process leaving some extra disposable income to be spent elsewhere. On the surface, the implications of a rate cut and declining inflation are hard to see, said analysts, adding this explains why that won’t affect economic growth positively. “In a proper, developed economy the impact will be noticeable, but not in Botswana where we don’t have empirical data on the relation of inflation and bank rate to economic growth,” said Garry Juma of Motswedi Securities.
BoB, Govt can’t tell
BoB, which is entrusted with drawing monetary policies that inspire economic growth said, “The current state of the economy, in which unemployment remains high, together with below- trend economic activity, provides scope for monetary stimulus to spur stronger output growth.”
They have already heeded to the belief that rate cut can spur economic growth, by adjusting it from 9,5 percent to the current 8 percent this year. The decision to cut bank rate(s) has not gone down well with a senior macroeconomics lecturer at the University of Botswana (UB).
Gaotlhobogwe Motlaleng who questioned the central bank’s justification to slash lending rate. “If you cut bank rate, you are actually encouraging borrowing, especially at household level, but the bottom line is, does that address fundamentals such as economic growth and high unemployment rates? The answer is no,” said the evidently concerned Motlaleng.
According to latest Botswana Core Welfare Indicators Survey, (2009/10) Botswana’s unemployment rate stands at 17,8 percent. Furthermore, the survey estimated that the total labour force of 710 600 persons aged 12 years and over 52 percent and 48 percent of which are males and females, respectively. Motlaleng, said government, working with the central bank must come out clearly and indicate how their monetary and fiscal policies ‘work in sync’ to address issues of high unemployment rates, poverty and economic prosperity. “I can’t see the link between government policies and the Bank of Botswana in addressing these issues,” he added. Another analyst shared the same view. “In my view there is a complete mislink between policies of the two on issues of economic growth,” said Juma, without giving details.
Government’s Ipelegeng programme tries to address unemployment issues, but it has been criticised for its wages that are below labour market rates. Historically, government has come up with large administered price adjustment that heavily affected BoB inflation objectives. This week, Dr Taufila Nyamadzabo, Secretary of Economic Affairs at finance ministry dismissed suggestions that they are not working closely with BoB. “We are working together. In fact we have a committee that comprise BoB which sits and addresses issues of the economy,” said Nyamadzabo. Dr. Keith Jefferies, a director at Econsult concurs with Nyamadzabo that there is ‘property relation’ between finance and BoB, but he did not explain.
Recovery, economic growth is in sight, but
While some analysts hold the view that recovery in Botswana is in sight based on the latest low rates, inflation, monthly balance of trade, market performances and exports data, Motlaleng holds a totally different view. He came short of saying that those entrusted with driving economic growth, are concerned with academics at the expense of bread and butter issues. “Until the economy is structurally adjusted, I can’t see this happening, with or without lower bank rates and inflation,” he pointed out. Government must come with long-term solutions to aid economic growth. Unless the economy is well diversified, Botswana’s economic prosperity still hangs in the balance, said Motlaleng.
“Right now the diamond industry if facing challenges, the beef sector is collapsing,” he observed. The beef sector challenges are not helped by apparent maladministration at Botswana Meat Commission (BMC).
BoB financial statistics indicate that the beef sector exported P236 million worth of beef in June when compared to P90 million the month before. Motlaleng said unless issues of diversification are addressed, the economy would continue to falter. “In Botswana, we import more than we export. Importing more means employment is created elsewhere,” said Juma. It remains to be seen how the country will fare when Statistics Botswana releases July trade digest this Friday. Botswana’s economy contracted by 2.2 percent quarter-on-quarter in the first three months of 2013 after rising by a revised 4.5 percent in the fourth quarter of last year. The decline was mainly due to a slow growth in mining.
Inflation can’t be felt in the pockets
Economists have also voiced concerns that consumers cannot feel declining inflation’s impact in their pockets. Food prices are still high. “Our inflation is affected by factors beyond our control. Challenges in the middle East and imported inflation in South Africa are key here,” pointed out Motlaleng. Data released on Wednesday from South Africa show that inflation surged to 6,3 percent in July, up from 5,5 percent in June. Crude oil currently hovers about $110 (about P900). Botswana, a landlocked country depends largely on South Africa for fuel and foodstuff. A market analyst based in one of the local asset management companies told Botswana Guardian that inflation decline should under normal circumstances have an immediate effect on commodities such as food and fuel. “Fuel has not declined, while food is increasing,” said the analyst. Fuel prices have not been adjusted in months.
Dr Keith Jefferies said it would take time before inflation decline bears anything to the local economy. “Not this year, probably next year,” said the former BoB deputy governor. Lower bank rates, according the UB economist, does not necessarily spur economic growth, let alone create employment. “In any case this creates more debts to the household sector,” he said. Furthermore, local commercial banks are not fully getting the benefits of a fall in bank rate. “Most of these large international firms borrow from outside,” said Motlaleng
Diamonds rebound a long time coming
Diamonds, whose sales declined in 2008, seem to be gaining momentum, if latest sales are anything to go by. Latest data provided by Bank of Botswana (BoB) indicated that diamond exports climbed to $451 million (about P3, 6 billion) for the month of June, a sharp increase when compared to $267 million (about P2, 1 billion) the previous month. De Beers sells Botswana diamonds through its Diamond Trading Company (DTC).
Diamonds are the biggest export revenue thus far. Responding to Botswana Guardian questions, Botswana Diamonds Chairman said the best times for the diamond industry is still a long time coming. “The current price is fragile. Prices are dependent on Chinese buying,” said John Teeling. BMO Capital Markets, a leading financial services company said prices for diamonds would reach 6 percent this year. “They will be more volatile than previously as the De Beers control breaks up,” said Teeling. Thapelo Nemaorani an economist with Econsult added Botswana monthly diamonds exports are somewhat volatile.
“With current market conditions, increasing prices of rough diamonds and decreasing prices of polished diamonds, it is highly unlikely that the rough diamond market will gravitate towards the pre-recession levels in the short term,” said Nemaorani citing apparent growth concerns in of India and China, both major markets for diamonds. De Beers, which is a leading rough diamonds producer netted $3,3 billion in the first six months of the year, same as last year.