Botswana a country of peaceful diamonds, which was called The Bechuanaland Protectorate before its independence in 1966 is a landlocked country situated in Southern Africa, with a population of about two million people. It's so fortunate for Botswana to trade well with the foreign developed countries since it doesn't have a better mode since its landlocked and relies on the neighbouring countries like Namibia and South Africa for the importing and exporting of their goods, it has lower rainfalls and a semi desert climate which is prone to drought, agricultural pests and animal diseases since it's a country of Agricultural practises for a living, thus relying on beef and diamonds for its economic stability. Botswana's government revenues is from Botswana's beef exports to Europe and the mining of diamonds which has started cutting in the late 2000 since they realized they produce diamonds and also spend a lot in jewelleries after they have been cut and polished. Botswana produces 22% of the world's diamonds, making it the top producer and accounting for half of government revenue. It also depends on tourism for its economic stability.
The country prides itself as a model of a successful African democracy. But in 2009, Botswana halved output and suspended much of its diamond activities as the global economic crisis hit its mines. Tourism, financial services, subsistence farming, and cattle rearing are other key sectors which were affected during the recession. During this recession the government also has to deal with high rates of unemployment, poverty, HIV/AIDS infection rates are the second highest in the world and threaten Botswana's impressive economic gains.
Extent of economic recession in Botswana
Botswana as an open-economy and also integrated into the global commerce, has had a share of these negative impacts. Whilst the magnitude of the decline of the country's Gross domestic product (GDP) due to global economic recession is not yet fully quantified and made public, economic growth is expected to drop significantly due to a fall, in particular, of mineral export revenue. The Botswana Central Statistics Office (CSO) is currently carrying out a quarterly survey on employment and employees and the results are expected later this year.
The mining sector, especially the diamond subsector, constitutes the backbone of the Botswana's macro-economy as public revenue from the industry is used to provide critical social services (health, education, water, infrastructure, social safety nets, etc) and investment capital for diversification. The ongoing global recession, in particular, is going to affect the country.
GRAPH SHOWING BOTSWANA'S HISTORICAL DATA
Year
GDP - real growth rate (%)
2000
5.8
2001
3.4
2002
8.9
2003
6.3
2004
5.9
2005
1.6
2006
5.1
2007
4.8
2008
3.1
*Source - IMF website.
As shown by the graph above Botswana has maintained a steady economic growth rate, even though there was a downfall in 2000 to 2001 till it reached the lowest of 3.4% Botswana still was stable enough to rise up again until it reached the sudden highest growth rate of 8.9 in 2002 which later on fell again to the lowest it has ever had in 2005 by 1.6 rate. After the global recession that have hit the US and affected the whole world in 2008, Botswana wasn't affected badly since it had a growth reduction of 1.7 from the previous year 2007 which recorded 4.8 growth rate. Through fiscal discipline and management, Botswana has transformed itself from one of the poorest countries in the world to a middle-income country, ranking Botswana as the best credit risk in Africa, proved by the graph above as it wasn't affected immediately by the global recession.
The information below is a brief summary of the economic sectors about the impact of the crisis on Botswana during the recession.
MINING SECTOR
A decline in export demand for and prices of her minerals( diamonds, copper, nickel, ) will lead to reduced public revenue and company sales, loss of jobs, lower household expenditure and savings, reduced inter-sectoral income and expenditure linkages, etc. Mineral revenue accounts for about 40 percent of Botswana's Gross Domestic Product (GDP) and over 40 percent of Government total revenue.
Unlike in previous years, mineral revenue which normally is the main source of the public revenue and accounting for about 40 percent of total government revenue, during 2009/10 fiscal year, this source will instead contribute about 28 percent of total public revenue whilst customs and exercise revenue will be the largest source of government total revenue accounting for about 29 percent. The decline in the contribution of the mineral sector is mainly due to the fall in diamond external prices caused by global recession or a reduction in external demand.
During 2008/2009, diamond export sales are expected to decline by 50 percent. Diamond sales account for the bulk of mineral revenue to government. Similarly, other minerals are also facing a decline in sales. The decline in mineral export earnings demonstrates the link between Botswana's economy and global commerce. A recovery in the global economy to revive the external demand for minerals is therefore very critical for the country's economy.
Currently output/production cuts, staff retrenchment and lengthy plant shutdowns characterize the mining sector. Several households are directly dependent on factor income from mining sector via their members who are employed in the industry. Loss of jobs in the mining sector means loss of household income or purchasing power and limited economic activity in the mining areas and surrounding villages.
CONSTRUCTION SECTOR
Whilst government has provided funds for capital formation (roads, schools, health facilities, dams, etc) during 2009/10 to benefit, among others, the construction sector, the deferral of some development projects due to budgetary constraints, will adversely affect the growth of this sector and reduce employment opportunities in it. A budget deficit forecast for 2009/2010 is mainly responsible for the deferral of some development projects.
It is, however, gratifying, at least in the short term, that government has been able to secure external loans which will help to finance public expenditure and possibly enable the construction to benefit also.
Limited access to finance domestically from banks will further reduce the potential for the construction sector to contribute towards capital formation and additional employment creation. In general, access to finance in Botswana is one of the major challenges facing the private sector.
Like in the mining sector, reduced demand for construction services due to lower per capita income, etc, has also led to loss of jobs in the industry. The construction industry is one of the largest sources of employment in the country especially for less skilled people.
MANUFACTURING SECTOR
The continuing decline in consumers' purchasing power is reducing the demand for manufactured goods like clothing, food, household items and building materials. The food and cement packaging industries are also experiencing a down turn. Exports of manufactured goods textiles, clothing and floor tiles to other parts of the world have also declined due to lower consumer demand. Manufacturing of timber products, light steel trusses and school furniture is facing a decline due to lower demand. A decline in the manufacturing sector has also led to job losses and a reduction in additional job opportunities.
FINANCIAL SECTOR
Unlike in other countries, the financial sector/banking industry in Botswana has not been affected by sub-prime and speculative lending as is the case in some industrialized countries. The country's financial regulatory system is still strong and transparent, thanks to the oversight role of the Bank of Botswana.
However, with falling demand due to low purchasing power and job losses, we expect banks to exercise more caution in their lending to the private sector in order to avoid/minimize losses or asset impairment. Similarly, the slowdown in external trade will also lead to a possible decline in providing trade finance to businesses.
The growth rate in the banking sector in 2009 will be lower than that of 2008 due the economic and financial crisis.
TOURISM/HOSPITALITY SECTOR
The tourism sector is one of the major contributors to the country's economy or Gross Domestic Product. Like other industries, this sector was also adversely affected by the current global economic crisis.
Hotel reservations have dropped with occupancy rate expected to decline by 35-40 percent. Similarly, travel and tour operators expect their business/turnover to drop by 35 percent.
Given the existing income/expenditure linkages between the tourism sector and other industries including households, a decline in tourism revenue also adversely affects food security, purchasing power and potential for expansion.
High-end tourism, Botswana's other economic mainstay, also took a hit as arrivals fell sharply during the recession. The Botswana tourism industry witnessed detrimental impacts during the recent global economic recession with a decrease in tourists' arrivals. The recession impacted negatively on Botswana tourism market. Much as the tourism numbers increased, it was a much lesser percentage in comparison to the previous years. According from the statistics from the Ministry of Environment, Wildlife and Tourism of Botswana stated that tourists' visits to Botswana during the global recession were still far below the estimated trends. The country witnessed a 3.1 percentage annual rise in tourist arrivals in 2008 and 3.5 percent in year 2009 which was still below the estimate of 8.4.
FOREIGN DIRECT INVESTMENT
Foreign direct investment (FDI), an important component for diversifying the country's economy is also likely to be negatively affected by global recession. According to Bank of Botswana, the mining and finance sectors account for the largest share in FDI inflows which in turn are dominated by Europe (Annual Report 2007, BOB). Indications are that FDI flows to developing countries such as Botswana will decline.
As FDI inflows are critical for sustainable economic diversification, the current global financial crisis coupled with declining commodity prices and low profitability will negatively impact on Botswana's economy. With declining commodity prices and the perception of low profits in the horizon, it might take time for Botswana to attract more FDI flows.
Interestingly, however, the recent FDI in the energy sector by China together with domestic investment from a local bank is encouraging and a positive development for Botswana.
ENERGY AND FOOD PRICES
It is l encouraging that, on the import side, global food and energy prices have declined and possibly stabilized to the benefit of, inter alia, Botswana. Whilst the latest increase in fuel prices is a major concern, hopefully the prices will stabilize to an affordable level for countries like Botswana. Paradoxically, the increase in fuel prices could also be a sign of economic recovery Food and fuel imports are major expenses for most low-income countries.
Monetary and Fiscal Policy Taken
Monetary Policy
Due to the economic downturn, one of the restoration measures which Botswana took to sooth out the impact of the recession was to implement an expansionary monetary policy through the increase of the money supply in the economy. The increase in the money supply was a result of the decrease in the federal bank's discount rate.
Decrease in the Federal Bank's discount rate
Nominal Sm1 Sm2
Interest
Rate
i*
i1
D
M1 M2 Quantity of Money
Because of the decrease in the Federal Bank's discount rate, the supply of money curve shifted to the right from Sm1 to Sm2 as illustrated on the graph above. As a result of the shift, the nominal interest rate decreased from i* to i1 while the quantity of money increased from M1 to M2. The decrease in the nominal interest rate meant that the financing of capital projects became relatively cheaper hence investment increased. In addition, the increase in the money supply also meant that consumer spending on goods and services increased due to the fact that the increased money in circulation made the consumers feel wealthier therefore it increased their urge to spend more.
Furthermore, the decrease in the interest rate will also result in a decrease in the exchange rate meaning that the domestic currency (PULA) will depreciate relative to other foreign currencies. The decrease in the exchange rate will result in an increase in total net exports; goods produced domestically will be relatively cheaper as compared to foreign goods therefore exports will increase whereas imports will decrease.
AS
AD1
AD
Q*
Q1
GDP
P*
P1
Price
Level
Increase in Consumption,
Investment and Net Exports
As an aftermath of the increase in the supply of money which eventually lead to an increase in consumption, investment and net exports, all of which are determinants of the Aggregate Demand curve (AD), their increase caused the AD curve to shift to the right from AD to AD1. The shift resulted in an increase in GDP from Q* to Q1 and an increase in the general price levels as well from P* to P1 meaning that there was increase in inflation.
Extent of economic recovery till now
As the drastic impacts of the recession have started to ease up on certain nations, Botswana has also started to show signs of recovery. The Minister of Finance has recently announced that they projected an economic growth of 5% between 2010 and 2011. This was mainly due to the fact that there the mineral sector has shown some recovery, especially focusing on the diamond sector which is the major contributor to the economy of Botswana. Furthermore, the federal bank has issued out bonds and increased the value added tax from 10 to 12 percent as a way of earning revenue in order to alleviate its budget deficit to ensure that the country gets back to normal. In addition, the government also took a loan from the African Development Bank of $1.5 billion also in an attempt to alleviate its budget deficit.
In case of unemployment the country placed some programs to assist in the alleviation of poverty and decrease the unemployment level targeting those who have no income or limited sources of income. The poverty alleviation program so far hired close to 234 462 people according the 2010 government budget speech.
Year
GDP - real growth rate (%)
2008
3.1
2009
-5.9
2010
6.3
Conclusion
In conclusion, it is understood that real economic recovery needs spending by the consumers. That would be the faster way of gaining tax revenue by the state, through revived spending and borrowing from banks with confidence to pay back by the mainstream. To help that when they could not increase salaries, then the government should not have increased VAT that will only serve to prohibit spending and decelerate diversification. However, the comforting thing in Botswana is that at the moment the economy is still largely driven by diamond business so when they recover that will allow government to then increase salaries. The monetary policy is recommended as used by the government to make sure that the economy recovers from the economic crisis as monetary policies controls money in circulation.
