'The most immediate effect is that part of the SACU revenue sharing formula ,i.e., the excise component, which is based on Botswana's GDP as a share of total SACU GDP, and we will get less revenue next year.'
Most economists and statisticians prefer to believe that they are hardnosed scientists but sometimes when the data shows itself to be inaccurate, then the artistic nature of both economics and statistics becomes more obvious. In September of last year, the value of the final goods and services that Botswana produces in any year, what economists call Gross Domestic Product(GDP),stood at Pula 120.5 billion in 2011. A nation's GDP is an incredibly important number. It is generally seen as a measure of how rich a country is- the bigger its GDP, the richer it and its citizens are meant to be. Of course, this is not always the case; but GDP still remains the single most important measure of a nation's prosperity. Just as significantly it is a figure that every businessman looks at when deciding on whether to invest or not in a particular country and venture. Its growth rate, after taking into account inflation, called the real GDP, remains the single most important statistic for measuring the health of an economy. If your growth of real GDP rates is high i.e. higher than your population growth rate, then your real GDP per capita rises and the country is seen as prospering and its citizens generally reward democratic governments with re-election.
Good Morning...today you are 9% poorer!
Then a couple of days later in October, Statistics Botswana issued a revised GDP figure; and lo and behold, it had lowered the estimate of the 2011 GDP to P109 billion and the entire nation was suddenly 9% poorer in nominal terms.This of course is the great mirage of statistics. The nation was actually no worse off - we had still produced the same amount of goods and services, just the mirage called statistics said we were a lot poorer. It is common for statisticians to revise estimates of GDP; and when a colleague complained I was using 'old data' in my work, I simply laughed, expecting the numbers to only be 1-2% different and would make no real difference to the way in which we see the country. But then sometimes when you make a mistake, it is so big that it causes you to change the way in which you look at things.
If someone would ask you, what is the biggest sector in the Botswana economy, almost everyone who knows anything about the country would say that mining is the largest part of the economy. Wrong, big time! While in nominal terms mining remains the biggest sector the new revised Statistics Botswana estimates, if they are to be believed, then in 2011 real value of mining value added is 17.1%of GDP, and the biggest sector of the economy is trade, hotel and restaurants at 19.7% of GDP. Even government (16% of GDP) and finance and business services (16% of GDP) are almost as big as mining.
An Almighty Blunder!
The interesting question is how did this all happen? How is it possible to make such a dramatic change to the most important statistic pertaining to the economic health of the nation? It is with great regret that, while the revision of GDP is technical, it stems from understandable but basic errors made in the valuation of the nation's GDP by Statistics Botswana.The biggest error that was made was the way in which Statistics Botswana measured the nation's mineral production. It consistently overestimated the value of the nation's diamond production and the magnitude of the error was staggering. Mineral value added i.e. wages plus profits in 2011 in the earlier published statistics was Pula 38.8 billion. In the new figures, mineral value added in 2011 was Pula 26 billion, a decrease of a whopping 30%! How did Statistics Botswana get it this wrong? There is a technical explanation, but there is also a much more important bureaucratic one. The technical one is that they used prices and stock estimates that were incorrect.
The second bureaucratic explanation is that no-one was checking to make sure the right thing was being done inside Statistics Botswana. The value of diamond production was not the only mistake- Statistics Botswana also failed to take into account the fact that most of our electricity is still imported and had to revise valued added in the water and electricity sector downward accordingly.
Who Cares? But Botswana will pay
After all, this is just a number, mere artistry, and who really cares- Batswana are really no poorer as a result of the change in estimates. Well, the truth of the matter is that it will cost Botswana as the GDP figure is so important for so many international calculations. The most immediate is that part of the SACU revenue sharing formula,i.e., the excise component,which is based on Botswana's GDP as a share of total SACU GDP, will now be lower. Once Pretoria gets the revised numbers, we will get less revenue next year.
Fortunately for Botswana the SACU partners will not ask us to repay a portion of what we have received based on GDP estimates that were far too high. This would have costs tens of millions of pula. The limits on government borrowing are set at 20% of GDP and, in absolute terms, will now be lower. The implications go on and on because virtually every international institution bases its fees or its allowances available to members as a percentage of GDP. These revisions will have reverberations throughout the economy- some positive, but largely negative.
But the real price of the error will be paid by private investors who based their investment decisions in Botswana on GDP growth figures that were simply wrong. Businessmen often rely on these figures to give them some quick idea of how well an economy is performing and, quite incorrectly, how well it is likely to do in future. The old figures say Botswana has experienced an 8% real GDP growth over the period 1994-2000. This is a pretty stunning result; but, on the basis of the revised figures, the growth rate was 5.5%,which, while still good by any standards, paints a somewhat different picture of Botswana. Over the last decade, the growth rate, based on the revised data,has been a much more modest 4.3% (up from 4.1% on the old data).But, this is still below the sub-Saharan African average of 4.6%.
The longer term cost of this blunder is both to the reputation of Statistics Botswana and to Botswana itself. The country has a justifiably good reputation for good macroeconomic governance and issuing economic data that, is meaningful and reliable. Our Achilles Heel is the lack of transparency in diamond figures and it is time that Statistics Botswana, the Bank of Botswana, the Diamond Hub and others resolve the production, export and sale estimates of diamonds.
It is also essential that government now creates a long term review mechanism for Statistics Botswana to restore its credibility in the eyes of the public. Let us hope that better quality data are forthcoming.
*These are the views of Professor Roman Grynberg and not necessarily those of the Botswana Institute for Development Policy Analysis where he is employed.