Effects of the Ukraine-Russia-war on the economy of Botswana
OSCAR CHIWIRA & LOVEMORE TAONEZVI* | Monday May 23, 2022 04:30
This move has been mostly condemned by the United States of America (USA) and Europe. Now about to enter its fourth month, the invasion is considered the largest attack on a European state since World War II (WWII) and has also resulted in the largest refugee crisis in Europe post--WWII war with over six million Ukrainians seeking refuge in neighbouring countries. Since the political issues, which triggered the war are quite complex, this paper seeks to only highlight some of the possible economic effects of the war on Botswana.
Besides being a major exporter of crude oil, Russia is the third-largest global producer of petroleum and liquid fuels after USA and Saudi Arabia. Consequently, the war is going to negatively impact fuel prices in Botswana since it is a net importer of brent crude oil and refined petroleum products. Punitive sanctions that have been levelled against Russia for its invasion of Ukraine will negatively affect the global supply of oil thereby putting an upward pressure on its price. The figure below shows the prices of brent oil prices for a one-year period from June 2021 to May 2022.
Before the invasion, the prices were just over US$90/barrel but have now broken the US$100/barrel mark, reaching a peak of US$124 in early March 2022. This is the first time brent crude oil prices have breached the US$100 per barrel mark since 2014. Since end of February, oil prices have largely stayed over the US100/barrel mark thereby reflecting the effects of the water.
A rise in global oil prices will increase fuel prices, and through the knock-on effect, prices of virtually all other products will also increase since local and international supply chains are powered by petroleum fuel products from oil.
Therefore, a rise in inflation should be expected in Botswana. Inflation reduces the purchasing power of households and affects the national demand for products and services. With a depressed national demand for goods and services, employment and economic growth will slow down, thus reversing the country’s gains of economic recovery from the effects of COVID-19. As a result, the conflict in Eastern Europe, although thousands of miles away from Botswana, will affect the economic well being of its citizens.
In the months of February, March and April, the Consumer Price Index (CPI) was 10.6%, 10% and 9.6 percent, respectively, as reported by Bank of Botswana. This level of inflation is way above the Bank’s target rate of 3-6 percent.
Fuel prices have also been increased twice – on March 29th and on May 13 causing a major public outcry. This has seen public transport operators embarking on a crippling national strike which has negatively impact the movement of people and that of goods and services.
Public transport operators are pushing for an increase in public transport fares so that they can sustainably continue their operations in the face of rising fuel prices. This strike leads to losses in the country’s economic output as people report late for work, fail to report for duty and informal traders fail to open their workstations, amongst other things. Therefore, the CPI for May is likely going to be higher than the previous month.
Furthermore, inflation is expected to increase through higher food prices. Russia and Ukraine are amongst the world’s top 10 producers of grains such as wheat, sunflowers, and corn. The war is going to reduce global supply of these products. Africa will be affected because it imports a significant amount of its grain consumption from these warring nations.
Trade data shows that African countries imported close to US$7 billion worth of agricultural products from Russia and Ukraine in 2020. Since the war started prices of cooking oil, bread and mealie-meal have approximately doubled from their pre-war levels. Hence, as war continues unabated, it will propel the prices of basic food stuffs, thus increasing hunger and food insecurity in African countries like Botswana.
The recent move by the Government to restrict the importation of certain vegetable commodities for a two-year period, which came into effect on January 1, 2022 has also amplified the upward pressure on food prices in Botswana. The country is a net importer of vegetables and a ban on imports will leave consumers scrambling for the insufficient supplies of the vegetables by the local farmers and contend with the resulting price increases, at least in the short to medium term.
The same inflation emanating from rising fuel and food prices that will be experienced in Botswana will also be experienced in USA and Europe. As stated before, rising inflation will reduce consumer purchasing power and significantly reduce the demand for luxury products such diamonds and recreation in the West.
The demand will further be depressed by the fact that Western countries are increasing their military spending in the wake of the Russo-Ukrainian conflict.
The Botswana economy is anchored on diamond mining and tourism, therefore, a decrease in demand for products in these two key industries will negatively affect the country’s economic growth. For instance, according to the Botswana 2022/2023 Budget Speech, P24.08 billion (35.5%) of the financial year’s expected revenue and grants will be from mineral revenue. Decreased mineral revenue due to the resulting low global demand caused by the conflict will exacerbate Botswana’s current problem of structural budget deficits.
The USA alone accounts for 51% demand of the global diamond supplies, therefore, a slowdown in the US economy has serious negative repercussions on Botswana’s economy.
The tourism industry, which was heavily affected by the COVID-19 containment measures and was largely inactive in 2020 and 2021, will be negatively affected by deteriorating consumer demand in the West.
Therefore, by negatively affecting both the mining and tourism industries, the Ukraine-Russia war will reduce economic growth and employment creation while at the same time impoverishing Batswana through high inflation.
While the clouds ahead seem to be completely dark for Botswana, there is a silver-lining.
Botswana is the second largest global producer of diamonds after Russia. With Russia increasingly being isolated by the West and penal sanctions being placed on anything Russian, if these sanctions end up excluding the sale of diamonds from Russia on the world market, this will highly benefit Botswana.
The reduced supply of diamonds will possibly put an upward pressure on their prices and will increase the demand for Botswana’s diamonds. In that way, the war will become a blessing in disguise to Botswana since the forecasted revenues from diamond in the 2022/2023 might end up being exceeded, much to the benefit of Botswana’s economy.
However, this will largely depend on strength of the effect of reduced demand for diamonds by consumers in Western countries due to worsening economic conditions.
In conclusion, the Russo-Ukrainian conflict is expected to lead to inflation in Botswana and the whole world through an escalation in fuel and food prices.
Revenue from the mining and tourism industries is likely to be below the forecasted levels thereby jeopardising the national budget for the 2022/23 financial year. Nevertheless, there is a chance of an increase in the sale of Botswana diamonds if the sanctions on Russia end up successfully blacklisting the sale of diamonds originating from Russia.
The Government of Botswana needs to prepare to cushion its citizens from the effects of the expected inflation so that the demand in the economy does not fall enough to negatively affect consumption and eventually dampen economic growth.
There is great need for the Government to take proactive steps to reduce the burden of inflation on consumers and businesses and in the process avert strikes like the one being carried out by public transport service providers.
The country cannot afford the costly disruptions that strikes and industrial actions have on the economy and the general peace and security which the country has enjoyed in the past five decades. With unemployment and poverty levels in the country already worsened by the effects of COVID-19, the government and the central bank will need to prudently manage the fiscal and monetary policies to avoid another global crisis-induced recession. In that way the country can close NDP11 on a positive note and keep the hope of achieving Vision 2036 alive.
Oscar Chiwira (PhD Economics, Dean: Faculty of Commerce – BA ISAGO University)
Lovemore Taonezvi (PhD Economics, Lecturer: Entrepreneurship Department – BA ISAGO University)