A familiar uncertainty sets over the economy
Mbongeni Mguni | Monday August 8, 2022 16:18
To use American slang, the economy, which includes business activity, employment creation and the collective aspirations of Batswana, cannot seem to “catch a break”.
The boom economy which stretched from the late 1990s to the late 2000s with diamond and copper production reaching historic peaks, government surpluses rising to similar highs, while poverty and unemployment fell, seems a distant, wistful memory of consistency that policymakers and citizens desperately long for today.
While the economy’s dependence on mining has, from the 1970s, exposed its fortunes to the “boom-bust” commodity cycles, since the global recession of 2009, these periods of growth and contraction have shortened. The booms have been shorter and the busts longer, in recent years.
In fact, the cyclical upturns and downturns in the economy have been both caused and cured by minerals, particularly diamonds, which account for a healthy proportion of economic activity, government revenues and foreign currency receipts.
After the recession of 2009, the recovery in the local economy was tripped up by another downturn in 2015, after which the subsequent rebound was snuffed out by COVID-19, which caused the economy’s deepest contraction in 2020.
The rebound from the pandemic was evident last year with the economy expanding by 11.4%, the largest growth since 1988, while government reserves are nearing their pre-pandemic levels and the budget for 2021/22 is expected to indicate a small surplus.
Most of the recovery in both the broader economy and the fiscus, has been helped by the rebound in mining, particularly diamonds, with Debswana sales reaching P38.1 billion last year, the highest level since 2016.
In the first six months of the year, Debswana sold rough diamonds worth P31 billion, setting it on track to break the six year high.
Rather than cheering, however, fiscal authorities and economists are keeping a wary eye on the growing possibility of another slowdown, arriving just on time like its predecessors to extinguish the flickers of hope for a sustained recovery.
The main drivers of uncertainty hanging over the local and global economy are the increasing potential for a slowdown in major economies such as United States, the European Union and the United Kingdom, arising from escalating inflation, raised interest rates to counter it and geopolitical tensions around Russia’s invasion of Ukraine. More tension has recently been stoked between the US and China over a high level visit to Taiwan by the US house speaker, an act Beijing views as provocative and supportive of Taiwan’s claims to independence.
With the US experiencing two quarters of negative growth, that economy is already technically in a recession, although officials say the strong jobs growth and other indicators suggest that such a descriptor is premature.
US economic performance and more specifically, the appetite of the American consumer for diamonds, is crucial to Botswana’s economic fortunes. The US is the primary market for Botswana’s diamonds and also a major contributor to the local tourism sector.
“The persistent geopolitical tensions and resultant spillovers entail significant threats to global economic growth in the immediate future and therefore, the demand for Botswana’s main exports, especially diamonds and tourism,” Bank of Botswana governor, Moses Pelaelo said in a briefing last week.
Other economists agree.
“The domestic and global economic environments are marked by high levels of risk and uncertainty,” researchers from local economic consultancy, Econsult, wrote in a report this week.
“The global macroeconomic environment is poor, with rising inflation and interest rates, and slowing growth, with risks of global recession.
“The diamond market is highly dependent on economic growth, and notably the fortunes of US consumers.
“On the last two occasions that the global (and US) economy suffered from a major negative growth shock, during the global financial crisis of 2008-9 and the COVID-19 pandemic in 2020, the demand for diamonds collapsed.”
De Beers, which co-owns Debswana alongside the Government of Botswana, has popularised the phrase “cautious optimism” over the years in describing the vicissitudes of the diamond industry. Having enjoyed stellar rough diamond sales in the first six months of the year and even while raising its targetted production for this year, the world’s second largest producer of diamonds is again apprehensive.
“The first half of the year has been very solid with our mines working robustly across the board.
“Looking forward, there’s some volatility going into the second half with high interest rates, geopolitical uncertainties and the COVID-19 situation in China.
“So although we had a great first half which are proud of, we are positive about the second half with a degree of caution,” De Beers' executive vice president responsible for diamond trading, Paul Rowley told a media briefing last Thursday.
The concerns about a possible knock on the economy from external developments are shared by fiscal authorities, with Finance Minister, Peggy Serame recently noting “rising economic stresses and risks globally”. Unveiling a suite of inflation relief measures recently, Serame said while diamonds had led the economy out of its pandemic slump, there were signs of distress on the horizon.
“Historically, when the global economy – and particularly the economy of the USA – slows down and even goes into recession, sales of diamonds, as a luxury good, typically fall sharply,” she said.
“We saw this in 2008-2009 during the global financial crisis, and again in 2020 during the COVID-19 pandemic.
“Hence, we must be cautious, as we could face a drop in earnings from diamonds in the medium term.”
While Batswana have been felt every bump in the rollercoaster of economic performance over the years, between recessions and rebounds, the imminent slowdown will feel particularly unfair.
While the economy enjoyed high growth rates last year and into the first quarter of this year, ordinary consumers have laboured under escalating inflation and interest rates, stagnant job creation and negative real wage growth.
For citizens, the recovery from COVID-19 has been a technical affair tracked by economists, while the reality on the ground has been that there has been little change in circumstance between the 2015 and 2020 recessions, despite the respective rebounds.
In fact, a groundbreaking Statistics Botswana report earlier this year found that one in five households is ‘multidimensionally’ poor, lacking sufficient food, shelter, education, access to ICT and others. The data agency also reported that the unemployment rate for those aged 18 years and above rose from 21.9% in December 2019, before the pandemic, to 24.5% in December 2020 and then to 25.8% in December 2021.
However, it is inflation that has been the albatross on the necks of ordinary consumers, rising to 14-year highs in June and averaging 10.9% in the first six months of the year. The two factors driving inflation, fuel and food fuel, have particularly been difficult to cope with for consumers, eating into whatever resilience they had from the pandemic’s effects on their disposable incomes and savings.
“Government is aware of the economic stresses on households and businesses caused by higher inflation, and has considered ways to alleviate some of those stresses,” Serame said last week, in announcing relief measures that include a temporary reduction of Value Added Tax.
The prospects of another slowdown or possible recession is thus unpalatable to households, particularly as the current economic rebound is yet to spread broadly to more non-mining sectors and to other indicators such as employment.
The Bank of Botswana only expects inflation to ease back to the three to six percent target range late next year and in the meantime, appears set to further hike interest rates to as a policy response to both inflation and inflation expectations in the domestic economy.
Econsult researchers, however, say the outlook is not all doom and gloom.
“There are signs that the surge in food and energy prices in recent months, which has had such a devastating impact on global and domestic inflation and living standards, is easing off.
“For global food prices, which surged in the first quarter of the year, there was a small decline in the second quarter.
“This bodes well for a reduction in inflationary pressures both globally and in Botswana in the coming months, even though there may be some price pressures still in the pipeline in the short term.”
Fiscal authorities, policymakers, economists and ordinary households will be hoping the global economy either completely avoids a recession, or at the very least, that any slowdown is not so sustained as to cause the hard shocks experienced in recent downturns.