Mr Matambo - so what do I tell Peggy?

Roman Grynberg | Friday April 11, 2014 11:35

 

Peggy is coming to the end of her studies at school and  she really needs to decide what she is going to do with her life. Like so many children of her age she really wants to go to university and study something that will help her and because she is fairly patriotic, help her country.

Now here is a young person with her life ahead of her and I really don’t know  whether the best and most honest thing to tell her, despite her love of country,  is that she is best off just emigrating to Canada.  And that is the issue- what future does she really have and what should I tell her? You have done a very admirable job as Finance Minister in the last five years. Certainly the trade unions don’t love you but being appointed a finance minister of any country in 2009, in the immediate wake of the 2008 global economic crisis is like being handed the proverbial poisoned chalice. But you did a sterling job of keeping Botswana’s finances on a relatively even keel during what were the stormiest economic times that the world has seen in over 70 years. There is not a finance minister in the world who would not wish to end a five years term like you, bringing home surplus budgets and balanced budgets over the last four years. Congratulations!

But Mr Matambo, you and I both know a secret or two. Well, in fact, what we know is not much of a secret as just about everyone in the Ministry of Finance and Development Planning and the Bank of Botswana know that our government revenues and expenditure might be balanced now but they are completely and utterly unsustainable. About 2/3 of our revenues comes from two sources- transfers from SACU ie Pretoria ( South Africans  now like to call it Tshwane but given the way they think  about their neighbours, Pretoria is more accurate) and from our earnings from diamonds.  You and I, the IMF the World Bank and just about anybody who gives serious thought to the economic future of the country know that both will eventually disappear. But what no-one in the government enclave, nor Washington or Pretoria nor at De Beers headquarters in London are willing or probably even able to tell us is when is ‘eventually’. We don’t know when the South Africans will get completely fed up with sending what they consider a subsidy to Botswana (a country with a higher GDP/capita than South Africa) and when the real crunch will come from diamonds.

The reasonable guess for those independent economists who think about these matters is that the South Africans will ‘spit the dummy’ on SACU long before our diamonds run out. There was even talk of a  ‘take it or leave it offer’ on SACU revenue sharing but Mr Zuma faces an election this year and he has enough on his plate with Nkandla that he really does not need to  add to his woes by turning Swaziland and Lesotho into economic basket cases by reforming SACU before the election in May. The safe bet is that the SACU crunch will come later in the second half of the year.

At this point SACU is more important to Botswana’s budget than diamonds. This is because each SACU member’s share of customs revenue depends on how much they import from their SACU neighbours. Given that we import almost everything from South Africa we get a disproportionate share of the total SACU customs revenue and  as South Africa imports almost nothing from us they get very little. They are not happy in Pretoria.  Once the penny drops Mr Matambo, you will be a happy man to have retired and given the keys to the Ministry of Finance to whoever your successor will be because if we have to collect our own customs revenues it will mean a loss of billions of pula and that will mean that there will be a belt tightening that will make the last five years look like a pleasant holiday. 

This may give rise to some positive effects because the government will be forced to rationalise some of the multiplicity of government institutions that replicate each other’s functions. The teaching colleges, nursing schools, the large number of financial institutions such as LEA and BITC and NDB will finally be rationalised. But each rationalisation will mean one less job for someone like my daughter coming out of university. Botswana’s post-colonial model of expansion of employment in the state sector will have to once and for all come to an end.

But that will only be the first blow. Some time late in the next decade the profits from the diamonds will run down and Debswana will no longer be the dependable cash cow that it has been since the development of Orapa and Jwaneng since independence. Since the beginning of the FAP in 1980 diversification has been an almost religious mantra and yet despite the government’s best efforts we are now more dependent on diamonds today than at any time in our post-independence history. In 2013 diamonds were 83% of our total exports. This is because our newest export industry is cutting and polishing of diamonds and they now make us even more dependent on diamonds for our exports. The automobile industry collapsed in the 1990’s, the garment industry collapsed over the last five years and within five to 10 years mining at Tati nickel and Selebi-Pikwe will come to an end. 

This all sounds rather gloomy but Botswana has other resources and the future is in  the hands of the Batswana to write well or otherwise. There are substantial coal bed methane deposits which have never been exploited and the coal which has real export potential along with new base metals deposits in Ngamiland. But none of them will make up for the loss of diamond revenues.

So where do we go – for Peggy Canada is an option only because of my nationality but I am sure it is not one that you, as Finance Minister  want for her, your children  or for the nation’s children. Increasingly the IMF and the World Bank have been quietly warning that it is time for Botswana to move away from its old model of pouring our diamond resources into social and physical infrastructure and time to start thinking of a cushion ; a real fund ( Not the Pula Fund) for  the day we have a hard landing.

Last year in a seminal paper  Professors Diamond and  Mosbacher suggested in the American magazine Foreign Affairs that in resource rich states like Botswana half the state revenues earned from  resource exports should be paid directly as cash payments to each citizens rather than going to the state. That would mean that you would open a bank account for Peggy and 2 million other Batswana based on half the revenues we get each year from now on. Clearly this would be a really bad idea if you allowed Peggy to use the account now without restriction because it would only result in an increase in Chinese imports. But waiting while these funds are invested by professionals and receives a good rate  return would provide a cushion for Peggy against the inevitable decline in government revenues is perhaps the very best thing government can do deal with our diamond predicament. It could be released around 2027 when the expected crash  in diamond revenues is likely to occur.

Mr Matambo, you and I will retire soon and what happens to Botswana’s economy after 2027 is obviously something for the next generation to worry about. But I for one care a great deal of what happens to Peggy as I am sure you do as well. We need to change direction and think outside of the old box of government spending and investment and as a departing Minister of Finance it would be really useful if you started just such a dialogue with the people of Botswana – including Peggy’s generation that will be around for the shocks that will certainly come.

*These are the views of Professor Roman Grynberg and not any institution with which he may be affiliated.