The economy and the election
Mbongeni Mguni | Thursday October 23, 2014 16:48
For fiscal and monetary authorities, the private sector, labour movements and households, the past five years will be unforgettable for the calamity that struck the local economy in October 2008.
At that time, exports of economic mainstay, diamonds, dropped from P2.4 billion in September, to P821.5 million in October, before slumping to P371.2 million in November, a level unseen in the previous five years.
The global recession had hit local shores. What had begun as a confidence crisis in the US housing market, had spread to the global financial system and collapsed the demand for commodities such as diamonds and other minerals.
The boom years stretching from 2004 to 2007 were quickly forgotten and in their place rose an abomination that caused desolation, chewing up jobs, livelihoods and hope while spitting out despair.
Botswana’s economy grew by an average of 7.1 percent between 2005 and 2007, before dropping to 3.9 percent in 2008 and officially entering recession the next year when it shrank by 7.8 percent.
Five years down the line, what direction has the economy taken?
Budget
After making landfall in October 2008, the recession’s impact was not immediately clear to the general public, although alarm bells were sounded when it was announced that a scheduled sale of Debswana diamonds had been cancelled due to low demand.
By February, former Finance Minister, the late Baledzi Gaolathe, was forecasting that Debswana’s revenues would decline by 50 percent, while also unveiling the country’s plan “to spend its way” out of the recession.
The idea was to run deficits in order to support growth through demand and then return to balance once critical economic sectors such as mining, were recovering.
The budget suffered deficits amounting to P24.5 billion between 2009/10 and 2011/12 before returning – right on schedule – to surplus in 2012/13. Focus going forward is to use budgetary surpluses to shore up the reserves that took a beating from the deficit drawdowns.
Economic Growth
While the economy was given a three-month notice before the recession struck, that still did not prevent widespread retrenchments, rationalisations and closures, particularly in the mining sector and those industries down-wind of it. Debswana spectacularly suspended production early in 2009, while other upcoming mines closed shop in later years due to ongoing market weakness.
The construction sector, propelled by government’s robust expenditure on public works such as roads, dams, airports and power stations, anchored the return from recession to an 8.6 percent growth in 2010. In later years, even as projects were completed and construction’s contribution to growth declined, the benefits of investment in sectors such as the financial sector, trade and services would stabilise the economy and ensure that a return to recession did not recur. Today, the mining sector is generally riding the crest of global positivity, which is also aiding capital availability for new projects and expansions. The non-mining sectors of the economy are also firing, with the Morupule B power station and various dams contributing to rosy figures, while adding momentum to other sectors.
Monetary Policy
In the last “boom year” of 2008, the Bank of Botswana increased interest rates by 50 basis points noting “the need to restrain aggregate demand, given the acceleration in credit growth and faster expansion of government expenditure”.
In the next few years, the central bank would abandon its austere monetary policy and to an extent, place greater focus on growth-targeting instead of inflation-targeting, as the economy receded. In 2010, the Bank shifted to a neutral monetary policy in which interest rates were frozen to support growth.
In 2012, it moved to an accommodative stance under which it sought opportunities to lower interest rates to foster demand. Inflation – one of the Bank’s key targets – gradually fell from the highs of runaway credit growth in 2008, as demand cooled in line with depressed business operating conditions. In the past five years, monetary policy has operated in tandem with fiscal policy, in the attempts to support, firstly the recovery of the local economy and secondly, sustainable growth.
Households
In the economic narrative of the past five years, households have perhaps had the bumpiest ride. From the mass retrenchments and rationalisations of 2009, to the lack of substantive public or private sector wage reviews during the recession recovery years, to the dismissals during the Mother of All Strikes, households have borne the brunt.
Pressure on households has also come from pre-recession credit commitments and other imprudent formal and informal borrowings that have left many wallowing in debt traps.
In terms of employment, the economy recovered the jobs it had lost during the recession, within three years, although many critics say the Ipelegeng programme is a large part of this recovery. Between March and December 2009, the economy shed 26,000 jobs, before turning the corner and adding 31,000 jobs up to September 2012.
All over Africa, it is rare that politicians directly tackle economic issues in their election campaigns. What is more common is for them to address certain economic indicators or issues they feel resonate with the public. Indicators such as unemployment, empowerment, diversification and poverty will receive attention, while those such as inflation, national accounts, trade balance, investment receive less attention.