Economy growth steadies in lukewarm 2014

Brian Benza | Friday December 19, 2014 09:16

 

According to figures presented by Statistics Botswana, the economy grew by 5.8 percent and 5.2 percent in the first and second quarter respectively, with analysts forecasting a year-end growth of around 5%.

While the IMF and other pundits forecast an economic growth rate of just under 5%, Ministry of Finance officials project the domestic economy to grow moderately by 5.2 percent in 2014 and a further 5.0 percent in 2015, underpinned an expected recovery in diamond production.

The IMF forecasts lower economic growth for Botswana this year, due to slower recovery in diamond production, coupled with subdued economic activity emanating from water and power shortages.

 

Mining and Energy

By the end of the third quarter, Debswana diamond production stood at 18.25 million carats with the end year output expected to be slightly higher than the 22.7 million carats produced last year.  While Debswana still holds the lion’s share of diamond production, a new mine Ghaghoo, was commissioned this year    with a production target of 200,000 carats per year.

 Karowe mine in Boteti is also on course to record its highest output of 420,000 carats in 2014.

On the energy front, power disruptions resurfaced again in the last quarter of the year as the country sole power plant broke down again, disrupting economy activity in the process.

 

Fiscal rule

The year also witnessed the review of the fiscal rule, which will see a ceiling set on the part of revenue to be spent on recurrent costs, while financial assets will also be boosted by a new diamond fund.

As part of a review of policy governing the use of public funds, government announced that from the next financial year, the percentage of mineral revenues allocated to capital projects in each annual budget would be from 50 to 60 percent.

Speaking at the Stakeholders Pitso for the 2015/2016 national budgets secretary for finance and economic policy in the Ministry of Finance, Taufila Nyamadzabo, announced a revision of the fiscal rule effective next year.

This means that from 2015, 60 percent of mineral revenues will be invested in capital projects, and 40 percent saved for future revenue through a yet to be established Diamond Fund. The revision of the rule aims at the sustainability of posterity and government operations beyond the diamond era by reducing the amount of diamond revenues that is allocated to recurrent expenditure.

On the expenditure side, government will also contain the share of total spending to GDP under 30 percent in NDP11 and beyond.  Previously, the fiscal rule set the government expenditure at a ceiling of 40 percent to the GDP. Government’s overall expenditure has continued to spiral largely due to increases in the wage bill.

 

Inflation

Despite inflation falling to historic low levels, demand remained sluggish in the year as government, the biggest player in the domestic market, cut down spending while personal incomes remained static leading to the erosion of disposable incomes.

In an effort to inject some life into the economy, the Bank of Botswana, backed by a favourably low inflation rate, keep interest rates unchanged through out the year.

Worldwide, rates are cut to spur economic growth with the growth coming through increased consumer demand for goods financed by cheaper personal loans while businesses increase supply to meet the demand by resorting to cheaper business and manufacturing loans.

However, analysts feel the rate cuts alone are not sufficient to reignite the flagging economy, arguing that such reviews are usually effective in countries like the USA where a big part of the demand comes from consumers.

While Botswana is celebrating the lowest inflation levels in over four decades, another school of thought is that the prevailing inflation levels, is a symptom of a stagnating economy.

Some analysts reckon that the current low inflation levels in Botswana are not a result of any policy interventions but rather a reflection of a weak economy characterised by low aggregate demand.

Normally the rate cuts trigger the demand for goods and services and this in turn causes demand for borrowings by productive sectors, pushing up inflation. While the low interest rate regime is aimed of spurring economic growth, households have been the biggest beneficiaries of the lower borrowing costs.

 

Banking credit

Consumer credit, which traditionally constitutes 60 percent of credit from banks, this year eased off marginally to about 55 percent as household credit growth slowed while business loans uptake rebounded in the second half of the year.

Bank of Botswana figures show that from a growth rate of 3.6 percent in November last year, credit to business has steadily increased in 2014 rising to 6.7 percent in January before further expanding to 8 percent in March and 21 percent in October.

Traditionally households have dominated the credit growth in the commercial banking sector with businesses recording lower growth rate and arrears as well.

Credit growth to the households sector decelerated from 24 percent at the end of 2013 to under 16 percent in May this year before further declining to 9.6 percent in October 2014

 By October, Total credit extended by the banking sector stood at P44.3 billion.