Stimulus package could hurt economy economists


President Ian Khama’s economic recovery package will actually hurt the economy more in the long run, according to economic analysts.

In a recent economic review for the third quarter of 2015, analysts from Econsult Botswana, Keith Jefferis, Brandon Basele and Sethunya Sejoe argued that in some respects, the stimulus package could make things worse.  The experts indicated that the real cause of slowing growth is not the absence of government spending, but a lack of competitiveness.

“Analysis of the likely impact of the stimulus package is difficult in the absence of information regarding its content, timing, magnitude and funding.  However, indications are that it will be large, and will be implemented as soon as possible,” stated the economists in the review.

They further noted that fiscally, the impact will almost certainly be a move to larger budget deficits, over and above those that would be likely to result from the impact of the global slowdown and reduced mineral revenue.  According to the economists, the stimulus will only result in a short-term boost to economic activity and some job creation, particularly in construction and related activities such as building materials supplies, architects, surveyors and engineers.

“How the larger budget deficit will be funded has not yet been announced, although the government will have a choice between drawing down its savings at the Bank of Botswana (BoB), or borrowing through bond issuance, or some combination of the two,” the economists stated in the review. They also pointed out that both funding approaches have advantages and disadvantages and that the government’s net financial assets will decline regardless of which method is used.

However, they said it is worth noting that government can currently borrow very cheaply – the 25-year government bond is currently trading below 6 percent – and further bond issuance would be received well by pension funds and asset managers.

“There has been some suggestion that the spending will be financed by drawing down the foreign exchange reserves,” the experts stated in the analysis report. Furthermore, the economists said this is not entirely accurate, adding that government does not own the foreign exchange reserves, and that it does not have direct access to them. They explained that government’s reserves, which can be used to directly finance spending are in Pula and are held in the General Investment Authority (GIA). The experts stated that there is an indirect link to the foreign exchange reserves, and that it is likely that additional spending will eventually cause the foreign exchange reserves to be drawn down.

They added that changes in the foreign exchange reserves are driven by the balance of payments, not by the government budget.

They concurred that a stimulus package with a high import component will most likely cause the foreign exchange reserves to decline, but this is a consequence of spending not of funding.

 In other words, additional spending will have the same impact on the foreign exchange reserves, regardless of whether it is financed by drawing on government savings or by domestic borrowing, they argued.

The analysts also indicated that beyond the short-term impact on aggregate demand and the construction sector, and some boost to business confidence and job creation, it seems unlikely that the stimulus package will address underlying constraints or help move the economy onto a higher long-term growth path.  They noted that numerous statements by the Minister of Finance and Development Planning in budget speeches and budget strategy papers have rightly pointed out the need to improve the efficiency of government spending and project management, and to ensure that only high-return projects that can justify the financial investment required should be implemented.  “To this end, major improvements in the quality of public sector project selection and appraisals are required.  A rush to implement projects under the stimulus package is unlikely to see these fundamental issues addressed,” stated the review.

The economists further suggested that it is essential that a focus on additional short-term spending does not distract attention from the need for fundamental structural reforms that will address competitiveness and productivity issues, which are essential for sustainable long-term growth and job creation. 

In response to declining business confidence, the slow pace of job creation and concerns about the impact of the global economic slowdown, Khama announced the introduction of an Economic Stimulus Package to boost economic activity. 

While details of the package have not yet been provided, it appears that it will comprise a range of infrastructure-related projects, some of which had been proposed earlier but postponed due to the non-availability of funds.

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