Darkening economic clouds to greet election victor

Former president, Ian Khama knows the feeling all too well. When he won his first term in October 2009, he was welcomed by the country’s worst economic crisis, in which the global financial crisis collapsed the diamond sector.

The economy shrank by 7.7 percent, shed thousands of jobs and forced the country to borrow US$1.5 billion from the African Development Bank.

Whoever is crowned victor next week will likely face a similar test.

All indicators are that what started out as a hiccup in diamond sales earlier this year, is deepening into full blown 2009-esque crisis.

De Beers’ rough diamond sales for the year have encountered severe difficulties owing to high levels of inventory in the midstream, where manufacturers are also struggling to secure credit. “De Beers diamond sales dipped by 39% year on year at its most recent sight with $295m of rough diamonds sold.  

“2019 has seen a series of soft sales, which now appears suggestive of structural headwinds rather than seasonality or ad-hoc challenges,” noted analysts at African Alliance in a brief published earlier this month.

De Beers, which owns 50% of Debswana, has thus far recorded year-to-date sales of $3.21 billion compared to $5.39 billion and $5.31 billion by the same time in 2018 and 2017 respectively.

Debswana, owned 50% by De Beers and the Government of Botswana, slowed production in the second quarter but says it generally expects to keep to a guidance of 24 million carats this year, the same as in 2018.

That figure may ultimately not be justifiable and while Debswana has ruled out 2009-style job losses, the pressure is expected to intensify, particularly as the IMF expects the world economy to register its lowest growth since the recession ten years ago. The warning signs have already been triggered at the Finance Ministry.

“Should the situation persist, it may pose further risks to the domestic revenue outlook, as it would affect the growth in mining value added and a spillover to other sectors that depend on mining activities such as manufacturing and finance business services, which include diamond cutting and polishing as well ad sorting and valuation,” reads a blueprint for the 2020/21 budget released recently.

The Finance ministry has already revised the projected deficit for this fiscal year upwards, from P7.3 billion to P7.8 billion. Fiscal authorities also forecast a P6.9 billion deficit for 2020/21 representing -3.1% of GDP. The 2020/21 deficit will be attributable to flat mineral revenues and a high civil service wage bill.

These figures are subject to change, the authorities caution, and the likelihood is that they could worsen.

The ministry’s senior policy advisor, Wilfred Mandlebe says the numbers will be further tuned as the impact of the slump in diamond sales becomes clearer later this year.

“We will go back and look at them especially given what’s taking place in the diamond market.” Whoever wins next week will land slap-bang in the middle of the 2020/21 budgeting process, which traditionally heats up towards December/January.

The promises made on the campaign trail will meet the realities of what is actually in the coffers and the actual priorities and tough decisions that need to be made.

For instance, fiscal authorities say the economy cannot keep incurring the running deficits it has been doing since the start of the NDP11 in the 2017/18 financial year.

Since that year, the running deficits have cumulatively totalled P16.1 billion, excluding the shortfall forecast for the current fiscal year.

Unpopular steps will have to be taken by whoever forms the next government.

The Finance Ministry’s deputy secretary for macroeconomic policy, Kelapile Ndobano says going forward, there will be no choice but to take those unpopular steps, in order to restore fiscal stability. “We need to see more efficient government spending focussing on urgent needs, as well as higher revenue collection.

“We also need to see other options of raising revenues including raising taxes which are the lowest in the region.

“We are not saying we are looking at raising them now but it’s an option that we may look at when it comes to that.

“Also the fees and levies for public services will have to be looked at especially for greater cost recovery in services such as health and education.

“We need to be discussing these things to see how far we can go in terms of cost recovery.”

While the Pula Fund, a sovereign wealth fund housing the country’s cumulative savings, stood at P53.2 billion in July, each withdrawal to shore up the budget is a withdrawal against future generation’s livelihoods in a post-diamond era.

Fiscal authorities stress that more sustainable budgeting will have to take place going forward, including restraining the development budget for the rest of NDP 11.

The new administration may also find itself having to break some bad news to civil servants. The dreaded reduction of the civil service, a decision that has been on ice for several years, may have to come forward and come forward quickly. In addition, civil service salary increments will be difficult to come by.

The tighter budget situation means the coming government will be hard-pressed to fund whatever economic and socio-developmental pledges made in its manifesto, at least in the short term.

The different parties contesting for the presidency appear keenly aware that the economy is a key issue with the electorate this year.

Besides highlighting their economic policies and planned interventions in their manifestos, the heads of the parties have used various platforms, including Wednesday’s historic presidential debate, to outline their plans for the economy.

Whoever stands next to Chief Justice Terrance Rannowane, taking the oath of office in the coming weeks, will have a lot more on his mind than celebrating election victory.