As at the time of writing the article, Botswana had registered four confirmed cases of COVID-19, but the effects and disruption to normal life were already being felt for the past three weeks.
The aim of this article is to therefore try to investigate the different economic effects that will arise from this disaster. I will look at individual industries, possible effects on unemployment, possible effects on the government budget and possible mitigating strategies the government can employ to try cushion us against this disaster.
The first and biggest question, which needs to be answered, is how long this pandemic will run for? For us to do that we have to then define what we would consider a win. For me a win will be a return to normalcy and this can only reasonably happen where we have data and are able to quarantine all people who have it with certainty. This calls for a lockdown (best practice around the world is 21 days) that will allow for the disease to come to the fore in all people it has infected and hence give us the ability to measure it. After initial lockdown, a period of a week can be provided to see if any new cases arise. If new cases do arise, another 21-day lockdown can be warranted. This process will be played out until we get to a situation where we have the disease under control.
Reasonably this could mean three lockdown periods and hence this could mean three months of disruption. (Donald Trump in some news conferences believes normalcy could be regained in July or August. There are other scenarios where you can see the pandemic running to end of 2020 or even possibly 12 months)
Our biggest concern as a government should be to try to stave off mass unemployment. Botswana currently has an economically active population of 934,000 people. At least 191,000 (20%) are unemployed, with 742,000 employed. About 421,000 (57%) are employed in the formal sector with 321,000 (43%) in the informal sector. Of the formally employed, government and parastatals employ 222,000 (this includes 72,000 under Ipelegeng which if you remove from employed, means the unemployment rate reaches 29%). Private sector therefore accounts for 195,000 people. The average salary in Botswana is P4,989.
The impact of the virus will hit industries with differing speeds. Below is a discussion of how I see these waves coming.
First Wave - Tourism, hospitality, entertainment, air travel (550 companies comprising possibly 80,000 jobs)
Across the world we saw the first casualties of this pandemic in the tourism and hospitality industry. Bookings for transport and accommodation dropped by 90% in the space of three weeks in Botswana according to HATAB. Flights were cancelled as travel bans ensued and entertainment and leisure activities halted as group gatherings with more than 10 people were banned. The Ministry of Investment, Trade and Industry instituted a ban on the sale of alcohol for 30 days and ordered a shutdown of bars, gyms, clubs, salons etc. This also affects service providers to this industry such as artists, photographers, DJs, decor and event managers, MCs etc. Retrenchments are very likely if more than one month is endured without income. This sector accounts for 20% of GDP and possibly 30% of the P14 billion non-mineral revenue budgeted for by the government meaning the possible loss to government could be P1.4 billion (calculated assuming three months disruption).
Second Wave - Small Business and Informal Sector (321,000 jobs)
With the lockdown imminent, this will greatly hit the ability of SMEs and the informal sector to trade. This includes taxi and bus drivers, car washes, hawkers and street vendors (vegetable, food, clothes, airtime sellers etc), salons and local stores and service providers. A lot of these businesses depend on foot traffic and when people are locked down these businesses immediately cease. The businesses also generally do not have savings so loss of ability to work will mean immediate unemployment for the people in those sectors.
Third Wave - Financial Services, Property and Real Estate (50,000 jobs)
With a possible spike in unemployment on the cards, banks and insurance companies would suffer loan and policy defaults from individuals and business. Banks would exacerbate this because their risk tolerance would heighten and they would not lend to businesses who may need support during the time. Owners of properties would also suffer as rentals go unpaid by both individuals and businesses. This would also put the banks at additional risk as properties might be financed by debt. Whilst retrenchments in these sectors would not be immediate, this would be determined by the length of the pandemic. A three to 12 months pandemic could be extremely detrimental and force retrenchments.
Fourth Wave – Mining (10,000 jobs)
This is Botswana’s most precious industry by value and GDP contribution. A shock to the system in 2008-2009 caused by the financial crisis plunged the Botswana economy into the abyss. We have already seen diamond sales by DTCB postponed due to travel restrictions and rumours of a Debswana shutdown during this period. With the imminent freeze of credit markets internationally, this may still hamper sales as banks stop lending to potential buyers. This could be another 2008-2009 in terms of diamond sales. In 2018 and 2019, sales of rough and polished diamonds totalled P60 billion and P45 billion, with about P4 billion in sales already done in January 2020. Diamond sights have not been possible since then and if we continue for another three months, the country could lose P15 billion of sales during that period.
Mining also accounts for P20 billion of the P65 billion of government’s 2020-2021 revenue budget (34%). If mines were to be shut down for three months, this would mean a loss to government budget of P5 billion.
Another operational risk that exists is if COVID-19 cases are recorded in Jwaneng, Letlhakane, Orapa or Toteng, which could force a shut down of mines. Whilst the government-owned mines would likely survive the crisis without needing to retrench, the private players would struggle. Although mining only employs about 10,000 people, it has the highest paying jobs and the knock on effect of these would create disasters akin to BCL.
Our biggest risks to unemployment come in the first and second waves. This means we have a potential high risk of close to 400,000 people losing their incomes quite quickly. This would shoot unemployment above 60% but assuming not all would lose their jobs, this could be between 40% to 50% unemployment. It is therefore imperative we put in significant assistance to those industries in the first two waves.
On March 31, 2020, President Mokgweetsi Masisi announced that the government was putting together an economic response which was further elaborated on by the respective Ministers of Finance and Trade on April 1, 2020:
l Wage Subsidy - this will be a programme where businesses can apply to government if their businesses have been forced to shut down and ordinarily they would have had to retrench the people. The government has proposed paying 50% of wages of companies affected by Corona for salaries between P1,000 and P2,500. The government estimates this to be equivalent of P1 billion
l Tax Relief - This would be deferring payment of tax by businesses whilst the state of emergency is in force. These would be applicable between March and September 2020 and be payable by March 2021, transferred to later times for payment. This is forecast to cost up to P1 billion.
l Loan guarantee scheme and payment holidays and moratoriums - Government will provide guarantees and assistance to banks to be able to provide payment holidays to businesses and individuals. Individual banks are to announce their own policies on how they can help in this regard but so far we have seen some offer three month repayment holidays to clients. This would be administered by BECI and would amount to P1 billion. This would be applicable to businesses with revenues less than P250 million and the businesses would be able to apply for up to P25 million.
l Other smaller programmes include speeding up paying of VAT refunds, expediting payments of government purchases orders and invoices, deferring of training levy payments and a programme for working capital funding with CEDA worth for P40 million for small businesses.
In addition to these, I hope government will consider the following:
l Small and Informal Sector Assistance - this would be assistance to all small business owners and informal sector. This is the largest section and the most vulnerable as their income will dry up quickly with minimal savings. These businesses could get a monthly ‘stipend’ to offset their loss of income as a result of a lockdown. One alternative would be to get these people to register and be given monthly checks (possibly) equal to P1,500 depending on their current job and income. This would allow them to be able to purchase food and possibly pay rental. This would possibly range anything from P300 million to P800 million a month (assuming support of 200,000 jobs).
l Rental Deferment Programme: For the same affected groups, rentals should be deferred both at home and business. To make this possible, banks would need to defer their expectations of financing payments from landlords. Government would need to convene these stakeholders and possibly give guarantees or assistance to banks to help in facilitating.
l Reduction of bank rate by Bank of Botswana – With the bank rate currently sitting at 4.75 percent and inflation at 2.2 percent with little risk of an upward trajectory, the central bank has some room to cut rates to make loans cheaper for individuals and businesses and encourage lending. Since the wake of this crisis we have seen most central banks across the world cut rates and BoB should follow suit.
Looking at all the efforts needed, assuming a three month disruption, the cost to government could easily eclipse P15 billion (possible P1-2 billion a month of assistance on salaries, subsidies and grants, P5 billion possible loss on mining revenue and P1.4 billion on trade, tourism and hospitality, P2 billion lost on revenues of reduced business in customs and SACU revenues). The announced COVID-19 Relief Fund which government has funded with P2 billion could prove to be extremely insufficient. The current fund is one percent of GDP whereas my proposal is at least 7.5 percent of GDP. The UK and US have announced packages close to 18% and 10% of GDP implying my proposal could also prove insufficient. This analysis has not even factored in losses resulting from shut down of supply chain, investment losses to pensions and portfolios and shutdown to private education sector.
How could we finance this expenditure considering our already stretched financial resources?
Botswana has Africa’s highest credit rating and this is the opportune time to use it to our advantage.
Whilst we have a fiscal policy limit of borrowing of 20% of GDP (implying roughly P40 billion with P32 billion outstanding in loans and bonds) it allows for us to issue bonds close to P8 billion without having to adjust our fiscal policy.
If that is needed though, it should be done without hesitation to save the economy. Botswana’s foreign currency reserves are also sitting at P70 billion. If need be, some of these should be brought from offshore to fund whatever efforts would be needed to stave off the effects of this looming crisis.
In conclusion, this is an unprecedented health and economic crisis that no one was prepared for or has seen. I
t is therefore imperative we treat it with the seriousness it deserves to avoid an economic meltdown and social unrest. We cannot also use old economic rules and policies to get us out of this crisis.
We will need proactive and risk-taking leadership. If we try to avoid raising and spending P15 billion to 20 billion to stave off this crisis, we may just throw the country into a recession where businesses and jobs are decimated.
The informal sector must also be considered and assisted as they will not have any way of making ends meet during lockdowns. They are also our most vulnerable in society and we will be judged on how we treat them.
Aside: Getting money and assistance to small businesses and informal sector is going to prove challenging. Are they all registered?
Even if they were, how would you send money to them? Are they banked? If they are, by the time you send them the money would they need to go to banks and then shops threatening the social distancing efforts? If they are not unbanked, could we be using mobile wallets? Would this mean they then need to go cash the money then physically go to shops? How long would all this take to do?
The above problem presents a big case for transformation of how we work and leverage on technologies.
We should have the data and information for all these businesses and people. If banked we should have their details, if unbanked we should be leveraging off wallets.
These should be able to spend at shops easily without need for cash. We should even be able to use these online with all our data on different shops databases allowing us to do online purchases and delivery seamlessly. The press of one button from government should be able to set off a string of transactions without need for us to leave our homes.
*Mphoeng is currently employed at University of Botswana as a lecturer in the Department of Accounting and Finance at the Business Faculty. He holds an MSc in Finance from Manchester Business.
He also works with the pioneering local data science company called Spectrum Analytics, where he is involved in steering Botswana into the 4th Industrial Revolution. His career started in 2006 at the Bank of Botswana where he held numerous roles in the Financial Markets Department between 2006 and 2009
*Employment data sourced from Statistics Botswana Quarterly Multi-Topic Survey for Q3 2019 released in January 2020 and the Formal Sector Employment Survey December 2018.