Time for Botswana to confront hard economic truths

Jwaneng mine

The mineral bonanza has transformed one of the world’s poorest and least-developed countries into an upper-middle-income economy that has seen average growth of 8.2% since independence in 1966 to 2015 – a performance only outpaced by China’s 9.3%.

Poverty levels have shrunk from 50% to 19%, with per capita incomes increasing a whopping 13 times from $483 in 1966 to $7,080 in 2015 (in constant 2010 US dollar terms).

There has been a significant social dividend too. The provision of healthcare and education has been expanded massively – today, 9% of GDP is spent on education and primary school is free.

Life expectancy has surged from 52 years to 64 – despite HIV/AIDS, which has infected almost a quarter of the population. Infant mortality has been reduced by two-thirds.

Despite these impressive achievements, Botswana’s income inequality is one of the world’s highest, while unemployment remains stubbornly close to 18%. Most of the jobs created are in the government, which in 2014 employed 40% of the country’s workforce – more than any other employer.

Although in 2015 mining consisted of only 20% of the country’s GDP – compared with more than half in 1988-89 – it still looms large over the economy. Despite the growth of tourism, the shift is largely due to the rise of domestic services – mining still accounts for the bulk of foreign inflows, and for 40% of total government revenue.

Jwaneng mine
Jwaneng, the world’s richest diamond mine by value. Source: Debswana

“‘Eating diamonds’ will not provide the basis for Botswana to move from upper-middle-income status to high-income status; indeed, it may not even provide the basis for maintaining current income levels,” says Keith Jefferis, the country’s leading economist, and the former deputy governor of the Bank of Botswana.

“The truth is that Botswana did not, in general, reach upper-middle-income status by being productive, competitive or efficient – although there are some pockets of economic activity that demonstrate all of those things. We reached it by consuming, and investing wisely, the proceeds of the natural resources under our soil.”

In order to shrink income inequality and turbo-charge employment creation, Botswana needs to make structural changes to its economy that would result in a more muscular private sector generating alternative sources of foreign earnings – thereby lessening dependence on diamonds and reducing the public sector’s dominance. Without these alternative foreign inflows, the country will be unable to sustainably grow its economy and unable to reduce unemployment and poverty levels.

Jefferis predicts that without a significant boost in exports from the private sector, the country could experience a serious balance of payments crisis in the latter half of the next decade.

Various strategic plans developed by Botswana’s government have attempted to foster economic diversification – particularly through encouraging local procurement. But these policies have, by and large, failed to achieve meaningful results.

Jefferis says the state-owned Botswana Development Corporation, which is supposed to drive diversification by providing funding and loans to businesses, has often ended up competing with the private sector rather than complementing it – particularly in property (it has become one of the country’s largest developers).

It has also made some questionable investment decisions – for example, reportedly spending nearly half-a-billion pula ($47m) on a glass manufacturing plant that was liquidated  before its completion.

The corporation’s recent restructuring will hopefully lead to a tighter focus and wiser investment choices.

Downstream activities

Another part of the government’s economic strategy is to gain greater value from diamonds through downstream activities. Pressure was applied on mining titan De Beers, which mines the country’s gems through Debswana, a joint venture with the government, to relocate its sorting and international sales operations from London to Gaborone.

Since the move, the country’s annual domestic rough diamond trade rose from $1bn to $5bn. Security, brokerage, training and grading firms have set up shop —and since 2014, 20 cutting and polishing companies have created 3,700 jobs.

The downside is that despite the increased economic activity, it is still dependent on diamonds – and at the mercy of their fluctuating demand and value.

According to the IMF, 1,000 jobs were lost in 2015 when several of the new cutting and polishing companies established in Gaborone went bust. This was due to a decline in diamond prices and a shortage of finance following the demise of the world’s second-biggest diamond bank, Antwerp Diamond Bank, in late 2014.

The Botswana economy contracted 0.3% in 2015 in the face of weak demand for diamonds globally, but there were improvements in 2016 in demand and prices.

In December, De Beers reported that the value of rough diamond sales for its 10th sales cycle of the year was $418m (provisionally) — significantly better than the $248m earned during the corresponding cycle of the previous year.

The economy has returned to growth and the World Bank forecast growth of 3.5% for 2016 and 4.1% for 2017.

Step back and the broader picture remains disconcerting. The respected Rapaport Diamond index reported in 2010 that in the previous 30 years, the price of high-quality stones has fallen by 80% in real terms, when adjusted for inflation.

There is little comfort to be found elsewhere in Botswana’s mining sector. Although coal prices have doubled in less than a year – and a possible $600m railway to a proposed port south of Maputo, Mozambique could offer access to international markets for the country’s 212 billion tonnes of reserves – Botswana’s other key commodities, copper and nickel, have been taking a battering.

In October, days after the country celebrated its 50th anniversary of independence, the government decided it could not afford the 8-billion pula required to continue bailing out the loss-making BCL – the country’s largest copper and nickel miner. KPMG, the provisional liquidator, said last week it would be recommending to the courts that the firm be placed under final liquidation.

BCL’s 5,000 employees face an uncertain future — as does Selebi-Phikwe, the town that is home to the bulk of its mining operations and little else. It is unlikely that the Selebi-Phikwe economic diversification unit will be able to create the 10,000 jobs it has promised over the next four years in the three sectors it has identified as having potential: tourism, horticulture and industry.

Against this sombre economic backdrop, Botswana does have a few pinpricks of hope. Tokafala, a collaboration between the government, Debswana, De Beers and its parent company Anglo American, is nurturing more than 60 entrepreneurs to establish clothing, electrical engineering and cleaning companies.

The Botswana Innovation Hub, a 57ha science and technology park, is under construction close to Gaborone’s airport. It hopes its high-speed internet, computer labs, meeting rooms and other facilities will encourage companies in ICT, biotechnology, green energy and other sectors to set up base there.

The government’s National Development Plan 11 (NDP11) launches later in 2017. Encouragingly, it places emphasis on economic diversification.

“While the plan makes a lot of high-level commitments about improving the business climate and encouraging private sector and export-led growth, there is insufficient detail as to what exactly will be done, and when,” Jefferis says, complaining that previous commitments have not been implemented — or only partially.

The first phase of the NDP11 supports a surge in infrastructure spending. In the past, this has often been spent inefficiently and projects have been poorly managed, Jefferis says.

“One of the constraints is that the capacity to do proper evaluation of competing projects or public spending proposals is weak, hence there is no rational basis for allocating public funds between competing claims and the process becomes politicised rather than based on objective prioritisation,” he says.

A radical overhaul

While Botswana outranks most of its sub-Saharan peers on the ease of doing business, setting up shop needs to be made easier: in the World Bank’s 2017 Doing Business Report, it ranks 153 out of 190 economies in the starting a business category – well behind SA (131), Kenya (116), Zambia (105) and Mauritius (48).

There needs to be a leaner, smarter regulatory regime, more attractive business tax rates, and a visa system that makes it easier for top international talent to work and invest in Botswana.

The education budget needs to be spent more effectively, with a radical overhaul of the system to tackle the country’s skills shortage, ensuring that graduates form part of a globally competitive and relevant workforce. While the past decade has seen some consolidation, there is still much work to be done in reducing the number of parastatals and state agencies – through privatisation and mergers – particularly those with overlapping mandates.

Having eschewed the mass-market in favour of a low density, high-value model, it is unlikely that tourism will be able to expand much beyond its current capacity without seriously changing tack. As a key foreign exchange earner, the sector’s strategy needs to be revisited, with thought given to expanding the range of travel experiences to attract a greater number of budget-conscious safari seekers – in a way that does not undermine the fragile ecosystems.

Botswana needs a fresh approach: one that is “outward-looking, embracing global integration, vigorously promoting and supporting companies that export goods and services, attracting inward foreign investment, welcoming foreign companies and individuals who wish to invest in Botswana, work in Botswana, and trade with Botswana,” Jefferis says.

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