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Over reliance on diamonds backfires

SHARE   |   Tuesday, 24 March 2020   |   By Ricardo Kanono
Over reliance on diamonds backfires

The Botswana government will have a hard time coming with a solid economic rescue package because of the way our economy is set up.

Ours is a government dominated economy, anchored by diamond exports which allow for the country’s economic engine to keep humming. The diamond market has been in recession since 2017, hence the massive budget deficits we have been running for three years.

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For over 50 years we have failed to diversify and build a strong citizen led economy. Though often you’d hear the gov officials saying mining now accounts for less than 30 % of GDP, the fact is, without diamonds sales the country will grind to a halt: the gov keeps the economic engine humming as the biggest spender and employer. Even your top profitable banks are dependent on gov through it’s workforce.

Now, how do you come up with an economic rescue package in this instance? Remember the gov has a headache of its own: falling revenues from weak diamond sales. At the moment, the gov has a few options when it comes to augmenting it’s deficits: the reserve fund and borrowing. In this case, tapping in the reserve funds makes sense, but we return to the initial problem: how do you curate that economic package to be effective in an environment of a weak private sector?

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In any case, who do you target big corporations or SMMes? Experiences from other countries is to target huge corporations to keep them going but this only works in countries with strong private sector: the kind that will use the availed financial power to plough back those monies through investments and expansions thus creating more jobs and creating demand in the country.

But here the multiplier effect will be little. Further complicating matters, some of the huge private sector companies continue to take in big profits, yet they always complain of the challenging environment, of which they appear constrained to intervene through making strategic investment decisions that will bolster job creation and demand. The constraint emanates from major foreign shareholders who every year demand healthy dividends, and they are know to call the shots, dictating to local management what to do and not to do. So it becomes hard for local subsidiaries to take some of those profits and invest it back in the economy through tapping into other sectors of their non-core businesses.

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So what’s the next option? Targeting small, medium and macro enterprises (SMMEs) will also be problematic. Some do not keep up to date financial records that will assist government to properly intervene, and as have been the case for long, most of them are also dependent on gov tenders, which means they will have to be spoon fed again. In this case does the gov bail out a company which for years has been a beneficiary of its lucrative tenders but failed to diversify its income streams through increased investments in the country/economy?

An economic package is intended to stabilize companies that have been exposed to vulnerabilities and also to stimulate consumer demand. But like i said, it tends to work only on countries with strong private sector that have solid businesses, not tenderpreneurs.

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For now, the best that the government can do at the moment is to subsidize some costs, especially rental costs for businesses that have been affected by the government’s directives to have the operations closed or scaled (bars, restaurants etc).

In addition, businesses will also benefit from flexible loan repayments(deferring or extending the loans). However this also will be a tough game me for the gov: it will have to convince the foreign owned banks here to agree to that, and the masters in SA might refuse because:

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1. It will eat into their profits, hence dividends

2. The banks, together with the central bank, might warn of excessive credit risk which might make matters worse later when many default on payments.

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3. In this case, should then gov be a guarantor to the loan modifications? But this creates a moral hazard where those businesses will fail to pay the loans when the time comes because gov will pick up the bill.

These are some of the important things to consider when putting up that economic package or else, it’s going to an expensive but ineffective approach. In fact, it might be another exercise riddled with corruption, where the money will be used to line up some pockets in the name of business rescue.

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Thankfully, the economic seismic caused by the coronavirus should make us all pause and take a deep look at our economy structure: it simply is not sustainable. It’s a government dominated economy through dependency on diamonds.

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Bonnie Modiakgotla



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