Economists’ verdict on ESP

SHARE   |   Monday, 19 October 2015   |   By Kabelo Adamson
Jefferies, Tshipinare, Juma Jefferies, Tshipinare, Juma

The Economic Stimulus Package (ESP) announced by President Ian Khama recently can improve the economic landscape if implemented well, economists say. The package targeting tourism development, agricultural development, construction, road development and the manufacturing sectors will see the country drawing from its Foreign Exchange Reserves (FOREX) to stimulate the economy.
Even though Khama did not say how much will be drawn from the reserves, questions have been raised on the decision to pull from the FOREX reserves which used to cushion the economy in the event there is a deficit. An economist at Barclays Bank Botswana, Katso Tshipinare, said the initiative is a good move that can totally change the outlook of the economy. The problem, he said, is that in addition to the timeframe, figures were also not provided hence making it difficult to say with any degree of confidence on the intended stimulus.
Even without clear information regarding the initiative, Tshipinare said what the president announced is exactly what the country has been missing. In September, the government through the Ministry of Finance and Development Planning (MFDP) cut the economic outlook to 2.6 percent with the economy reported to be facing a budget deficit of P4.03 billion.
Tshipinare said there is nothing wrong with drawing from the FOREX reserves. The package, which has been dismissed by opposition politicians as a political stunt by Khama and his political party, could serve the local economy well in the economist’s view. This is because the country’s main source of revenue, particularly diamonds whose demand since late 2014, has slowed down, overstretching into the current year.
“It is a short-term move, which is aimed at stimulating the economy and once the economy is stable, a surplus can be created and the withdrawn amount can be put back into the reserves,” said Tshipinare. The FOREX reserves, which the government intends to use some of its portion stands at P88 billion (8.5 billion in USD terms) and half of it, is held in Sovereign Wealth Fund (SWF), meaning that only half of that is eligible for expenditure.
The SWF is the pool of money derived from the country’s reserves and set aside for investment purposes that will benefit both the economy and the citizens. Over the last few years, the country has seen its FOREX reserves increasing; however Tshipinare said it should be noted whether they increased in real terms or was because of the Pula depreciating against the US Dollar.
Keith Jefferies, Managing Director at econsult, previously said in an interview that FOREX reserves are essential for macroeconomic stability in a mineral economy, and depleting them would undermine that stability. Jefferies then explained that it should be assumed that all the money belongs to the government. He said that only a portion represented by government deposits at Bank of Botswana (BoB) that are in principle available to government for spending purposes.
Garry Juma, Head of Research at a local brokerage firm, Motswedi Securities told Patriot Business on Thursday that at the moment it is difficult to make a position on the now famous stimulus package since information on how much exactly will be drawn from the reserves has not been provided.
“Before we can reach a conclusion on whether the project is good or bad for the economy, we need to be provided with figures first on how much will be spend on those projects,” Juma said in an interview. He, however, said areas that have been identified make sense particularly the construction sector which he said will create employment. Juma said other chosen sectors such as manufacturing which has been struggling due to funding can help in import substitution while the agricultural sector will besides improving food security, will also control inflation if the country can plough cereals which it has been importing from South Africa.
The tourism sector, he said, will help diversify the economy from mineral-based, mainly diamonds whose prices are exposed to external shocks. A Research Manager at FNB Botswana, Moatlhodi Sebabole, said it will only make sense to tap into the reserves if there is derived value in the form of tangible return on investment such as sustainable employment creation, sustainable development of targeted industries and ability to create more robust national output which will increase the country’s exports and decrease import bill.
Sebabole said it is normal to tap into reserves in times of economic hardships and using the reserves to fund projects is only justifiable if it does make the country worse-off. “There are alternatives that the government can use such as debt participation by either public private partnership or even its bond programme which is underutilised,” Sebabole said. He said given these options that the government can use to fund projects, usage of reserves to fund projects, as well as the proportion of the total P88 Billion of reserves to remit and use for projects has to be subject to scrutiny and assessment so that there is optimal benefit. “It also has to be done to the extent that it will not hurt the cushion or safety net that reserves will provide in case of recession or persistent budget deficits,” he said.
Sebabole said is a common practice in most economies to tap into their reserves during slowing economic periods and Botswana employing the same tactic is not an alien thought. “However, the success or failure of the stimulus package in boosting economic performance will depend on a robust assessment of the cost-benefit,” Sebabole said. Just like others, Sebabole said questions such as what proportion of reserves will be used needs to be addressed and going forward, what is the intent on usage of reserves and what import cover or reserve levels are considered optimal for Botswana’s economy.
He explained that the usage of reserves can only be successful if there is extensive analysis of real and opportunity costs versus sustainable benefits so that it is not done on a thumb-suck basis.

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