Diversification cul de sac

SHARE   |   Monday, 08 February 2016   |   By Kabelo Adamson
TEXTILE INDUSTRY; Women working in a clothe manufacturing firm TEXTILE INDUSTRY; Women working in a clothe manufacturing firm

No matter the numerous attempts at it, economic diversification is not bearing fruit. Experts are calling for a pursuit of a more defined and aggressive agenda to turn things around. Otherwise the country – with little to celebrate under this score on its 50 years of independence – faces a bleak future. KABELO ADAMSON reports

Regardless of many efforts and interventions made over the years to diversify the economy away from minerals, progress seems to be slow, to some degree even regressing. At independence, the agricultural sector was the pillar of the economy, contributing more than 40 percent to the GDP. There was no mining activity while other sectors such as manufacturing, construction and government services contributed just below 10 percent. The financial sector was contributing about 20 percent to the GDP at the time.

But the whole scenario changed at the discovery of diamonds, with mining upstaging all sectors to contribute around 23 percent to the GDP, followed by other sectors such as Trade, Hotels & Restaurants and General Government. The agricultural sector, which used to be the support of the economy, went into a terminal decline. Manufacturing has failed totally to take off. The country today is heavily reliant on one commodity export – diamonds – which constitutes 80 percent of export revenue. Experts have cautioned against such dependency as commodities, diamonds not excluded, are susceptible to shocks as their sale is subject to demand, which influences their pricing.

They relate to lack of progress in the diversification plan to many circumstances, including the very same policies which were meant to push the agenda. Diamonds will at some point get depleted and as such there is need to find other ways which will bring revenue to the national coffers. Researchers believe that progress has been very slow as far as economic diversification is concerned. Many acknowledge that there have been efforts on the government side to broaden the national income but it is also apparent that much of those have hit dead end. A research paper written by a University of Botswana Lecturer Lesego Sekwati titled ‘Economic Diversification: The case of Botswana’, observes that the risk of depending on diamonds has been underlined by the recent global recession, which resulted in unpredicted loss of national income of the country.

The recession, it said, made demand for luxury goods to plummet resulting in reduced export earnings and government revenue. It is against the backdrop of these realities that the government went on a campaign crusade to come up with policies and interventions that will create more revenue sources for the country. So far little appears to have been achieved. Chief of the policies that were crafted in the past is the Financial Assistance Policy (FAP) meant to support enterprise development. The policy, according to Sekwati, consisted of a capital grant which was aimed at assiting the start-up and extension of manufacturing, tourism and agricultural projects. The policy has been terminated and replaced with Citizen Entrepreneurial Development Agency (CEDA).

Recently, other initiatives like Economic Diversification Drive (EDD) have been added to promote diversification. The EDD, which was formed by the government with the aim of diversifying the economy by developing sectors other than the primary sectors, is divided into two component; short-term and the medium to long-term strategies. The short-term seeks to leverage the government’s purchasing power to enhance local production and consumption through local procurement. The long-term strategy aims to develop a competitive private sector to drive growth and diversification. When giving the State of the Nation Address (SONA) last year, President Ian Khama said since its inception in 2010, the EDD has resulted in the purchase of a total of P17.98 billion worth of goods and services, including P1.1 billion for the first two quarters of 2015/16 financial year. He said the number of EDD registered companies stood at 1,425 contributing to the employment of 40,333 Batswana.

But what remains a concern is the growth of the private sector as it still heavily relies on government expenditure for survival. Earlier this week when presenting the 2016 budget speech, Minister of Finance and Development Planning Kenneth Matambo said in a bid to accelerate private sector growth in the country, Special Economic Zones (SEZ) programme was announced in August 2015. Matambo said the implementation of the SEZ programme will be in three phases. The first will include three sites being the mixed-use near Sir Seretse Khama international Airport, comprising international diamond activities, auto components manufacturing, agro-processing, pharmaceuticals, and general manufacturing.The second site under the first phase is Gaborone Fairgrounds’ financial services and the third being Pandamatenga Integrated farming, agro business and food processing.

Matambo further said Phase II of the SEZs is planned for Francistown, Selebi Phikwe, and Lobatse areas, while Phase III will focus on the Tuli Block and Palapye areas.  An economic review in 2015 written by University of Botswana economists, Dr Boitumelo Moffat and Mavis Moalosi, highlights that economic diversification cannot do well without Foreign Direct Investment (FDI). Though they point out that FDI may be the catalyst to diversification, the country has not been able to achieve a desirable FDI to achieve the results. Moffat and Moalosi say contrary to business climate rankings that Botswana enjoys, it has not attracted as much FDI as rakings would suggest. The economists believe the country lags behind its neighbours in this regard with even less stable countries such as Democratic Republic of Congo (DRC) supposedly doing well in attracting FDI.

Botswana Investment and Trade Centre (BITC) board chairman, Victor Senye, says in the organisation’s latest annual report that Botswana has fared well in terms of attracting investment into areas like mining and mineral exploration with sectors such as tourism and beef also lending them to investment development. The BITC report states that regarding the FDI, in 2014, 16 companies involved in various sectors, mining included were attracted into the country. Other companies are in sectors of agriculture, manufacturing, tourism and financial services. The capital investment realised by BITC registered companies was P691.45 million with a corresponding creation of 656 jobs.

In a bid to promote Botswana as an attractive investment and trade location, BITC says in 2014 it embarked on seven outward missions with the intention of generating interest in investment opportunities in Botswana and progress engagement with companies previously targeted for FDI.
The projected capital investment from these companies is P462.9 million and would create 2098 jobs once fully operational. Sekwati argues that there is collaboration among government agencies and research insitutions with budget allocations showing little emphasis on the research industry to support its growth.

He says it has been found that countries which are successful in diversifying their economies have done so by heavily investing resources to research and development. FDI is seen as a perfect model for diversification as it allows for transfer of technology from abroad to the host country. Moffat and Moalosi suggest that Botswana’s low FDI may be due to the high costs of doing business and also the country’s success with the trade surplus and Balance of Payment created by diamond export. The two economists submit that a high surplus on saving over investment may suggest that Botswana does not, in financial terms, need inflow of foreign capital. But the reality, they say, is that even with such trade surplus on paper, it does not mean that the country does not need FDI as it can be the source of growth and largely contribute to the country’s push on diversification from mineral wealth.

Sekwati says for a long time there was no comprehensive policy to guide strategies and programmes to achieve diversification. There are many reasons that explain why implementing policies aimed at diversifying the economy seem to be failing. One of them, Sekwati says, is the increase in the number of institutions established to drive the diversification agenda, making implementation, monitoring and accountability almost impossible. He states that policies, strategies and programmes also lacked clearly defined timeframes within which policy actions were to be implemented. Economic diversification even when policies have been put in place to guide it seems to be making small progress and it appears the government is over-consumed with the agenda to an extent of duplicating insitutions and policies with the view of achieving a spread wealth.

One of those is the Special Economic Zones Authority (SEZA) which is under the interim of BITC. It is reported that the Special Economic Zones (SEZ) has identified eight potential viable sites across the country. The Associate Professor and Acting Dean of Faculty of Social Sciences at University of Botswana, Professor Imogen Mogotsi said diversification efforts are being made though at a slower pace, saying maybe the Economic Stimulus Package (ESP) will assist to push the agenda. She said other sectors are slowly increasing their contribution in both the GDP and export revenue. Mogotsi said the financial sector together with the tourism industry are coming up very well and are expected to contribute significantly to the GDP.


With regard to manufacturing, Mogotsi said there are challenges faced by the industry that renders it hopeless and failing to show any signs of improvement. Mogotsi says the manufacturing industry is faced with stiff competition particularly South African firms compounded by cross border trading which leaves the little produced locally without the market due to competitive products offered by South African companies. The other challenge, she says, is the transport costs arising from the geographical location of the country together with a very small market occasioned by small population.