Khan’s alarm bells

SHARE   |   Monday, 10 April 2017   |   By Kabelo Adamson
Standard Chartered Chief Economist for Africa, Razia Khan Standard Chartered Chief Economist for Africa, Razia Khan

Standard Chartered Chief Economist for Africa, Razia Khan warns of the dark clouds hovering over Botswana and calls for accelerated reforms that reduce dependency on government to allow the private sector to dominate. She warns that Botswana is underperforming when compared to her peers. KABELO ADAMSON reports.

The local economy is facing a major risk due to the underperformance of the South African economy on a multi-year basis; this is according to Standard Chartered Chief Economist for Africa, Razia Khan. “2017 was supposed to have been a year of recovery; Botswana had been through a lot; the Southern Africa drought had weighted on prospects across the region but it started raining again, the dams are full, notwithstanding the army worm, better year for agriculture is anticipated,” said Khan. Khan said there is no doubt that if the neighbouring economy underperforms it would definitely impact negatively on trade in Southern Africa which will in turn affect SACU receipts, directly impacting on the Botswana economy. The South African economy has been downgraded by two leading agencies – Standard &Poor (S&P) and Fitch – to “junk” status following a cabinet reshuffle by President Jacob Zuma which saw Finance minister and his deputy ousted from cabinet. “Diamond revenue is coming back and because that depends much more on global demand, this is going to be the good news. There are expectations that would be sustained a while longer,” said the London-based economist who was in the country to address a Global Market Focus Group. Khan said the expectation is that Botswana will be seeing a cyclical recovery in 2017 which she said seems to be a correct assessment, with very little taking away that this will be better year than the previous one.

Botswana’s model
The Stan Chart economist believes government spending will obviously play a role in the expected growth, mostly from the Economic Stimulus Plan (ESP) and additional capital expenditure will also help to boost activity over time. “Still there are more important issues that need to be grappled with in Botswana and these are the sustainability of Botswana’s model. Botswana didn’t load up on the externally traded debt, the Euro bond issuance which other countries did,” she said, adding that Botswana is probably going be seeing fewer issues to undergo that rapid fiscal consolidation because global financial conditions are tightening. All these, Khan made it clear did not mean that Botswana does not have pressures of its own and most notably she said Botswana seems to be caught up in a classic middle income trap. “We really saw the good years of really heady growth that drove 80 percent plus tight growth rates in the economy. That is a significant number. If an economy can sustain seven percent tight growth, it’s doubling in size every 10 years,” she said. This, she said, was achieved through various ways such as management of its diamond revenue, its fiscal conservatism and its high rate of investments together with public investments.

Investment models
But all that is now in the past and Khan insists that of recent economists are beginning to call into question the efficiency of public investment with questions being hinged on whether the current investment model is driving the same extent of growth benefit as it once did. “It’s almost as though you when become a larger economy, there are diminishing returns to more and more public investments. Economists are also calling into question the efficiency of public investments,” she said. In the past, Khan said, the economy tended to see a lot of borrowing at consumer level, a great consumer culture which she said helped to drive growth during those years, but now external conditions are changing. “So the real question as an economist looking at Botswana is, there has been this model in Botswana, a very careful management of fiscal revenue of a diamond boom that allowed for that to happen, and because of that it allowed dis-saving at the household level. We have a lot of reasons to question the sustainability of that model,” she said. But what will happen if government is no longer able to drive growth and to answer this question, Khan said if you look into it from a rating perspective, all of the rating agencies have said there is an issue with the local economy.

Vulnerable revenue sources
All of them tend to agree on one thing, that the revenue sources of Botswana are vulnerable; the diamond mining revenue, the mainstay of the local economy, is very vulnerable to the economic cycle and when the commodity prices are doing well, revenues become stronger and when prices go down they take with them the revenue. The same applies to SACU revenue, another key revenue earner for Botswana along with mining revenue. “It doesn’t help when you look at the volatility and the low demonstration of growth in the neighbouring country that is going be the key driver of the SACU revenue. You can’t look at current events in South Africa and be at all positive that this is going to be a super turbo-charged source of revenue,” the Stan Chart Chief Economist said.

Years ahead not rosy
Khan has warned that the years ahead are not going to be easy for the local economy and says the country should now put in place accelerated reforms with the model of the economy moving away from dependency on government and allowing the private sector to take over. There are several questions that need to be asked according to Khan.  This includes why the assessment of rating agencies is that despite Botswana’s considerable strength and its history, it is not able to provide the reinsurance that the adjustment to a new economic model addressing new challenges can happen very easily. “When you look at the return on government expenditure, however you are measuring that, looking at the social returns, employment being generated, looking at whether that can be generated sustainably, Botswana is under-performing relative to even other middle-income countries,” she said. Khan said even when the rest of the continent was caught up in the “Africa rising” hype growth rates in Botswana did not compare favourably with growth rates that were seen in the part of region and going forward she said answers are needed on questions such as what is it that is going to be engine of growth for Botswana. But a simple response to that, Khan said, would be why the private sector can’t take over from the government.