THE ART OF OIL

Jubilant crowds in Tripoli were met by speculation over oil prices. When the rebels swept into the heart of Libyan city, oil prices began to tumble over  speculation and expectation that once the rebels have taken over, oil supply from Libya will increase substantially from its low since the revolution.

On Monday as battle raged in Tripoli, Brent crude dropped $3.47 to $105.15 a barrel, a fall of 3 percent, and is now trading at $107.35, while US crude fell by a dollar before recovering by the same amount to $87.37 a barrel. Lybia could be pumping as much as 1m barrels a day within months, close to the pre-war figure of 1.6m, nearly 2 percent of global supply. The prospects of oil prices going down in the short term is not on assumption that Libyan production will go back to pre-revolution immediately, but rather that the political situation would stabilise, reducing risk associated with production and exporting oil.

Post revolution it appears that it will take a while for Libya to be back on its feet- both politically and economically. However,  one can only hope that the oil wells have not been sabotaged or tempered with. While we could all, oil users, get excited over the prospects of oil prices going down due to the potential end of the revolution, we must remember that there are a lot of factors that influence oil prices; Financial markets, demand by major markets (OECD) and global inventories just to mention a few. Just to illustrate, Global oil inventories balance supply and demand; If market makers notice an inventory build, spot oil prices will likely drop in response to balance demand with supply. Conversely, if oil futures rise in relation to the current spot price for oil, the impetus to store oil will increase.

During the month of August, international oil prices dropped; WTI oil declined by 10.88 percent; Brent oil fell by only 4.86 percent. So does this mean the rise in fuel prices in Botswana was unexpected, a hoax, a rip-off, like I have heard many people say? Not at all, in actual fact, we should have seen a higher increase earlier this year when we only got a 10 thebe increase/litter. The thing is our prices are decided about a month before they are announced and at the time when a decision was made, oil prices were going up and we needed to catch up. I know I will most probably get ugly stares for having made that statement but we have some of the lowest fuel prices in the region, look at our neighbours; South Africa is trading at around R10 per litre and we are still P7.70/litter (around$1.15). In Botswana retail fuel prices are regulated by the government, The National Petroleum Fund cushions and stabilises national prices when international prices are erratic. This means that sometimes, when international oil prices are too high, the government through the NPF will pay a share of the fuel prices for the consumers and sometimes when oil prices go down, the excess between real oil prices and what we pay is a contribution to the NPF.  If oil prices continue to go down, we will as Batswana enjoy those benefits as well.

BUCANEER ECONOMY- The Story of Somalia

Most of us know Somalia because of the pictures of starving women and kids the most memorable to me being that of a vulture overlooking a child nearing death. Also Somalia is known for the pirates who boost its coast economy. Other than that, most of us are clueless when it comes to Somalia and I must admit that it was not easy writing this peace. I hope this peace will shed some light on the Somali economy and maybe its people.

Historically, the Somalis raise cattle, sheep, and goats, but the camel plays the central role as an indicator of wealth and success. Camels provide meat, milk, and transportation for Somali pastoralists, and serve as their principal medium of exchange. Camels are provided as compensation for homicides and are a standard component of the dowry package.

At independence the Somali economy was at a near subsistence level, and the new state lacked the administrative capacity to collect taxes from subsistence herders and farmers. The state could rely on the customs taxes from international trade, which were easier to collect, but tariffs failed to meet the needs of a government with ambitious development goals. Somalia therefore relied on international subsidies particularly Italy and Britain, which funded about 31 percent of the new nation's current budget in the first three years of independence.

The country could not overcome its dependence on foreign assistance, even to meet its current budget. Moreover, imports of foreign grains increased rapidly, indicating that the agricultural sector was not meeting the needs of the growing urban population. There was however a boom in livestock export from Hargeysa, cows, goats, and camels were becoming concentrated in northern Somalia, much to the detriment of rangelands, which as we know now are completely eroded.

In the 1970s, Siad Barre, the then president, introduced Scientific Socialism which quickly brought a substantial proportion of the modern economy under state control. The government nationalized banks, insurance companies, petroleum distribution firms, and the sugar-refining plant and created national agencies for construction materials and foodstuffs. Two economic trends from this period were noteworthy: increasing debt and the collapse of the small industrial sector.

The Somali economy was hurt as much by these factors and by the economic cost of creating a large modern army as it was by the concurrent drought. During the 1970s, foreign debt increased faster than export earnings. Many loans, especially from the Soviet Union, were, in effect, written off. thanks to the accumulated debt burden, by the 1980s the economy could not attract foreign capital, and virtually all international funds made available to Somalia in rescheduling agreements came with the provision that international civil servants would monitor all expenditures. As a result of its international debt, therefore, Somalia lost control over its macroeconomic structure.  Like most countries devastated by debt in the late 1970s, Somalia could rely only on the nostrums of the IMF and its program of structural adjustment. The government had to scale down on its projects and cut down on expenditure. They also suffered much devaluation of the shilling and reductions in government personnel.

As a result of the civil war in many areas, the economy deteriorated rapidly. Previously, livestock exports from northern Somalia represented nearly 80 percent of foreign currency earned, but these exports came to a virtual halt when the Saudi Arabian government banned Somali beef. Shortages of most commodities, including food, fuel, medicines, and water, occurred virtually countrywide.

Since the collapse of Siad Barre’s regime in 1991, Somalia has been functioning without a state, gradually descending to anarchy and chaos. This led a large amount of non-state actors seeking power to gain control over Somalia, creating a war economy where war-lords collected taxes to fund the war. However, there has been a gradual shift from the war economy of the 1990’s to a quasi-legitimate trade (import/export, telecommunication, transports) of the beginning of the 2000’s. Service sectors in Somalia are now more developed than in other countries, though Somalia remains one of the poorest countries in Africa. According to the World Bank, the development of such private sector should play a major role in the conflict de-escalation, and should encourage clans to cooperate with each other.  The agriculture sector is struggling and as we know, Somalia is hit by what the UN has termed the worst ‘humanitarian crises’.

The Somalia story goes deep beyond the famine, I’d like to encourage all to take some time and read some more on Somalia . Remember to lend a helping hand to those in need

The Colossus is Crumbling

As the biggest economy in the world is being rocked by winds of shock and debt chaos, we all wonder where our fate lies. Questions have been springing from all directions on what our prospects are and if the future looks bleak. While there is a lot of controversy in American politics, I would like to, as a person, believe that we as a race are able to set aside our ideologies and face reality, deal with issues and handle them the way they deserve. There is very little cooperation between the American legislators and that kind of dichotomy is hurting the US Dollar; this is no time for Russian roulette; the US is gearing up to shoot itself in the foot and the whole world in the face. Last week I wrote briefly on the repercussions of US default and this week I’d like to reiterate and add some more points on this topic.

If the US defaults on its debt, the global banking and financial market liquidity could dry up. Lending between institutions and people or businesses could possibly cease altogether or become cost prohibitive. Further, the US government will effectively start to run out of money to pay civil servants, government contractors, pensioners or holders of government debt. The shock would quickly spread throughout the world and would very likely lead to a serious global recession, possibly worse than the one seen a few years ago. The risk appetite of investors has been dented and rating agencies have warned of potential downgrade over the past weeks. Some of the fear arising now on the US defaulting on its debt could hoist interest rates, weaken the dollar and erode the dollar's reserve currency status.

As the dollar gets weaker, US exports get cheaper and our exports to the US get expensive. With a weak dollar, the oil exporters adjust their dollar prices upward to compensate, thereby forcing oil importers (like us) to bear higher energy costs and suffer the resultant rise in the prices of energy-dependent products and services. As the prices of oil rise, most commodity prices will raise leading to reduction of real incomes. When real incomes drop, consumers start to reduce consumption of luxury goods such as diamonds and the fact that our prices in the US then become expensive does not help our case. As Botswana from this we face another deficit in the balance of payments like that during the 2008 crisis.

The US dollar has always had the privilege of being the sole reserve currency in the world which meant that USA has been the only country with no foreign exchange risk when buying back its debt as it never faces the problem of an increase in foreign debt as the value of its currency declines. Most countries have their reserves in US Dollars and are worried that the continued weakening of the dollar may cause losses in their foreign reserves which cannot be offset by other overseas investment earnings. The big developing countries, those referred to as the BRICS countries (Brazil, Russia, India, China and South Africa), are making some effort to protect them from what they see as steady erosion in the value of the American currency; in a summit of the BRICS in Hainan recently, they agreed to make trade settlements with each other in their own currencies and not in US dollars. They also announced, “We support the reform and improvement of the international monetary system, with a broad-based international reserve currency system providing stability and certainty.”

The support to the international monetary system reform should become widespread after this turmoil; countries should follow on the path of the BRICS, encourage trade in other currency and most importantly diversify markets; reliance on one major economy creates instability. It will take a long time for the US Dollar to lose its sole reserve currency and the repercussions of the Dollar not being the centre of the world could introduce radical change to the lifestyles for both those in the US and other countries particularly those with currencies pegged to the Dollar, large foreign reserves and those receiving aid from the US while European and African countries who have loans in US Dollars will enjoy lower debt.

The euro's real trouble (The ECONOMIST)

ANYONE struggling to understand why Europe has proved incapable of putting an end to the euro’s crisis might find answers in a bad-tempered dinner at a summit on October 28th 2010. The argument was over a demand by the leaders of Germany and France, made days earlier at Deauville, for a treaty change to create a permanent system to rescue countries unable to pay their debts. Everyone groaned. It had taken years of tribulation to agree on the European Union’s Lisbon treaty, which had only recently come into effect. But they bowed to Angela Merkel, the German chancellor, who wanted to prevent any challenge to the new system by Germany’s constitutional court.

However, Jean-Claude Trichet, president of the European Central Bank (ECB), worried about something else: her demand that future bail-outs must include “adequate participation of private creditors”, meaning losses for bondholders. That could only alarm the markets, he thought, still jittery after the Greek crisis in the spring. “You don’t realise the gravity of the situation…” began Mr Trichet. But he was cut off by the French president, Nicolas Sarkozy, who interjected, one Frenchman to another: “Perhaps you speak to bankers. We, we are answerable to our citizens.” Mrs Merkel chimed in: taxpayers could not be asked to foot the whole bill, not when they had just paid to save the banks.

The politicians won the day. But Mr Trichet’s worries have also been vindicated, as contagion has spread and is now engulfing Italy (see article). The dinner-table row illustrates how, throughout the sovereign-debt crisis, the requirements of financial crisis-management have collided with political, legal and emotional priorities. Indeed, the euro’s woes are as much about politics as about finance. European officials such as Mr Trichet parrot that the euro zone’s overall debt and deficit are sounder than America’s. Yet Europe lacks the big federal budgets and financial institutions to redistribute income and absorb economic shocks. And it has no single polity to mediate tensions within and between member countries. It is hard enough to get Californians to save Wall Street bankers; no wonder Germans bristle when they are asked to rescue Greek bureaucrats.

READ THE REST AT:

http://www.economist.com/node/18959279

GLOBAL MUMBO JUMBO

While I prefer and rather enjoy writing on local happenings, I can’t help but join the rest of the world in gazing at the biggest markets, The United States of America and European Union, as they struggle with debt. Euro zone countries are battling with collapsing economies and debt ridden states while the US is in denial of a $14 trillion debt of which is in need of debt ceiling revision, otherwise, the US economy will face severe shocks pulling the global financial markets with it.

The EU is experiencing a situation of uncontrollable debt crisis; we have seen countries like Greece, Portugal, Ireland, Spain, all in huge debt and now Italy with one of the world's highest levels of public debt - at around 120% of gross domestic product, second only to Greece in the euro zone.

The US’s debt ceiling is ever changing, ranging from 60% as a percentage of GDP during Bill Clinton’s second term to 80% during George Bush’s term and now reaching a 100% of GDP. The US has a debt ceiling law which allows Congress to increase or lower the debt limit. The US is in this situation because the government spends more (than it receives) on bailouts, medicare, military supply, and social welfare and receives fewer taxes than can be attained. ‘The public debt is the people’s money, and today, the people are coming up short. Shrinking the public debt means shrinking more than just the services the government is expected to provide. It means shrinking the money supply itself, along with the ability to provide the jobs, wages and purchasing power necessary for a thriving economy.’ Ellen Brown, on the current situation of the US.
As per Wednesday 13/07/11, there was a deadlock on how the US would reduce its debt, there are basically 2 positions; 1. Punish the poor and save the rich or 2. Punish the rich and save the poor. It’s very clear that both wings need to come to a compromise to deal with this issue. In the mean time, we analyze potential problems facing the US and the rest of the world should a compromise not be reached soon.

If no agreement is reached, If the government subsequently admitted that it would be unable to meet some of its obligations, then confidence in the United States would evaporate overnight (the US losing its triple-A rating, leading to a massive crash in the dollar, dramatically higher interest rates (due to a loss of creditworthiness) and a crash in equities markets. Thus, global banking and financial market liquidity could dry up. Lending between institutions and people or businesses could possibly cease altogether or become cost prohibitive. Further, the US government will effectively start to run out of money to pay civil servants, government contractors, pensioners or holders of government debt.

The shock would quickly spread throughout the world and would very likely lead to a serious global recession, possibly worse than the one seen a few years ago. Lest we all forget the challenges brought forth by the crisis, but in case you forgot; most notable to us in Botswana is the tightening of consumer spending on luxuries, decline in diamond revenues and subsequently government revenues. Our economy is government driven and any cuts in government spending we have seen cause a big uproar from the civil servants and of course our local economy-tenderpreneurs suffer the most.

The debt ceiling is simply a cap on how much money the government can owe both locally and internationally. For instance, debt ceiling for Botswana is 20% of GDP, and currently we are around 18% and we know of  government efforts in trying to reduce the deficit by not only increasing revenues but by reducing government spending. Money is an inflow and outflow of debits and credits, the liabilities of the government are the assets of the private economy; the national debt is what backs the money supply. While this may be, we should be careful not to let it get out of control; many lessons are to be learnt from the ‘superpower’ economies.

It's a (WO)Men's Business World

In the past week, I had the privilege of meeting Mrs Michelle Obama, the First Lady of the United Stated of America, and some 75 extraordinary young women leaders from across Africa, in Johannesburg. While I could go on and on about our discussions, I will focus on some of my thoughts provoked by the discussion on women in business and economic development.

All over Africa, the majority of women owned businesses are in the informal sector. In Botswana, a 2007 study estimated around 67% of informal businesses to be owned by women. Further, we know that formal businesses sprout from the informal and thus those in the informal sector are drivers of the economy; an IMF report on Women and Men in the Informal Sector indicates that there are estimates of the contribution of the informal economy as a whole to GDP and that the average (un-weighted) share of informal sector in non-agricultural GDP varies from a low of 27% in Northern Africa, 29% for Latin America, and 31% for Asia to a high of 41% for sub-Saharan Africa. While some economists say that people are in the informal sector because of choice, most (me included) acknowledge that sometimes it’s by necessity. There is a significant, but not complete overlap, between working informally and being poor; especially in the lowest-return activities where the link is stronger for women than for men.

Although the informal economy is good for start-ups, there is need to encourage these setups to legalise and make their operations formal. Growth of the formal sector not only reflects growth of output in the economy but taxes which fund public services and improves the standard of living of the nations. Many of the self-employed would welcome efforts to reduce barriers to registration and related transaction costs especially if they were to receive the benefits of formalizing, such as written and enforceable commercial contracts as well as access to financial resources and market information.

There are some questions that keep coming up in my discussions; ‘what do we need to do to ensure that those in the informal sector grow to join the formal sector? For example; how do we transform the woman’s hair dressing business from under a tree to a fully fledged salon? How do we transform that one salon to a chain business?’ when one starts, the hope is to grow big and in most times, the business environment is not welcoming; the regulatory environment is a main hindrance, paper work is dubious and entry just becomes very difficult. As a precursor to attract informal sector to formalise, we need to see an increase in incentives to legalize business; lower costs and lessened hassles in business start-up, provide service and let there be equitable distribution of resources. But till then, maybe there is more to learn from the Kiosk economy in Kenya; the art of vicious negotiation, high aggression to business pursuits and the spirit of team building.

 In order for our country to reach new heights of equitable and sustained development, the ingenuity and energies of both men and women must be fully harnessed in social and economic development. I hope for more participation of women in the formal business sector, and development initiatives that fully embrace the role of women in economic and business activities and that in Botswana and worldwide, governments will start or strengthen their policies to ensure that women attain their full measure as equal partners in nation building.

Not so perfect After all, courtesy of the ECONOMIST

Before I paste the article from the ECONOMIST, I would like to mention that this is one of the most unbiased, 'tell like it is' article on the civil servants' strike in Botswana.

FOR the past four decades or so, Botswana has been Africa’s golden boy. The former British possession has grown as fast as almost any country in the world. It has built an enviable reputation for good governance and political stability. It has a decent record on civil liberties and a relatively free press. Once one of the world’s poorest countries, it now ranks among the richer middle-income ones. A lot has to do with the discovery of diamonds, of which it is the world’s biggest producer, soon after independence in 1966. But unlike many other mineral-rich countries, it has invested wisely. It has been ranked as Africa’s least corrupt country.

But for the past two months it has been shaken by its first nationwide public-sector strike. Botswana’s 2m people, generally a deferential lot, were shocked when their normally unarmed police used tear-gas and rubber bullets to disperse rioting secondary-school pupils after they went on the rampage in April. The government closed all state schools, though they have since reopened.

The affair started as an ordinary pay dispute. Permitted for the first time to join trade unions under a new law, the country’s 120,000 public-sector workers promptly demanded a 16% pay rise after a three-year wage freeze. The government, pleading poverty following a slump in the diamond market during the global recession, offered just 5%, conditional on future economic growth. Eager to flex their muscles, the newly formed unions stood their ground. But the government, the country’s biggest employer, accounting for 40% of formal jobs, also refused to budge.

The three main opposition parties along with some members of the ruling Botswana Democratic Party (BDP) have sought to jump on the bandwagon by coming out in support of the strikers. The BDP, in power for the past 45 years, was recently hailed by President Ian Khama, son of its founder and the country’s first president, Sir Seretse Khama, as “one of the most successful ruling parties in the world”. But it has been riven by factions. Last year a group of BDP backbenchers, claiming that the president, who used to run Botswana’s army, had become too authoritarian, broke away to form the Botswana Movement for Democracy (BMD). But this still left the ruling party with a fat majority.On April 18th the unions called an all-out strike, claiming that 80% responded. Even at its peak, says the government, no more than half of its employees walked out, leaving most ministries and services operating more or less normally. But the government has dealt with the dispute with a heavy hand, firing 1,400 striking health workers, including some 50 doctors, claiming they were providing an “essential service” and as such were banned under the constitution from striking. Worn down by almost two months without pay, the unions have agreed to accept the government’s revised unconditional 3% offer, provided all sacked workers are reinstated. This the government is refusing to do.

Fired by the strikers’ determination, the three main opposition parties, hitherto divided and fractious, have been trying to form a united front in alliance with the unions. A new generation of opposition leaders believe they at last have a sporting chance of breaking the BDP’s grip, though few people think it could happen soon.

One way or another Botswana is facing change. Its diamond bonanza, which accounts for nearly half the government’s revenue and over a third of its GDP, will not last much longer. Production has peaked and deposits may be exhausted by 2030. Growth has been slowing from an average annual rate of 13% in the first five years after independence to 5% in 2000-05 and 3% since then, including a 5% contraction in 2009-10. Last year it bounced back to 7% and is expected to remain at about that level for the next two years. But the government may not be able to keep spending at its present level of 40% of GDP.

For the first time since independence, the budget is in deficit. The World Bank has urged the government to slash its bloated public workforce by a quarter. But Mr Khama is resisting. With an official jobless rate of 17% (and a real one probably closer to 30%), he says he is loth to turf more people out of jobs. But neither, he insists, can Botswana go on living beyond its means.

http://www.economist.com/node/18806159?story_id=18806159

A DIAMOND SOCIETY

The 19th century pure capitalist model of society was a pyramid, concentrations of enormous wealth in a small group at the top, a not very big middle-class in the middle, and an enormous percentage of the population in the bottom part of the pyramid. And the job of the not too big middle-class was to sort of act as a go-between, on the one hand carrying money back up to the top and orders down to the bottom. Now, a diamond shaped society is what most people are aiming for and what some countries have achieved; a small upper class, a big middle class and small lower class (which if ‘wishes were horses’ would get swallowed into the larger middle class) making the society more equal.

The ugly head of income inequalities is about to rear its head once again in our country. This is not to say it didn’t exist before but with an increase across the board, the disparity between the highest paid and lowest paid becomes wider, and it’s no wonder the labour unions in their latest demands are asking for a pyramid distribution of the 3% increase of the total wage bill suggesting that the lowest paid get a higher increase while the highest paid receive a low or no increase. There most certainly is a big disparity in wages of management and the lowest paid employees and closing in on that gap even by a few Pulas could create a difference. A boost to the lower class income could see growth in the middle class and drive consumption not only for food but for other assets, moving away from hand to mouth spending, economically empowering people.

Africa’s middle class has been growing modestly in the past decade, but ADB admits that it is difficult to define who exactly falls into this group, and even harder still to establish how many middle class people there are in Africa, however, it has come up with a definition that middle income class constitutes of those spending between $2 and $20 and Botswana is among one of the countries with the biggest middle class in the continent but some growth in it wouldn’t hurt. Many have asserted that long term economic growth in the region is inexorably linked to the rise of the middle class consumer. The true test of progress is whether new riches trickle down from the elite to create a group of consumers large enough to sustain broad economic spurts in the service and manufacturing sectors which will create a virtuous circle of budding industries, more jobs, eventually benefiting the poor.

If William Thackeray is to go by, IT IS to the middle class we must look for the prosperity of Africa and so prosperity of our country, Botswana.

FANCY FIGURES, UGLY FACTS

The income gap between the rich and the poor has always been a controversial economic, ethical, political and social issue. Income inequality in terms of how the total pie is distributed among different groups has remained a hot topic among researchers as well as politicians.

Botswana has had the highest rate of per capita growth of any country in the world in the last 35 years, with a GDP per capita of about US$70 at independence in 1966, to US$7550 in 2008. However, we don’t see the benefits of growth being distributed evenly. In 2010, Botswana’s Gini coefficient sat at 0.61, translating into that 61 percent of the population share 20 percent of the wealth whilst the remaining 40 percent share 80 percent of the nation’s wealth, making it one of the most unequal countries in the world, second only to Namibia in the region. Income inequalities in Botswana widened during decades of sustained economic growth. Gini coefficient measures the extent to which the distribution of income among individuals or households within an economy deviates from a perfectly equal distribution, 0 expressing total equality and 1 maximal inequality. The most equal countries, like Sweden, Finland and Iceland, are also the most developed.

In the Botswana case, our high unemployment plays a critical role as it limits income options. The percentage of people living below the poverty datum line is estimated at 23 percent in 2009 (official Central Statistics Office statistics) while UNDP estimates it to have been around 37 percent in 2002. Whatever figure or calculation may be right, poverty and unemployment levels in Botswana remain very high for a country doing so well economically. The income inequalities in this country are so severe that I noted that last year when public servants’ working days got adjusted, some officials got an adjustment of P50 000 to their annual salaries while others got as little P5000. Another example is that between the wages of cleaners and recent graduates, the latter will at least get P4000 while at most, the former will receive P1000. This is a 400 percent difference!

Some researchers argue that globalisation, skill-biased technological progress, institutional and regulatory reform are responsible for the inequalities. The wider and deeper integration of national markets for goods and services through international trade and investment has increased the demand for high-skilled labour more than the demand for low-skilled labour. Disparities in labour income from wages and salaries, accounting for 75 percent of household incomes of working-age adults, are the major determinant of income inequality. Though some families may have property or investments, their share in total income remains small. Although there is no formula to fixing inequalities, it is generally agreed that reducing inequalities will smoothen out poverty issues. Skills improvement is one of the less socially and politically challenging ways. Since workers' skills aren't keeping up with the advance of technology, worker education and skills development are vital. When skill-based graduates rise and there is some growth in the private sector, then there will be a reverse of economic forces, spreading the benefits of economic growth more evenly.

Just so we remember, all has not been lost. According to the IMF, “Botswana has been among the world’s fastest growing economies over the past 40 years, with an impressive record of prudent macroeconomic policies and good governance, which has moved the country from being one of the poorest in the world to the upper-middle income range.” Considerable achievements have been made in achieving virtually universal primary and junior secondary education, health care (88 percent of the population live within 8km of a health facility, and trained health personnel attend to 99 percent of births) and access to clean water supplies (97 percent of the population have access to safe drinking water).

There is so much on inequalities or the ‘behind the shadows’ facts of our vibrant economy that I will most probably 

have to explore in future instalments of this column.

*Inspired by “Fancy Figures and Ugly Facts in Botswana’s Rapid Economic Growth” written by

 Manatsha.B,and Mahajan K. of Hiroshima University, 

BACK TO BASICS: Botswana Economic Overview

In the wake of the civil servants’ mother of all strikes, and having received numerous questions on governments ability to extend a 16% pay increment and the reasonability of the unions’ demands; I found it fitting to write this piece as the first instalment of a 2 part series which hopefully will represent both sides of the strike at the end.

Though an economic overview is given with every Budget speech; usually people only wait for the salaries part and end up missing important pieces like the revenue stream and government expenditures. Most people know that Botswana suffered a low blow during the crisis and that it was during and after the crisis that government departments started cutting back on some projects. I did field research in December and during the whole trip, there was a phrase I heard often ‘Ga gona madi’!  And yet the same people are asking for salary increments.

Government’s sources of revenue include mining revenues, tax revenue including customs and BoB revenues. The major contributor to government revenues is the mineral royalties and dividends which went down substantially during the crisis. There was about a 20 % decrease in mineral revenue in 2009 and a subsequent decline in total government revenues and in contrast there was a slight increment in non mineral tax revenue though not enough to compensate for the mining revenues loss. Currently 2011/12, we have higher estimated revenue based on expected recovery in the mining sector, while this may be; there is an expected decline in SACU revenues affecting total government revenues. As a whole, it will be a while before government revenue stream is back to its pre crisis level. The key point, therefore, is that Botswana has a fiscal revenue problem not just because of the recession, but because of adverse medium-term revenue trends.

Like other countries, Botswana’s Budget since 2009 entailed a substantial deficit; in order to provide a source of aggregate demand to compensate for the weakness of the global economy – Botswana’s own fiscal stimulus package, driven by a substantial increase in government spending. This represented short-term crisis management and the withdrawal of the economic stimulus in 2010 was inevitable and thus a shift of the balance away from increased spending towards a decreased deficit. The rule of thumb is that 3% of GDP is sustainable deficit; this is also backed up by the fact that one of the main criterions for monetary union convergence is between 3-5%, for example in SADC is a deficit of 3% of GDP. As it stands, Botswana sits on a 6% budget deficit which remains unsustainable.

The 2011/12 budget reiterated the 2010/11 budget objective of a budget balance by 2012/13 and this can only be achieved by dedication to reduced spending and a stronger revenue stream (which is highly reliant on recovery in the diamond market.).What still remains a challenge is much of the unnecessary govt infrastructure. The whole principle of infrastructural development has to change in terms of budget constraints and cost effectiveness. There is also a fundamental problem in that government is too big. Just as parastatals are being rationalised to remove overlaps and duplication, government needs do the same process. Government has been happy to add to the activities it undertakes, but has not been willing to cut back on others. Many government activities are no longer necessary or justified. This is at the core of the budget sustainability problem – and hence the longer-term challenge of reducing   the size of the government workforce remains. And it is necessary for all of the good intentions laid out by the Minister of Finance in the previous 2 budget speeches to be translated into concrete actions, and quickly.

The Economics past the Jasmine revolution

The Jasmine revolution which is sweeping through North Africa and the Middle East started with a young man setting himself ablaze because; 1. He had no job prospects in the field he studied, 2. He was thus forced to sell on the streets and when he was shut down because he couldn’t afford a trading licence, he set himself on fire in protest and then just like wild fire, the revolt spread fast across Tunisia, Egypt, Yemen and Libya to mention a few.

The turmoil in those regions isn’t just for the North Africans and Arabs, it’s a problem for everyone. The jasmine revolution is sweeping through the largest oil producers of the world giving a shock to the oil supply.   At the top of the list of things to worry about as a result of the turmoil is almost assuredly the flow of oil. Recently the Europe Brent spot price of crude oil is around $115 per barrel for the first time since the start of the recession. This price was reached as a result of speculation that supplies of oil may be interrupted because of the unrest within the region, despite assurances by Saudi Arabia, a major petroleum exporter to make up for any shortfalls in supplies. There is reason for concern as a sustained increase in the price of oil will adversely affect employment in the world where there is continued struggle to recover from job losses resulting from the recession. Though the 30% price spike over the year to date isn't big enough to be a major shock, and the world economy isn’t as vulnerable as in 2008, any further uncertainty and spikes in oil prices could lead to a resurgence of the economic crisis.

Research by economist James Hamilton of the University of California, San Diego suggests that oil prices imperil the economy when they reach a new three-year high. Steven Kopits, managing director of the energy consulting firm Douglas-Westwood, says the overall economy is threatened when the 12-month average oil price exceeds the year-ago 12-month average price by more than half. Below those levels consumer and investor expectations aren't sufficiently disrupted to make a difference. Both conditions are not far from being triggered at today's prices.

Furthermore, higher prices will hit consumer spending hard as inflation continues to rise because of higher energy expenses calculated into commodity prices. Currently, some of the concern about higher oil prices is justified. The turmoil in Libya, a country with the ninth largest reserves of oil in the world, has forced some oil companies to curtail operations and evacuate their employees. 

In Botswana, we have lagging oil prices; the latest 10thebe increase, was below expectations and doesn’t reflect full oil price increase to date. The expectation is that, we will see another oil price increase if international oil prices continue to rise. The impacts felt globally will also be felt at home; the rise in commodity prices coupled with stagnant salaries will lead to slow economic growth as consumer spending falls in real terms. Moreover, if the US and EU economic recovery is slowed down, this could have a negative impact on our economy because it would affect demand for our exports.

In conclusion, if sustained, these oil price increases have the potential to sap the strength from a global economy striving to recover from the worst decline since the Great Depression.

Open Skies

A couple of weeks back I went on a trip to West Africa that involved, amongst others, the following flights: Johannesburg to Accra, Ghana on Air Namibia; Accra to Monrovia, Liberia on Kenya Airways; and Monrovia back to Accra on Ethiopian Airways. What makes this interesting? The point is that all of those flights were on airlines from countries that were neither the start nor end point of the journey. This is an example of the “fifth freedom” of the air, whereby an airline starts a journey in its own country, proceeds to a second country, and can then pick up passengers and proceed to a third country, and vice versa. South Africa, Ghana and Liberia subscribe to this “fifth freedom”, one of the key components of an “open skies” policy with regard to air travel. What is the result? Well, for Ghana, the outcome is that Accra is a bustling air transport hub for West Africa, with flights to many regional and international destinations operated by a range of airlines, almost all of which are not based in Ghana.

What about Botswana? Unfortunately we don’t grant fifth freedom rights, even though under the Yamoussoukro Declaration, African countries are in principle committed to such open skies liberalisation. So, for example, the Kenya Airways flight from Nairobi to Harare and Gaborone cannot transport passengers between Harare and Gaborone. Apparently this has been blocked by Air Botswana who consider Gaborone-Harare to be one of “their” routes. The result: fewer air transport connections for Botswana.

Wouldn’t the granting of such fifth freedom rights help to establish Botswana as a regional air transport hub, as has been cited as a government policy objective? Of course it would. I am reliably informed that KQ has offered to operate a flight on the Gaborone-Lusaka-Nairobi route, on condition that they have traffic rights between Gaborone and Lusaka. Again, blocked by Air Botswana. Result: no direct flights between Botswana and Zambia.

Open skies liberalisation of air transport in the European Union was one of the main factors behind the dramatic growth and falling cost of air travel in Europe. Extensive evidence shows that when air travel is liberalised, inefficient state-owned airlines may suffer from increased competition, but the overall benefits – from, say, lower air fares and increased jobs in the tourism industry – far outweigh any losses. It is time for Botswana to take the plunge and fully liberalise air travel, and not let narrow vested interests block policy reform that is in the overall national interest.

Structural Economic Change and the Budget Challenge

It is well known that the global financial and economic crisis that erupted in the second half of 2008 has had a dramatic impact on Botswana’s government finances. The collapse in diamond exports in late 2008 and early 2009 sharply reduced government revenues from the mining sector. This was compounded by reduced receipts from the second most important revenue source, the Southern African Customs Union (SACU), as trade volumes fell. Combined with increased government spending – largely planned before the crisis but maintained in the face of reduced revenues to produce a fiscal stimulus to the economy – the result was a budget deficit projected at 15% of GDP in 2009/10.

Like many countries, Botswana faces the challenge of balancing fiscal objectives: maintaining a sufficient fiscal stimulus to support economic activity in the face of global weakness, while not running up excessive debt that could cause a long-term sustainability problem.

However, it is not just a question of waiting for the world economy to recover, and expecting that everything will be back to normal. For instance, in the recently released budget figures for 2010/11, mineral revenues are projected to continue falling, even though diamond production and exports are expected to recover.

In Botswana’s case the fiscal problem is compounded by adverse long-term revenue trends. Before the global crisis, diamond production had more or less reached a peak, with a steady decline in output projected between 2020 and 2030. Although this decline has now been pushed out by a few years, due to the combined effect of the global crisis (and reduced production) and ongoing investment to extend the life of the Jwaneng mine, the eventual challenge of declining mineral revenues has not disappeared.

Hence the emphasis on diversifying the economy and government revenue sources. While these are important objectives and should continue to be pursued, they will not solve the long-term fiscal challenge even if they are successful. The reason for this is simple: diamond mining is extremely profitable, and those profits are taxed at an extremely high rate. Hence, government revenues account for a very high proportion of the value of output. As the economy diversifies, the importance of diamond production diminishes, and it is replaced by other economic activities that are neither as profitable nor can be taxed so highly. The average tax rate will therefore fall, and so will government revenues as a share of GDP.

This can be illustrated by a simple example. Suppose that profit in Botswana’s large, low cost diamond mines accounts for 80 percent of revenues. Suppose also that government’s share of those profits (derived from production royalties, profits taxes and dividends from its half share in Debswana), amount to around 80 percent of profits. Government revenues would then account for around 65 percent of the value of the industry’s gross output.

Consider what happens as the economy diversifies, and other industries – whether agriculture, mining, manufacturing or services – grow as diamond production declines. While rates of profit vary from industry to industry, an average rate of profit might be, say, 25 percent of revenues – far below that in diamond mining. And a more normal tax rate would be 25 percent of those profits – again, far below the effective tax rate on Debswana. The outcome in this example is dramatic – government revenues would only account for around 6 percent of the value of gross output, barely one-tenth of the revenues raised from the same value of output produced by Debswana.

The above is an illustrative example, but the numbers are probably not far from reality. And the conclusion is clear: even if the economy successfully diversifies, government revenues will decline as a share of GDP (which is the most relevant measure).

Historically, government has based its budget around an expectation that revenues will be equivalent to around 40 percent of GDP – this was the basis of the Fiscal Rule presented in the mid-term review of NDP 10, which limited spending to 40 percent of GDP on average.

Going forward, the Fiscal Rule needs to be drastically revised. In 2010/11, revenues are expected to be only 27 percent of GDP. This may seem low, but it is typical of middle-income developing countries. Elsewhere in SADC, for instance, government revenues amount to some 25 percent of GDP in South Africa and only 20 percent in Mauritius, both countries with similar levels of income per capita as Botswana.

In the medium to long term, the maximum sustainable level of government spending in Botswana is probably around 30 percent of GDP. Relative to the NDP 9 Fiscal Rule, or to projected spending in 2010/11, this means that Government spending has to shrink by around one-quarter, relative to the size of the economy. Hence the emphasis on “Transformation” in the 2010 Budget Speech – government spending has to become much more efficient, and much more focused on priorities.

How Mobile Money can transform lives

What is Kenya the world leader in? Coffee production? Glorious beaches? Political instability? Crazy bus drivers? It certainly scores highly in all of these. But in economic terms its main recent success has been a mobile money transfer scheme called M-Pesa. Established by Safaricom, Kenya’s largest mobile phone company, M-Pesa is based around the transfer of cash from one user of the scheme to another, anywhere in the country. Suppose, for example, John Obama has moved from his village near Kisumu to work as a taxi driver in Nairobi, and wishes to send money back to his mother at month-end. Before M-Pesa, he would have had to use a money order from the post office, or an informal channel such as a bus driver, or taken the money himself - all of which are expensive, risky or time consuming. Now he can use M-Pesa to send money back to his relatives, cheaply, safely and conveniently. After registering for the service, he simply pays the cash to an M-Pesa agent in the city, specifies who the money is to be sent to, and the system sends an sms the recipient, who then goes to another M-Pesa agent, enters a PIN number, and collects the money.

M-Pesa has spread like wildfire in Kenya since its introduction in 2007, and now has as an estimated 9 million users, and 14 000 agents countrywide. That is, an estimated 50% of Kenyan adults make use of the service. It has spread beyond its original remittance function, and now incorporates a payments facility (which is technologically very similar to the remittance function). So John Obama not only uses M-Pesa to send money to his mother on the shores of Lake Victoria, he also lets his customers pay for their taxi fares by M-Pesa - which saves him the bother and risk of handling cash - and as well uses it to pay for his vehicle service and repairs and to buy his groceries. If he has money left at the end of the month, he leaves it on his phone, as it is safer than keeping cash under his mattress. Many people use M-Pesa for paying their utilities bills, so much so that apparently the payments halls of the electricity and water companies have now been emptied of customers, and employers are starting use M-Pesa to pay their workers, rather than using cash. M-Pesa has just started a cross-border service, with remittances enabled between Kenya and the UK.

M-Pesa has spread quickly because it is incredibly useful, saving users time and money. Research by Safaricom indicates an average transaction saves 3 hours in time and 3 dollars in costs. With an estimated half a million transactions daily, these savings add up to large enough numbers to have a macroeconomic impact, leading to considerable efficiency gains and productivity improvements. In agriculture, for example, the labour shortages that often emerge at harvest time are exacerbated when workers take time off at the end of the month to send money home, and similarly teachers in remote locations would have to take a day or more off at month end to take their salary cheque to a bank for encashment.

There are some factors specific to Kenya that have made M-Pesa a roaring success. First, there is a great need - the majority of adults (around 80%) are unbanked and did not previously have access to formal financial services. Second, Kenya has a high level of rural-urban migration, and hence a high level of remittances, mostly between extended family members. Third, it has a high level of mobile phone penetration. It also has a mobile phone company that was prepared to take a risk and make a considerable investment in software, security and an agent network.

But Safaricom was also helped by an accommodating stance taken by the regulator, the Central Bank of Kenya. The CBK recognised that the main regulatory issues were payments related - hence the focus was on consumer protection, security, reliability, and the integrity of the system and the agent network. One of the most important requirements was that all M-Pesa balances on the system had to be backed by money in a “trust account” at a licensed bank, thus providing security for customer funds. Crucially, however, the CBK recognised that this was not a banking service in the usual sense of the word - deposit taking - and hence did not have to be operated by a bank - leaving the way for the mobile network operator (MNO) to implement it. This enabled rapid innovation to be rolled out, and costs to be kept low. This in turn encouraged the growth of high volume low value transactions - in contrast to the normal high value low volume transactions favoured by banks.

M-Pesa-type systems have been rolled out in other countries, and have proved particularly adaptable even where infrastructure is limited - in Afghanistan and Sierra Leone for instance. The approach of the regulator is of crucial importance. Not all have been like the CBK - some have insisted that only banks can operate such systems, but this can stifle the business. The characteristics of the product are more suited to mobile operators than banks, and around the world innovation is generally being driven by the MNOs and technology companies rather than the banks.

As M-Pesa has demonstrated, mobile money has tremendous potential to provide cheap financial services to the unbanked. It may not work everywhere, but policymakers and regulators can assist by taking an appropriate regulatory approach - commensurate with the level of risks involved, but not stifling innovation. As the CBK points out, M-Pesa may involve large numbers of transactions, but the values, even in aggregate, are relatively small. The regulatory task is therefore to protect consumers of the service, rather than to worry about its impact on the banking system. As for the banks in Kenya, they ignored M-Pesa initially, and only woke up when it was too late, and realised that they had lost potential business to a dynamic new competitor.

GREEK LESSONS

Greece’s central bank governor, George Provopoulos, had some harsh words for his compatriots on Tuesday as he exhorted them to break with the past and do what is necessary to right the country’s fiscal and economic situation.

To turn this situation around is not a short-term proposition, Provopoulos said: “On the contrary, what is needed is a persistent and systematic effort, an effort that is sustained, concerted and groundbreaking. Overcoming the crisis will, in other words, require a break with the past.”

But it was his catalogue of Greece’s shortcomings – the ‘recipes of the past’ – that was perhaps the harshest. These include:

· Myopic focus on the present to the detriment of the future

· Consumption behaviour verging on overindulgence that exceeds productive capacity of the economy by far

· Selective and "at will" compliance with laws and regulations

· Shifting of responsibility onto others

· Refusal to make the slightest effort towards consensus-building

· Dogmatic interpretations of reality

· Claims to maintain acquired privileges that go against the interest of society as a whole

· Short-termism and an easy-profit culture

Does any of this sound familiar?

While it might be tempting to say “those poor, misguided Greeks”, this same list of failings could apply equally well in whole or in part to other countries.

Back to basics; wage erosion

In the last column, we looked at Botswana’s economic overview, the revenue stream, expenditure account and the deficit that the country is facing. This was in response to the on-going public servants strike. On the same topic, this issue will 

take a look at rising oil & commodity prices, stagnant wages and decreasing disposable income.

Anyone who has been shopping for the past 5 years can definitely testify to the constantly rising commodity prices and just on Wednesday, drivers were hit with another oil price increase, which probably won’t be the last for the near future. We know that an increase in oil prices subsequently translates into an increase in prices for many other commodities, food being just a part of it.

Well before the global financial crisis finally broke in September 2008, most people in developing countries including Botswana were already reeling under the effects of dramatic volatility in global food and fuel markets. During the crisis, we recorded one of the highest inflation levels, reaching 15.1% in August 2008 which was further fuelled by the introduction of the alcohol levy in November 2008. In 2009 as the pressures in the oil market eased and the inflationary impact of the alcohol levy fell away, inflation went down to as low as 5.8%, the lowest it’s been in over5 years. The low inflation party was in 2010 brought to an end by an increase in Value Added Tax from 10% to 12%. Many people suspect that this didn’t just mean an increase in prices by only 2%, and that some stores took advantage and increased by a much greater percentage, although there is no evidence from the inflation data that this actually happened.

Meanwhile, for the past 3 years, public servants have attentively listened to the Budget speech, crossing fingers for a salary increase only to dismay. Although the various Budgets contained nothing, the new Public Service Act became a blessing to public servants, as through it they gained a 10% wage increment due to a technical change in the number of working days in a month (although of course nobody had to work any extra days). And although it was not presented as a cost-of-living adjustment, it had the same effect.

Despite last year’s increment, the real wages of public servants and those corporations guided by government wages saw a slump in the past 3 years. While many retail prices have been moving up, public sector workers' wages have not kept pace. The mismatch between rising prices and stagnant wages has put a squeeze on workers. Employees therefore responded as a country would when in crisis, BORROW. The crisis period household borrowing grew by about 30% between March 2009-2010, and furthermore household savings took a dip. Maintaining a lifestyle, expenditure through borrowing and eating into the savings is unsustainable and with the wages being eroded fast by rising commodity prices, eventually employees have no choice but to cut down on spending and prioritize.

The public servants of the Republic of Botswana are like the Republic they serve; they have to fix their revenue stream, reduce dependence on one source and manage their funds better. The crisis hasn’t only been a wake-up call for the country, but for the employees as well. The country is not as well off as it used to be, and the impact of this has to be shared by everybody. As I mentioned last week, the Government is too big, inefficient and will eventually have to reduce in size; the public servants need to be ready for that just as the government needs to be ready for the time that diamonds run out.

Both the government and unions are at their thresh-holds yet, only one player can win the battle and the question remains; WHO WILL IT BE?  How far is government willing to pull against salary increments which might lead to a blow to the economy should the strike get bigger and how far are unions willing to go given that some of their ‘soldiers’ may receive an unemployment blow?