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?