THE IMPACT OF THE ECONOMIC AND FINANCIAL CRISIS ON AFRICA: CHALLENGES AND OPPORTUNITIES FOR THE FUTURE. PAPER PRESENTED ON BEHALF OF THE PRIVATE SECTOR IN
BOTSWANA TO THE 10th REGIONAL SEMINAR OF ACP-EU
ECONOMIC AND SOCIAL INTEREST GROUPS,
29 JUNE, 2009.
The expansionary monetary and fiscal policies coupled with sub-prime and speculative lending and weak financial regulatory systems in the industrialized world, especially the US, have led to the global financial and economic crisis (Laborde and Torero, IFPRI, 2009). Low interest rates and high public expenditures in industrialized countries have contributed to the crisis.
The global financial crisis in the industrialized world is mainly through financial integration/linkages whilst in the developing world it is through trade, foreign direct investment (FDI) flows, tourism revenue and remittances. These developments and transactions have together led to the current global economic recession and financial crisis!
An economic recession occurs in a country/ region or world when there is a decline in economic growth or Gross domestic product (GDP) for at least two consecutive quarters as well as fall in employment, industrial/manufacturing out, retail sales, per capita income, etc. In short, an economic recession is characterized by a declining demand for raw materials including minerals, products and services. It is reported that since World War 11, there have been about eleven global economic recessions (Srinivasan, et al, 2005)!
Global economic growth is expected to decline from about 3.5 percent in 2008 to 0.5 percent in 2009. It is also possible the decline in global economic growth could be worse than currently forecast (IMF, 2009). The worst economic decline is forecast in highly industrialized countries (US, EU, Japan).
Highly industrialized countries (where most developing countries send their exports) are expected to register an economic growth of 1 percent in 2010 but there are still some uncertainties. These uncertainties are due to the fact that the magnitude of the effects of the global financial crisis is still not fully known and quantified due to several factors. For instance, there is still uncertainty (including doubts) about how the world will respond to current and planned country economic stimuli packages by several developed countries!
There are, however, some encouraging positive but weak signs of economic recovery globally possibly due to the response to various stimuli packages (i.e gains in the stock market, construction and housing industry, stability in consumer spending, slowing down of joblessness, etc). A rebound of economies of industrialized countries is critical for Botswana’s exports and economic growth.
Growth in the emerging and developing countries is also slow but still positive and higher than that of highly industrialized countries. Economic growth is forecast to decline from a high of 6.5 percent in 2008 to 3.25 percent in 2009. It is also expected that in 2010 economic growth in these countries could rebound to about 5 percent.
For commodity exporters in Africa, Latin America and the Middle East, economic growth is expected to decline from 4.5 percent in 2008 to about 1 percent in 2009. Botswana as primarily an export-dependent economy is adversely affected by the economic downturn. Already the external demand for its minerals (diamonds, copper and nickel) has declined drastically.
Countries in the emerging economies including China and India are expected to experience a decline in growth from about 8 percent in 2008 to about 5.5 percent in 2009.
Besides declining economic growth, the current global recession has other negative effects on the world. These effects include job losses with unemployment rate above 5 percent in most industrialized countries whilst in many developing countries, the figure is above 20 percent. Manufacturing/industrial output and retail sales are declining whilst disposable incomes for households have also worsened
IMPACT ON BOTSWANA
Botswana as an open-economy and also integrated into the global commerce, has had a share of these negative impacts. Whilst the magnitude of the decline of the country’s Gross domestic product (GDP) due to global economic recession is not yet fully quantified and made public, economic growth is expected to drop significantly due to a fall, in particular, of mineral export revenue. Central Statistics Office (CSO) is currently carrying out a quarterly survey on employment and employees and the results are expected later this year
The mining sector, especially the diamond subsector, constitutes the backbone of the Botswana’s macro-economy as public revenue from the industry is used to provide critical social services (health, education, water, infrastructure, social safety nets, etc) and investment capital for diversification.
The ongoing global recession, in particular, is going to affect the country. Below is a brief summary received from sectors about the impact of the crisis.
A decline in export demand for and prices of her minerals( diamonds, copper, nickel, ) will lead to reduced public revenue and company sales, loss of jobs, lower household expenditure and savings, reduced inter-sectoral income and expenditure linkages, etc. Mineral revenue accounts for about 40 percent of Botswana’s Gross Domestic Product (GDP) and over 40 percent of Government total revenue.
Unlike in previous years, mineral revenue which normally is the main source of the public revenue and accounting for about 40 percent of total government revenue, during 2009/10 fiscal year, this source will instead contribute about 28 percent of total public revenue whilst customs and exercise revenue will be the largest source of government total revenue accounting for about 29 percent.
The decline in the contribution of the mineral sector is mainly due to the fall in diamond external prices caused by global recession or a reduction in external demand.
During 2008/2009, diamond export sales are expected to decline by 50 percent. Diamond sales account for the bulk of mineral revenue to government. Similarly, other minerals are also facing a decline in sales. The decline in mineral export earnings demonstrates the link between Botswana’s economy and global commerce. A recovery in the global economy to revive the external demand for minerals is therefore very critical for the country’s economy.
Currently output/production cuts, staff retrenchment and lengthy plant shutdowns characterize the mining sector. Several households are directly dependent on factor income from mining sector via their members who are employed in the industry. Loss of jobs in the mining sector means loss of household income or purchasing power and limited economic activity in the mining areas and surrounding villages!
Whilst government has provided funds for capital formation (roads, schools, health facilities, dams, etc) during 2009/10 to benefit, among others, the construction sector, the deferral of some development projects due to budgetary constraints, will adversely affect the growth of this sector and reduce employment opportunities in it. A budget deficit forecast for 2009/2010 is mainly responsible for the deferral of some development projects.
It is, however, gratifying, at least in the short term, that government has been able to secure external loans which will help to finance public expenditure and possibly enable the construction to benefit also.
Limited access to finance domestically from banks will further reduce the potential for the construction sector to contribute towards capital formation and additional employment creation. In general, access to finance in Botswana is one of the major challenges facing the private sector.
Like in the mining sector, reduced demand for construction services due to lower per capita income, etc, has also led to loss of jobs in the industry. The construction industry is one of the largest sources of employment in the country especially for less skilled people.
The continuing decline in consumers’ purchasing power is reducing the demand for manufactured goods (clothing, food, household items, building materials, etc.). The food and cement packaging industries are also experiencing a down turn.
Exports of manufactured goods (textiles, clothing, floortiles, etc) to other parts of the world have also declined due to lower consumer demand.
Manufacturing of timber products, light steel trusses and school furniture is facing a decline due to lower demand.
A decline in the manufacturing sector has also led to job losses and a reduction in additional job opportunities.
Unlike in other countries, the financial sector/banking industry in Botswana has not been affected by sub-prime and speculative lending as is the case in some industrialized countries. The country’s financial regulatory system is still strong and transparent, thanks to the oversight role of the Bank of Botswana.
However, with falling demand due to low purchasing power and job losses, we expect banks to exercise more caution in their lending to the private sector (mining, manufacturing, construction, transport, hospitality, housing, etc) in order to avoid/minimize losses or asset impairment. Similarly, the slowdown in external trade will also lead to a possible decline in providing trade finance to businesses.
The growth rate in the banking sector in 2009 will be lower than that of 2008 due the economic and financial crisis.
The tourism sector is one of the major contributors to the country’s economy or Gross Domestic Product. Like other industries, this sector is also adversely affected by the current global economic crisis.
Hotel reservations have dropped with occupancy rate expected to decline by 35-40 percent. Similarly, travel and tour operators expect their business/turnover to drop by 35 percent.
Given the existing income/expenditure linkages between the tourism sector and other industries including households, a decline in tourism revenue also adversely affects food security, purchasing power and potential for expansion.
Foreign direct investment (FDI), an important component for diversifying the country’s economy is also likely to be negatively affected by global recession. According to Bank of Botswana, the mining and finance sectors account for the largest share in FDI inflows which in turn are dominated by Europe (Annual Report 2007, BOB). Indications are that FDI flows to developing countries such as Botswana will decline.
As FDI inflows are critical for sustainable economic diversification, the current global financial crisis coupled with declining commodity prices and low profitability will negatively impact on Botswana’s economy. With declining commodity prices and the perception of low profits in the horizon, it might take time for Botswana to attract more FDI flows.
Interestingly, however, the recent FDI in the energy sector by China together with domestic investment from a local bank is encouraging and a positive development for Botswana.
There are some Botswana citizens who are working outside the country and remit money to their families for investment and consumption. Most of the citizens working outside the country are in South Africa. The current global financial crisis is likely to reduce employment opportunities for those citizens working outside. A decline in remittances will also adversely affect household income security.
ENERGY AND FOOD PRICES
It is l encouraging that, on the import side, global food and energy prices have declined and possibly stabilized to the benefit of, inter alia, Botswana. Whilst the latest increase in fuel prices is a major concern, hopefully the prices will stabilize to an affordable level for countries like Botswana. Paradoxically, the increase in fuel prices could also be a sign of economic recovery! Food and fuel imports are major expenses for most low-income countries.
CHALLENGES AND OPPORTUNITIES FOR THE FUTURE
As indicated earlier, the current global economic recession is neither the first nor the last to rear its head in our economies. We can expect more of such adverse socio-economic developments given the different policies and financial regulatory systems pursued by countries, and some times lack of harmony in policy framework as well as their inherent contradictions and polarized interest groups! Africa and Botswana should prepare themselves for such adverse developments.
Below are some of the challenges and opportunities that the private sector is likely to face in future or when an economic recession prevails.
RESTORATION OF DEMAND.
An economic recession is primarily characterized by a decline in demand for goods and services. Specifically, the purchasing power of consumers is adversely affected by an economic recession due to loss of jobs, stagnant wages/salaries, contraction in the economy, decline in export demand, etc. It is therefore critical that countries through their governments and other stakeholders endeavour to restore demand through expansionary public policies to improve purchasing power and create/retain job opportunities.
The various economic stimulus packages by several countries are partly aimed at restoring demand and this is a major challenge for countries like Botswana where the government is the major player in the economy. Coordinated and sustainable monetary and fiscal policies at both national and global levels are critical to restore demand given the increasing integration of economies.
Private sector initiatives such as target advertizing, customer satisfaction or retention, maintaining quality, etc could also contribute towards restoring demand.
Increasing Domestic Investment.
Like other countries, Botswana has reduced the prime lending rate with a view that investors could secure capital/finance from commercial banks, etc to venture into sustainable and yet competitive production of goods and services.
A decline in the prime lending rate by the Central Bank is aimed at reducing the cost of capital for the benefit of the private sector. Encouraging domestic investment in the face of declining demand due to recession is a challenge that Botswana like other countries will have to face.
As for FDI flows into Botswana it is likely that these will also be negatively affected due to the global economic downturn, low commodity prices and possibly the uncertainty about recovery.
Improving Access to Trade Finance
Access to finance in Botswana by the private sector has always remained a major challenge (FAP, 1982; FIAS Report, 2004). Even with programmes like the Citizen Entrepreneurial Development Agency (CEDA), local companies especially small, micro and medium enterprises (SMMEs) still struggle to access working/trade finance due to some stringent requirements by commercial banks. Evidently, CEDA assist firms with capital finance but accessing additional working capital for firms has remained a challenge.
It might be opportune and appropriate for the ACP-EU cooperation to consider introducing a private-sector friendly financial scheme in ACP members/countries for their local firms and SMMEs to benefit in order to diversify the economy and contribute towards poverty reduction in line with the UN Millennium Development Goals (MDGs).
Previous and current ACP-EU projects have mainly benefited the public sector for the provision of social services (education, health, water, etc), infrastructure, research and development, natural resource management whilst the private sector has not been comprehensively and specifically targeted for assistance. As the private sector is also critical for the transformation of ACP economies including Botswana, this important regional seminar is strongly urged to consider establishing an accessible and long-term financial scheme/programme for SMMEs and other firms in the private sector.
Diversification of economy, exports and destinations.
Botswana’s economy is not satisfactorily diversified while exports (diamonds, copper, nickel, textiles, clothing, beef, etc) are few and dominated by minerals .Further; minerals are not fully beneficiated to increase domestic value.
Similarly, the country’s export markets are mainly the EU and the US and yet with increasing per capita incomes in many parts of the world including Asia, Latin America and others, it are in the interest of Botswana that exports and their destinations are diversified to minimize risks and reduce dependency on few markets. The current economic recession should provide an opportunity for the country to diversify her exports including sources of imports (food, raw materials, machinery, etc).
The formal sector has to date received more support for the country to diversify and generate additional job opportunities to reduce poverty. The informal sector, sometimes referred to as the second economy/unregulated sector, has the potential to diversify the economy and contribute towards income and food security through employment. In many developing countries, this sector is one of the key sources of employment and output (UNU, 2006). The current economic recession should therefore offer Botswana an additional opportunity to critically review the informal sector/second economy with a view to designing sustainable policies and programmes for it to develop and contribute to the objectives of the country.
Improving Productivity and Competitiveness through an increase in Research and Development (R&D).
An economic and financial crisis provides a golden opportunity for a country and its private sector to review policies and programmes aimed at improving productivity and competitiveness. In a fast and changing but integrating global economy, it is critical that countries and companies constantly improve on their productivity and competitiveness to minimize the adverse effects of economic and financial crisis. Cost and quality competitiveness, and productivity are central to a company’s sustainability and profitability.
In Botswana both government and the private sector should therefore use this opportunity to “re-engineer” their organizations and firms to invest in high levels of capital and labour productivity to face future competition globally. In this regard, current programmes and the existing Hubs in the country on agriculture, education, innovation (science and technology), diamond and health should be constantly reviewed and resourced to improve productivity and competitiveness.
Botswana, like other ACP countries, can take leaf from the relatively high allocation of funds from the US economic stimulus that are allocated to research and development(R&D) to improve productivity and competitiveness through science, technology and skills! There is no shortcut to sustained productivity and quality improvements to outwit one’s competitors.
Strengthening Financial Regulatory System
Whilst our financial system has not been affected by subprime and speculative lending that has contributed to the current global financial malaise, the ongoing economic recession should provide an opportunity for Botswana and the Bank of Botswana, in particular, to review its financial regulatory system with a view to making it air-tight to prevent subprime lending and its undesirable effects.
There is no doubt that Botswana through BOB has prevented a potential crisis that could have worsened the negative effects of the global recession by, inter alia, increasing the number of toxic assets in the companies’ balance sheets! Toxic assets are financial assets like mortgaged property that have significantly lost value due to unfavourable economic and market conditions. These assets have blighted balance sheets of several firms and banks, especially in some industrialized countries.
Other countries including industrialized countries are currently reviewing their financial regulatory systems to avoid future subprime lending and its attendant negative effects. The UN has also assembled a group of experts to advise members about adopting and implementing a comprehensive, transparent and effective international financial regulatory system in order to minimize the adverse effects of global financial crisis.
This paper has indicated how the ongoing global financial crisis is affecting the economies of countries by reducing growth, trade and investment flows, employment, remittances, etc.
For developing countries, in particular, the global recession will reduce the demand for their traded goods and investment inflows which in turn will reduce growth to address poverty, industrialization and meeting MDGs.
For Botswana, the paper has indicated that not only is its mineral-dependent economy adversely affected by the global downturn, several sectors face a decline in the demand for their products/services, output, turnover and employment. Loss of purchasing power will also negatively affect the ability of firms to grow or meet their business targets.
Finally, the paper identified challenges and opportunities that the private sector will need to address or take advantage of in future. These challenges and opportunities are not only relevant to Botswana; other developing countries are also directly or indirectly facing them. It is also assumed the ACP-EU cooperation will help countries like Botswana to address some of the challenges in order to help the private sector to grow and contribute towards the realization of MDGs.
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