Friday, September 19, 2014

Parastatals need to up their game

According to the Midweek Sun, The Minister of Transport and Communications signed performance agreements with Board chairpersons of parastatal bodies that fall under his ministry. All sounds good. Here is a performance suggestion for parastatals - to publish annual reports on time. A recent check of parastatal websites showed the most recent annual reports available for download are as follows:

Bank of Botswana
Botswana Power Corporation
Botswana Development Corporation
Botswana Post
Botswana Telecommunications Corporation
Citizen Entrepreneurial Development Agency
Botswana Agricultural Marketing Board
Botswana Housing Corporation
Botswana Railways
Botswana Meat Commission
No Annual Reports
Air Botswana
Botswana Savings Bank
National Development Bank 

If the Bank of Botswana can publish its annual report within six months of its financial year end, and companies listed on the Botswana Stock Exchange have to publish their annual financial statements within the same period, why can't other parastatals do the same? Clearly many of them have a long way to go to deliver on their accountability to the public - their ultimate owners.  

Friday, February 1, 2013

What to expect from the 2013 Budget

The 2013 Budget will be presented on February 4th at a time of considerable economic uncertainty. International economic prospects are quite uncertain with the IMF having revised its 2013 global growth forecasts downwards in January. On the positive side, prospects of a resolution of sovereign debt problems in the Eurozone have risen, and the US managed to avoid the worst of the “fiscal cliff”. However, these issues have only been temporarily resolved, and there may well be further disruptive events during the early months of 2013. Economic weakness in the USA and Europe, combined with slower growth in India and China, have impacted on the global diamond market, with lower demand and weak prices throughout much of 2012. These conditions are expected to continue in the first half of 2013, although there are hopes of improvement later in the year.

These developments will have a major impact on projected fiscal revenues, with mineral revenues likely to have come in under-budget in 2012/13 and to show little growth in the new 2013/14 fiscal year. Recently the over-riding fiscal objective has been to achieve a balanced budget in 2012/13, and a key test will be to see how close the projected outturn will be to this. It remains very important to achieve a balanced budget and in due course to achieve budget surpluses so that the government’s savings can be re-built – fiscal buffers that served through country well during the global financial crisis have been drawn down, and now need to be restored as protection against the impact of possible future crises.

There will be many demands on the spending side of the budget in 2013/14, including an increase in public sector salaries, the completion of outstanding government projects (such as the SSKA terminal building) and new projects, especially given the election coming up in 2014. Not all of these demands can be met. After years of public sector pay restraint, there are strong arguments for giving public sector employees a meaningful pay rise this year – it serves no purpose to force continued reductions in real wages on government employees when they are required to deliver quality public services. However, it needs to be understood that given fiscal constraints, a salary increase for the public sector is dependent upon a reduction in employment in the public sector.

Finishing off outstanding projects should also be a priority. It is likely, however, that there will be limited scope to implement major new projects. In choosing projects, government should focus on those that will deliver maximum economic returns and will “crowd in” private sector investment. This also means the proposed projects will need to be subject to through appraisal beforehand and identification of costs and benefits, an essential practice that has been absent from government project selection in recent years.

Government should also aim to use the private sector to deliver projects and infrastructure wherever possible. The fiasco of BPC’s non-delivery of power from Morupule B and continued delays in commissioning, leading to widespread load shedding that has a negative impact on the economy and on business confidence more generally, shows that government should use the private sector to generate power (through IPPs, independent power producers), leaving BPC simply as a distribution company. More generally, the quality of public sector project management needs to be dramatically improved, so that the recent experience of poor budgeting, delays, cost-overruns and non-completion is brought to an end. 

Although not strictly a budget issue, much greater attention needs to be paid to improving the business climate – much has been said by government on this topic, but often this is just lip-service and real improvements on the ground are lacking; the private sector continues to be frustrated by pointless bureaucracy and anti-business attitudes in both central and local government. Botched reforms of immigration and trade licensing systems are a case in point.

There is a need for reform of revenue generation. The proliferation of “off budget” levies is imposing an increasing tax burden on the private sector, and as well the expenditure of funds raised through such levies is not subject to the normal scrutiny by parliament. There is also a need to make it easier to pay taxes by improving efficiency and competency at BURS and introducing electronic means of filing and paying taxes, so as to make the time-wasting queues at BURS a thing of the past. The quality of tax administration at BURS also needs to be improved, as the frequent mistakes both penalise taxpayers and lose revenue for government.

Finally, there is evidently a crisis in the country’s education system. This is not seemingly the result of a lack of resources, given that education continually gets the largest budget share and per capita spending on education in Botswana is relatively high by international standards. However, much of the money is spent on expensive “hardware” (buildings and equipment) while the all-important “software” (teachers, maintenance, management, curriculum development) is neglected. A rebalancing of the allocation of resources in education is sorely needed. More generally, the way in which our education system is designed, managed and implemented needs a complete overhaul. All of those involved – government, teachers and learners – have a responsibility to contribute to this.

Monday, July 18, 2011

Making Sense of GDP Growth Data

Improvements in the production and dissemination of GDP data now mean that output and growth figures are now released within three months of the end of each quarter. Of course there is a great deal of interest in these important data, which can potentially reveal a great deal about the level and growth rate of economic activity. However, the data need to be interpreted carefully. The recent release of data for the first quarter of 2011 has given rise to headlines such as “Economy falls 2.2% in first quarter” (Mmegi, July 5, 2011), referring to the fact that real GDP was 2.2% lower in 2011Q1 than in the previous quarter (2010Q4). The reported negative growth would seem to be bad news, perhaps indicating that the economy is heading back into recession. But is this the correct interpretation?

GDP growth can be reported in various ways from any given set of GDP output data. The main ways of reporting GDP growth used internationally are:

(i) quarter-on-quarter, annualised growth (qoqar): the growth in real GDP from one quarter to the next – e.g. from 2010Q4 to 2011Q1 - expressed at an annual rate;

(ii) quarter-on-same-quarter-a-year-earlier (qo4q): e.g. the growth in real GDP between 2010Q1 and 2011Q1.

(iii) annual GDP growth (yoy): growth in GDP over full year (4 quarters) compared to the previous 4 quarters;

Each of these methods has various advantages and disadvantages, and the choice of the most appropriate measure depends on both the circumstances and requirements of the reporting.

In any period, GDP is determined by both underlying developments in economic growth and short-term events. Sometimes the short-term events can be the result of economic changes, such as an economy entering a recession or a recovery period (which is important information), but they can also be the result of random events or volatility (which is not so useful or important). Interpretation of GDP data, as with much other economic data, is in part a question of distinguishing “signal” from “noise”.

So which measure is most helpful for Botswana? One point to note is that the measure that Mmegi reported on is that it does not fall under any of the categories (i) – (iii) above. This is because the growth figure, which is reported by Statistics Botswana, is not “annualised” – i.e. it is simply quarter-on-quarter growth, which is not comparable with the more conventionally reported annual growth rates. Annualising the q-o-q figure in line with international practice results in a GDP growth rate in 2011Q1 of minus 8.6%, which sounds altogether more serious than the reported minus 2.2%.

The qoqar measure of growth is widely used internationally, as it can provide a timely snapshot of economic developments that responds quickly to underlying changes. It does, however, have a problem in that it is heavily influenced by short-term volatility or “noise”, which can detract from the more important underlying developments. Hence, it has to be used with caution. It is also influenced by seasonal factors, and hence the measure is most appropriately used when “seasonally adjusted” GDP measures are available.

In Botswana’s case, GDP tends to be very volatile from one quarter to the next. For instance, real GDP growth according to the qoqar measure was 80% in 2009Q4, but was minus 35% in the following quarter. This volatility is partly because movements in GDP are dominated by changes in mining output, which is highly variable on a quarterly basis. But other sectors also show volatile growth on a quarter-to-quarter basis. For instance, in the first quarter of 2011, using the qoqar measure, growth rates were minus 31% for agriculture, -15% for mining, -22% for finance & business services, -27% for government, and +36% for construction. Because of this volatility, and the fact that seasonally-adjusted GDP data are not provided for Botswana, the quarter-on-quarter measures of GDP growth that are conventionally reported are not very useful.

The qo4q measure ((ii) above) is perhaps more useful, in that it is less affected by seasonal factors, but it still dependent upon a small amount of data (two quarters, like the qoqar measure), and hence is still very volatile and the signal-to-noise ratio is low.

The annual (yoy) measure of GDP growth ((iii) above) has the advantage of being based on much more data (eight quarters) and hence is much less affected by short-term volatility. But it is less effective at detecting economic turning points quickly. Nevertheless, in our opinion it is the most useful measure of GDP growth, especially for monitoring longer-term growth trends. Unfortunately it is not regularly calculated or reported by Statistics Botswana, which only reports the qoq and qo4q measures on a quarterly basis – the annual figure is only reported for full calendar years. Nevertheless, it is easily calculated from published data, and Econsult does so each quarter.

GDP growth measures – quarterly since 2010Q1

2010 Q1




2011 Q1













annual (yoy)






So what does this all mean? The most recent GDP growth rate according to our preferred measure was 4.9% in 2011 Q1 – i.e. GDP in the year to March 2011 was 4.9% higher than over the previous 12 months. However, this reflected quite different growth rates in the mining and non-mining sectors of the economy – mining grew by 0.6% over that period, while the non-mining private sector grew by 7.7%. While the overall growth rate is healthy enough and broadly in line with expectations for the year as a whole, the mining result is disappointing given expectations that mining sector recovery would lead an upturn in growth. However, the outturn for the non-mining private sector is very positive.

In our view, Statistics Botswana should place less emphasis on the qoq growth rate that currently receives so much attention – at least until they can also produce seasonally adjusted GDP data. And even then it should be presented at an annual rate, in line with international practice. But more importantly, SB should calculate and publish the yoy GDP growth rate on a quarterly basis, and not just at the end of each calendar year.

See the figures below and decide which of the three measures presents the most useful information.

Thursday, May 26, 2011

If not manufacturing, then what?

Botswana’s industrial development policy has long had manufacturing at its centre. There were many reasons for this. The “traditional” development model holds that most countries follow a natural progression, starting by producing and exporting mainly primary commodities, then moving on to manufacturing as the main source of exports and job creation, and eventually moving on to services.

There are, or were, good reasons for pursuing this approach. The long-term trend in terms of trade – the price a country’s exports, relative to its imports – has been negative for commodity exporters over a long period, as the price of primary commodities declined relative to imports of manufactured goods. This provides an argument for diversifying away from dependence on primary commodities to manufacturing. A second reason is that manufacturing is often thought to provide great potential for productivity gains, through “learning by doing” and moving from low-tech to high-tech manufacturing as skills and capacity improve. A third reason is that manufactured goods are exportable, and successful export-led manufacturing has great job creation potential.

Botswana’s experience with manufacturing has not been particularly successful, however. Between 1994 and 2009, manufacturing value added increased at an average rate of 4.1% a year - not bad, but not very impressive either, and slower than the growth of many other sectors so that manufacturing’s share of total GDP fell over this period. Employment in manufacturing increased by around 3.7% a year – also not very spectacular. Clearly, years of special support for manufacturing, through tax incentives, subsidies and institutional support, have not yielded the anticipated rewards.

But there is reason to believe that changing circumstances have made a focus less relevant than it was historically. Trends in terms of trade have switched – whereas the price of primary commodities declined for a long period relative to the price of manufactures, the opposite is now occurring. Rising prices for commodities – perhaps even a commodity supercycle that could persist for many years – and declining prices for manufactured items, remove one of the planks of the convention rationale for the move into manufacturing. And the intense competition from cheap manufactured goods from Asia makes it very difficult for African countries – with their relatively high labour costs and low productivity – to compete in global markets, especially landlocked ones with high transport costs, such as Botswana.

A second important change is that services are increasingly being traded internationally. Conventionally, many services were seen as non-tradeables, to be produced and consumed domestically but not traded on international markets. However, a great deal of the growth of world trade in recent years is due to increased trade in services, rather than manufactures. This includes some conventional services such as tourism, but also newly traded services such as business and IT services. Increasingly, as India is showing, services can provide a channel for export-led growth.

So what does this mean for Botswana? There are several implications. First, there is no particular reason to diversify “away” from minerals – instead we should aggressively develop the minerals sector, especially if the minerals sector itself can be diversified by exploiting a range of minerals (rather than our current extreme dependence upon diamonds). If we have a comparative advantage in an activity whose economic value is rising, then all well and good. Developing the minerals sector will in some cases include the beneficiation of those minerals (such as generating electricity from coal).

Second, there is no particular reason to focus on manufacturing, where our potential for comparative advantage is limited. While manufacturing has a role to play in the economy, there is no reason to give it special treatment – noting that an incentive in favour of manufacturing (such as tax concessions) is an incentive against other economic activities, which may have more long run potential.

Third, we need to explore the potential for developing services exports, especially those services that have potential for large-scale employment creation and productivity gains, such as business and financial services.

This will require a change of thinking on the part of government, moving beyond the “manufacturing is something special” approach. It requires investment in appropriate infrastructure (internet connections rather than rural roads). Most importantly, it requires engagement by government with the private sector in order to identify the bottlenecks to investment, and speedy action to resolve those bottlenecks.

Friday, May 13, 2011

How many flat-screen TVs can you buy for a shipload of iron ore?

One of the best-known ideas in development economics is the Prebisch-Singer hypothesis, which states that the terms of trade between primary products and manufactured goods tends to deteriorate over time. The hypothesis, which dates back to the early 1950s, asserts that countries exporting primary commodities (minerals and/or agricultural products) would be able to import fewer and fewer manufactured goods for a given amount of exports, and hence would become progressively worse off, or fall further behind developed countries. A common policy recommendation based on this idea is that developing countries should strive to diversify their economies and reduce dependence on primary commodity exports by developing manufacturing activities.

The hypothesis is closely linked to the idea that most countries follow a natural progression from producing mainly primary commodities, moving on to manufacturing and eventually to services.

The progression from primary commodities (minerals) to manufacturing has underpinned much of Botswana’s thinking on industrialisation and diversification, and the manufacturing sector has benefitted from incentives and special treatment by government. And yet the policy has been largely unsuccessful, in that manufacturing has shown only sluggish growth rather than dynamism. There are only a few examples of manufacturing firms that have demonstrated long-term sustainability, while many more have collapsed once subsidies or special treatment was withdrawn.

But perhaps the Prebisch-Singer hypothesis is wrong, or at least not as applicable as it once was. Two major developments suggest that it may be less relevant today.

First, the commodity “supercycle”, whereby an increase in the demand for primary commodities, driven by higher global economic growth, leads to sustained higher commodity prices;

Second, the steady fall in the prices of many manufactured goods, associated with a shift in the locus of global manufacturing production from developed to developing countries.

These two trends, if sustained, suggest that the reverse of the original hypothesis may now be true, and that the terms of trade of primary commodity producers are now improving, rather than deteriorating, and that a given level of primary commodity exports can now buy an increasing amount of imports of manufactured goods.

The importance of this was recently illustrated by the Governor of the Reserve Bank of Australia, a country that mainly exports primary commodities and imports manufactured goods. Five years ago, Governor Stevens noted, a shipload of iron ore bought 2,200 flatscreen TVs; now it buys 22,000. A long term trend of declining terms of trade seems to have been reversed, with Australia’s terms of trade improving by 42% since 2004.

The fact that commodity prices – for both minerals and foodstuffs – have resumed their upward trend after a temporary interruption in 2008-9 following the global financial crisis, suggests that this may well be a long-term development. Rising mineral prices are being driven, to a large extent, by demand from emerging market economic, especially India and China, which is likely to persist for some time, even if they eventually move to a less resource-intensive growth path. And while the decline in the prices of manufactured goods may be slowed as wages start to rise in China, there is still scope for manufacturing to move to other low-wage Asian economies.

What does this mean for Botswana? Certainly the focus of industrial development and diversification policy needs to change, with manufacturing no longer the centre of attention. But it also means that continued reliance on minerals, especially if the mining sector can itself become diversified, as seems to be happening, is not necessarily a bad thing.

Saturday, May 1, 2010

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.