POLICY SERIES No. 4/2009

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suffered the worst financial crisis in living memory.

In addition some of the mining companies, particularly diamond mines had shelved their investment plans.

1 POLICY SERIES No. 4/2009 Social Impact of the Global Financial Crisis Country Study Botswana A pattern has developed which largely explains the genesis of social impacts of the economic and financial crisis in Botswana. This starts with the fall in commodity prices of oil and other industrial minerals (copper, nickel and diamonds) at the global market as the country s main trading partners the USA and Europe suffered the worst financial crisis in living memory. For instance, the fall in demand by USA manufacturers, which account for 41% of the global jewellery demand directly undermined Botswana s diamond production, employment and export receipts. In addition some of the mining companies, particularly diamond mines had shelved their investment plans. Botswana is not only vulnerable even to minor external shocks, but has also become a prime candidate of this global crisis in the sense that the fall in global commodity prices has hit hard its mining sector, the mainstay of the economy. Local companies, particularly in the mining sector have slowed down operations due to lack of credit lines and long-term investment funds while some enterprises curtailed and/or postponed capital expenditure programmes. While the crisis is likely to generate negative social impacts, the country s track record of pluralistic democratic credentials, nearly five decades of prudent management of its mineral resources and sound macroeconomic policies offers the necessary condition to overcome this episode. The country enjoyed nearly half a century solid economic growth, including 18 years of double digit growth. This is supported by Chipeta, et al (2007) who argue that National Development Plans (NDPs) provide a sound and conservative framework for prudent policies in the country. The extensive safety nets have positioned the government well to deal effectively with some of the more pressing socio-economic challenges facing the country including food insecurity, an unemployment rate of 7.9%, poverty levels of about 30%, growing inequalities and the increasing rate of HIV/AIDS. The country has a tradition of a sound macro-economic base and prudent policy framework, which has resulted in steady improvement in the economy. The country s gross domestic product (GDP) has been improving between 2004 and 2008, driven primarily by such sectors as mining, trade (including hotels and restaurants), banks, insurance and business services, now the prime target of the financial crisis. In addition sound economic performance has in the past enabled the country to respond to such natural calamities like droughts without external assistance. The unfolding economic and financial crisis represents a serious setback for Botswana because it is taking place at a time when the country is making progress in its economic management. The United Nation Economic Commission for Africa (UNECA) report (May 2009) predicts a 13.5% depreciation of Botswana Pula against the US dollar this year. This reflects a serious challenge to policy makers who are used to presiding over a sound economy. However, this external shock has direct influence on the economy, not only because the country is a net importer of both food and fuel, which drains foreign reserves, but also due to its direct impact on traditional importers of diamonds and other precious base metals (copper and nickel) from Botswana. This is certainly going to slow down economic growth and trade flow of the mineral commodities. In this way, the financial crisis directly impacts on the dynamism of the 1

2 mineral sector in terms of reduced growth, employment opportunities and incomes as well as shelving any planned production investments. All this results in reduction in government revenue, a critical source of social policy expenditures, which directly undermines social service delivery, particularly in education, health, social protection, sanitation and water, child protection and child care Impact on government revenues and fiscal budget management Good performance in the mining sector, particularly diamonds, generated significant flows of government revenues which resulted in a balanced budget over the medium term as dictated by NDPs. The government recorded deficits in five 1 of the 12 years. But both sound macro-economic policy frameworks and fiscal discipline enabled the authorities to reduce inflation from a double digit level in 2006 to levels between 4% and 7%. The country has no record of borrowing external resources, except in few circumstances when the authorities had good prospects of servicing the debt. Thus, such a debt is usually of concessional nature, and its proportion to GDP over the past five years decreased from 11% to 5%. The country has no balance of payment (BOP) crisis, and has now opted to use its past substantial foreign reserves to finance any deficit caused by dwindling revenue from the mining sector. Currently, the country has two-years of import cover. However, the Botswana Confederation of Commerce, Industry and Manpower has recently expressed concerns over decision to invest some of the country s reserves in assets that are fast losing value due to the ongoing market recession. The government desisted from domestic borrowing largely due to significant inflow of mineral revenue and the ability to build substantial foreign currency reserves over time. As a result, the country has not adopted any explicit targets for the current account balance, and is likely to shy away from doing so in the short-term despite the threat of global economic recession. A sharp decline in commodity prices for the past four months (September, October, November and December 2008), particularly in such minerals as copper, nickel and gold, resulted in corresponding fall in economic growth, employment opportunities, incomes and capital losses on personnel savings. The underperformance of the mining sector also led to a corresponding fall in government revenue. In Botswana, mineral-related taxes, ranging between 35-50% of the total budget, have constituted the bulk of government s total revenue for 2008/2009. However, this revenue windfall is predicted to fall significantly in 2009/2010 and 2010/2011 fiscal years owing to the prevailing global economic and financial crisis, a development that the Minister of Finance says requires serious restraint in spending. View of the Minister of Finance and Development Planning, Baledzi Gaolathe This crisis continues to affect Botswana, mainly through lower mineral exports and hence reduction in government revenues. It is going to be crucial for us to find innovative ways of addressing our development needs within the expected revenue limits. There is a need for all to exercise even more financial restraint and discipline to smooth the adjustment process necessitated by the decline in mineral revenues , 2001, 2002, 2003 and

3 Trade regimes and investment The global economic and financial crisis has negatively impacted on global trade with Asia 2 and China recently recorded 30% and 22.6% drop in exports, respectively. Similarly, the USA, Europe and Japan experienced weak demand for foreign commodities. Some of the above constitute Botswana s major trading partners as shown in the table below. From the table, the European Union (EU), particularly the United Kingdom and USA are the dominant importers of Botswana products and commodities, particularly diamonds, copper-nickel matte and beef. Main trading partners and exports by value, P Main Trading Partners (P 000) Common Customs Area 924, , ,730 1,117,119 Zimbabwe 373, , , ,029 Other Africa 107,697 84,432 40,525 32,160 United Kingdom 12,283,285 13,210,602 12,736,001 10,423,383 Other Europe 451, ,563 1,235, ,106 USA 35,259 77,959 53, ,329 All other 130, , , ,026 Total 14,306,488 15,341,940 15,635,318 13,400,152 Main exports products fob by value (P 000) Meat and meat products 365, , ,022 37,793 Live animals 6,908 1, Hides and skins 61,339 27,304 10,746 9,457 Diamonds 12,085,896 13,155,609 12,958,227 10,713,371 Copper-nickel matte 597, ,957 1,229,203 1,180,081 Textiles 192, , , ,747 Soda ash 128,200 84,758 16, Vehicles and parts 298, , , ,032 Other goods 569, , , ,388 Total 14,306,488 15,341,940 15,635,318 13,400,152 Source: SADC Review, 2007/2008 Botswana realises that opening bilateral and multilateral trade fronts require an industrial sector that is ready to capture the market by way of improving local products competitiveness at the national, regional and global markets. It is therefore imperative for the country to diversify its regional and global market portfolio. Regardless of the financial crunch, the country, as a net importer has no choice but to meet national import demand. Exports maintained steady growth between the first and the third quarter of 2008 before a nosedive in the fourth quarter, a period that coincided with the global financial crisis. This not only shows the relationship between trade and the global financial crisis, but also signifies a reduction in foreign export receipts, which has future impacts on the country s ability to meet national import demand. As expected, this development forces the government to draw from the foreign reserves. 2 Particularly Indonesia, Malaysia and the Philippines 3

4 Exports and imports, Quarter 1 Quarter 2 Quarter 3 Quarter EXPORTS IMPORTS Impact on labour Source: CSO, 2008 The International Monetary Fund (IMF) projected substantial slow-down in the global economy between the second half of 2008 and the first half of 2009, resulting in a corresponding fall in output growth from 5.0% in 2007 to 3.9 in This output growth is projected to fall again to 3.0% in This affected mostly industrialised economies, particularly the USA and European markets, traditional major importers of mineral commodities from Botswana. So, the prices of mineral commodities during the second half of 2008 fell on account of weak demand, resulting in many primaryexport commodity producing countries generating significantly less export revenues. Many marginal mines including those from Botswana have since ceased operations. The country has three mines operated by Debswana (Orapa, Letlhakane and Jwaneng) that have both the quality and quantity reserves of diamonds. Production levels of diamonds have historically been increasing while various cutting factories expanded their capacity, and other four new licensed resulting in more employment. However, diamonds which prior to the global crisis accounted for over 50% of national income; 55% of the country s total exports of goods and services; and 50% of government s revenue, have been under tremendous stress. As a result output (diamond) plunged by 89% from P3.3 billion to P371 million between August and November The situation worsened when some of the country s diamond mines ceased operations between December 2008 and April The closure of some mines and scaling down operation activities of others resulted in the retrenchment of workers who were promised that they would be re-hired when things improve. The situation translated directly to loss of income and fiscal revenues. For instance, mineral revenue to the government is expected to decline by 50% during 2009 since diamond sales for this year have been predicted to be worse. 4

5 Debswana Diamond Company recorded a slump in production since the last part of The company even suspended production from 29 December 2008 to 25 January 2009, a decision that affected all categories of employees except those in the maintenance activities who were allowed to continue. The company also temporarily shut-down its operations between 25 February and 14 April 2009; and suspended production at Damtshaa Mine and Orapa No. 2 Plants for the rest of This development directly affected 580 employees ( In addition, Orapa No. 1 and Jwaneng operation sites have instituted production stoppage between February 2009 and mid-april The rest of the operations only commenced production after 14 April 2009, al beit at a reduced scale in response to weak global demand for the commodity. As a result, diamond sales are anticipated to be reduced from 27.6 million carats in 2008 to 19 million carats during To avoid retrenchments, the company put some employees on extended leave with full pay and others on short working cycles. However, despite the promise to re-deploy those currently retrenched, the unfolding situation creates psychological pressure to affected workers and their respective families, forcing some of them to alter their living standards. The situation as described by the Secretary General of the Botswana Mine Workers Union calls for multi-stakeholder dialogue. DiamondEx Botswana (Lerala Mine) also experienced a disappointing sale in October 2008, in which the ruling price was 35% below the previous value of diamonds. In February 2009, the company was put under the Judicial Management due to difficulties in meeting financial commitments. Subsequently, production at the mine was suspended indefinitely resulting in 284 job losses. Although 15 of the 16 licensed diamond cutting and polishing factories had employed 3,267 people prior to the economic crisis, by end of March 2009, about 29% (2,308) employees were retrenched. Nickel price at the global market fell from an average of US$14/lb in March 2008 to US$4/lb in last quarter of 2008 as well as the first quarter of This directly affected production and marketing of Botswana nickel. As a result, Botswana s BCL Nickel Mining Company in Selebi Phikwe in December 2008 incurred labour-related costs of about 40%, which is equivalent to about P100 million. The company also retrenched 348 employees, of which 15%, 13% and 7% were from categories of senior management, junior management and general work force respectively. The company further asked those due for retirement in 2009 to do so early and also encouraged voluntary retirement for those willing to do so. Similarly, Tati Nickel Company, which has retrenched 105 employees so far this year, doubt that two of its companies would meet their financial obligations from their metal sales. Similarly, base metals (copper and nickel), the second largest export minerals suffered about 70-80% production decrease following the sharp plummeting of prices at the global market. As a result, the African Copper (Mowana Mine) ceased production by end of 2008, resulting in 384 job losses; falling export earnings and government revenue; and loss of incomes thereby worsening poverty and inequality levels in the country. Only care and maintenance were the remaining activities. 5

Job losses, January 2008 February 2009 Total Tati Debswana Diamond Ex BCL Mowana 0 200 400 600 800 1000 1200 1400 Source: Ministry of Minerals and Energy The preceding graph illustrates how the

6 Job losses, January 2008 February 2009 Total Tati Debswana Diamond Ex BCL Mowana Source: Ministry of Minerals and Energy The preceding graph illustrates how the global economic and financial recession is really negatively impacting on labour, a development that calls for a coordinated policy response at the global level in ways that galvanise global mitigation measures in order to save the sector from spiralling negative social impacts. The BCL Nickel Mining Company has promised to re-employ all the casualties of the current financial crisis once the situation has improved. 6

7 RECOMMENDATIONS 1. Stimulate national production by encouraging and promoting the consumption of domestic goods and services. 2. Get a broad national consensus on a wider vision for social protection that aims at long term support to reduce the vulnerability of the chronically poor. 3. Place employment and labour market issues at the heart of any stimulus package. 4. Increase support for small enterprises. 5. Strengthen public financial management with a view to increasing public expenditure efficiency. Broader sections of civil society, together with strategic and crucial regional and global works and activists, should relentlessly push for increased aid flows to education even though donors will be under pressure to reduce their overall aid package. Similar levels of advocacy should aim to achieve better donor support to health. 7

This policy brief is a summary from The Social Impact of the Financial Crisis in the SADC region the case of Botswana, written by Richard

8 Produced August 2009 Authors: Richard Kamidza Editors: Percy F. Makombe and Sofia Svarfvar Published by: Economic Justice Network with support from the Open Society Initiative for Southern Africa (OSISA). This policy brief is a summary from The Social Impact of the Financial Crisis in the SADC region the case of Botswana, written by Richard Kamidza. Please find the full report on Contact: Economic Justice Network Church House 1 Queen Victoria Street Cape Town 8000 South Africa Tel: Fax: admin@ejn.org.za 8

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