Botswana central bank calls for an open economy

By Mpho Tebele

GABORONE – The Bank of Botswana (BoB) has called on the government to pursue what it calls an open economy as part of its effort to diversify the economy away from minerals.

An open economy is described as an economy in which there are economic activities between the domestic community and outside world.

In a report presented to President Ian Khama and his Cabinet, the central bank noted that since the country has a relatively small market, it is crucial to persist with an open economy and export-led growth model.

Such an approach, the bank says, encourages output of products (goods and services) that can effectively compete in foreign markets, with positive implications for local productivity, innovation and entrepreneurship. In turn, the report says, local producers are also able to compete with imports in the domestic market without resorting to additional government support.

“This contrasts with protection from competition and is, ultimately, costly to consumers in terms of the price variety and trade facilitation and the promotion of industrialisation also involve rationalisation of administration with a view to achieving integrity and predictability of processes to support legitimate economic activity, and reducing opportunities for rent-seeking behaviour by service providers,” reads the report.

The report also states that in an open economy environment, it should be accepted that foreign workers complement locals in various ways, including as part of the needed foreign direct investment and skills transfer.

Bank of Botswana expressed concern that Botswana has not achieved the level of economic diversification expected from the various trade-related instruments that the country has adopted.

“To diversify away from heavy dependence on the mineral sector, it is proposed that SEZs are established by building a culture of clustering and value chain retention, to drive the competitive advantage of enterprises and nurture emerging industries that have been shielded from competition so that they can become internationally competitive,” reads the report.

The report says the slow pace of economic diversification evidenced by continuing concentration of output and trade in terms of both products and direction. In addition, the challenges of unemployment (20 percent) inequality and poverty remain primary concern indicating the need for increased effort to accelerate inclusive growth.

It says that the predominance of exports of raw materials and dominance of imports in domestic production and consumption, respectively, suggest a weak impact of both the export-led and import-substitution policies and strategies.

“Proximity to a large economy that is also part of a customs union in which Botswana is a member further accentuates the challenges of industrial polarisation and the limited discretion the country has in using industrial/trade policy (including the structure and level of tariffs) to guide the path of industrialisation,” the report says.

Given the extent of trade openness, the report says, the country’s endowments and the largely favourable macroeconomic policy and social environment, it is apparent that the limits to business expansion and industrialisation essentially relate to the country’s capacity in the various aspects of leadership, management, skills as well as policy and strategy implementation, monitoring and effectiveness.

It is noted, in this regard, that there has been a continuous development and renewal of policies and institutions focused on sectoral development, broader industrialisation, economic diversification  and employment. These efforts, the report says, have yielded varying degrees of success, overall, the achievements so far and pace of progress fall short of the national objectives and aspirations.

A notable feature of institutional and policy development over time has been multiplication of efforts with deficiencies and weak results addressed through creation of additional policies, institutions and additional layers of bureaucracy, rather than review and rationalisation of prevailing approaches.

In the event, resources are thinly spread, with additional direct and indirect costs to Government and the economy, which could undermine the country’s fiscal position. Furthermore, the preference by Government for continued ownership and control of institutions and strategy tends to restrain the pace of privatisation and private sector participation, including exploitation of economic opportunities.

Going forward, the report recommends that the trade policy institutional framework and regulatory environment need to be re-considered to effectively address the formulation, implementation and evaluation of the policy.

“Institutions dealing with trade-related matters are numerous and complex, with overlapping functions and responsibilities. Hence, the need to rationalise and strengthen the institutional mechanisms so that they can provide timely and effective implementation of the adopted policies,” the report says.

May 2017
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