Public-sector strikes weigh heavily
The intended fiscal adjustment, aimed at bringing the budget into balance by the next financial year, is facing its most severe test yet. More than 50,000 public-sector workers have gone on strike, initially demanding pay increases of 16% and then modifying this demand to 12%. The government has insisted that it cannot afford a pay increase above 5%. Although public salaries were recalibrated last year in line with a redefinition of the working month, inflation stood at 8.2% in March. Pressured by administered levies, a weaker BWP-ZAR cross rate, and rising food and fuel prices, the Bank of Botswana (BoB) expects CPI inflation to remain above the 3-6% target until at least the second quarter of 2012.
The strike is into its seventh week. With the authorities implementing a ‘no work, no pay’ policy, the economic impact is bound to be severe in this country of 1.8million, where the government is one of the largest employers and government spending typically accounts for 40% of GDP. Unions, unable to pay their members, want the ‘no work, no pay’ rule to be set aside, as it has directly affected striking workers’ spending, with reports of late payments of rents and utility bills and difficulties in servicing personal loans. Retail sales are down sharply. With much of the private sector dependent on government spending, delays in government orders as a result of the strike have had a wider impact. Private-sector firms are also downsizing and implementing cost-cutting measures. Some small, medium-sized and micro enterprises (SMMEs) face closure. An outright q/q contraction in non-mining GDP now looks plausible in the second quarter of 2011, putting at risk the full-year GDP growth forecast of 4.9% – despite an overall increase in government spending and a healthy rebound in diamond sales.
THE BIGGER PICTURE
Externally, the outlook has been improving for some time. Diamond exports have recovered to healthy levels, although not to pre-crisis peaks. Worldwide polished diamond sales increased 8% in 2010 and were up 7% in the US, the largest market. In India and China, sales increased 37% and 26%, respectively. The demographic boost to demand arising from the strong growth outlook for these economies is likely to be substantial. But this may not be sufficient for Botswana, where new mining projects on the scale seen in the early 2000s are unlikely. The maturing of large development projects aimed at diversifying the country’s economic base, which had involved significant capital imports, should at least see the trade balance return to surplus.
Some of the necessary fiscal consolidation will take care of itself, with the development spending budget likely to be reduced sharply in the years ahead. However, concerns will now focus squarely on domestic growth. Despite its historic economic success – post-independence per-capita income grew faster than it did in some ‘Asian Tigers’ – the need to develop an economic model that is less dependent on public spending is paramount. Given the small domestic market, any new model will necessarily need to be externally focused. But the policy challenges are significant, and any boost to competitiveness will need to be real rather than solely reliant on nominal depreciation. *Razia Khan is Standard Chartered Bank’s Regional Head of Research in Africa