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Business rankings: Only broad-based reforms will reverse decline

Publishing Date : 06 May, 2019

Author : AUBREY LUTE

A local economic think tank, econsult Botswana has advised that the key challenge for the country is the implementation of broad-based reforms that will reverse the decline in Botswana’s rankings on business environment rankings. The observations are captured in econsult’s Economic Bulletin for the period January-March 2019.


According to this report compiled by Keith Jefferis, Sethunya, Sejoe, and Kitso Mokhurutshe, “this requires the implementation of a coherent policy agenda, based on prior analysis of the likely impact of policy proposals, and ensuring that policy measures are in line with the Transformation Agenda laid out in Vision 2036, whereby Botswana will become more globally integrated, with growth driven by high productivity, innovation and competitiveness.”


Jefferis and his team are of the view that measures such as the tax limit on interest deductions make starting a business more difficult, not easier, and the proposal to make it more difficult for non-citizens to buy property makes Botswana less globally integrated, not more.  Similarly, they observe that Botswana should avoid populist measures such as import controls and border closures, which raise the costs of trade and make the country less competitive, not more.


Furthermore econsult says a disappointing development during the quarter was Botswana’s inclusion on new lists issued by the European Union (EU) regarding Tax Co-operation and Anti-Money Laundering (AML). The EU issued two new lists. The first related to tax transparency and the exchange of information regarding tax compliance. Botswana was “greylisted” as a country that had made some improvements, but would have to implement more changes before the end of 2019 to bring tax transparency standards into line with international norms if the country is not to be blacklisted next year.


The second list relates to anti-money laundering and counter-terrorist financing frameworks (AML-CFT). Botswana has been included on the list of 23 countries identified as having strategic deficiencies in their AML-CFT frameworks. According to Jefferis and his team, Banks and other entities covered by EU anti-money laundering rules are required to apply increased checks (due diligence) on financial operations involving customers and financial institutions from these high-risk countries to better identify any suspicious money flows.


“This may make such financial institutions reluctant to deal with Botswana, which has adverse implications for attempts to diversify and attract foreign investment. A prominent challenge is therefore to rectify the AML-CFT framework in order to ensure that Botswana is removed from the EU blacklist at the earliest possible opportunity,” they observe. A further disappointing development, according to the E-Consult economists is the failure to issue more work permits for foreign workers and investors.


The number of work permits in issue as at the end of 2018, 5,605, was 3% lower than a year earlier. “So, despite the proclaimed intention to liberalise the issuance of work permits and be more responsive to the needs of firms, the actual impact has been limited. Whether this is due to a lack of applications for permits, or a continued high level of rejections is not known; the statistics published by Statistics Botswana do not include information on the numbers of applications and rejections.”


The econsult economists in their Q1 Economic bulletin opine that there have also been a couple of policy mis-steps, due in part to a lack of proper analysis of proposals before being implemented. “For example, the Income Tax Amendment Act, passed in December 2018, introduced a restriction on the amount of loan interest that firms could claim against taxable profits.


The rationale for this measure was to reduce the potential transfer of profits out of the country through debt-financed “thin capitalization” companies owned by foreign investors; the measure is in line with OECD recommendations to avoid Base Erosion and Profit Shifting (BEPS). However, as introduced in Botswana, the restriction applies to all companies, whether domestic or foreign owned. Hence it goes way beyond BEPS prevention.”  Jefferies and his team argue that this effectively makes start-ups more difficult, as they often have high levels of debt and low profits in their early years.


“Companies supported by the Citizen Entrepreneurial Development Agency (CEDA) would be amongst those affected. It also kills the Variable-Rate Loan Stock (VRLS) property company model, which was introduced to enable (tax-exempt) investors such as pension funds to invest in property through a fund model rather than directly, and therefore to benefit from professional property management expertise. Debt finance is penalised, even when the loans are from domestic financial institutions (which are taxable, so the issue of profit-shifting is not relevant),” says the econsult Economic Bulletin.
 

Meanwhile Botswana’s outlook for 2019 is for growth at or slightly below the 2018 level. The IMF is projecting real GDP growth of 3.9% in 2019. Our view is that growth will be within the range of 3.5%-4.0%. The public sector pay rise to be paid in April 2019 will add somewhat to domestic demand, which will provide some relief for retailers and other service sectors that have been squeezed by slow real income growth in recent years.


According to the econsult report, the first quarter of 2019 has seen a mixed but broadly positive set of economic developments. Real GDP data for the fourth quarter of 2018 (and hence completing the picture for the year as a whole) showed an improvement in economic growth to 4.5% for the year. This was broadly in line with expectations, but was sharply higher than the previous year, when growth was only 2.9%. The recovery was driven by improved output in the mining sector, with higher output from Debswana and Botswana Ash.


In addition, the impact of the closure of the BCL copper-nickel mine in 2016 dropped out of the annual growth calculations. The non-mining private sector also performed well in 2018, with the only major detractor being a slowdown in diamond trading activity (part of the wholesale sector of the economy) during the year, as total sales volumes through De Beers Global Sightholder Sales (DBGSS) were 4 percent lower in 2018 than in 2017.

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