07 Aug 2024

The International Monetary Fund (IMF) has revised economic growth to one per cent, down from 4.2 per cent projected by the government as the diamond industry continues to be suppressed.

A commentary from independent economic research agency, Econsult, GDP says growth fell to 0 per cent in the first quarter of 2024, compared to a growth of 2.7 per cent in 2023. Non-mining growth also fell to 0.7 per cent during the same period, according to Econsult report.

Consecutive quarters of negative growth result puts the country in a recession.

Econsult states that the diamond market has been experiencing difficulties emanating from competition from synthetics, weak demand in China, disruption of supply chains due to the Russian invasion of Ukraine and the negative impact of measures imposed by G7 countries to enforce sanctions on Russian diamonds.

Lower sales and high inventories have pushed De Beers to reduce planned production which has resulted in lower GDP growth forecasts due to projected contraction in diamond mining output, says Econsult quarterly commentary.

“The uncertain environment and outlook for natural diamonds and the likelihood that any recovery will be slow adds to the difficulties faced by Anglo America in pursuing their planned sale of De Beers before the end of 2025.”

The commentary says slump in the diamond sector has hit hard on the government coffers,

“Lower mineral revenues, combined with highly expansionary budgets in 2023/24 and the current 2024/25 financial year (FY), have had a huge negative impact on the budget. The preliminary budget deficit for the recently completed 2023-24 FY, was double what was projected a few months back in the 2024 budget. Our estimate of the projected deficit for 2024/25 has also doubled to a very worrying P17 billion or six per cent of GDP,” states Econsult.

It is said that the drop in revenues have led to a rapid depletion of government balances.

“The Government Investment Account (GIA) balance has fallen from P19.1 billion in July 2023 to P5.1 billion in April 2024, a drop of P14 billion in only nine months. Clearly this rate of depletion is unsustainable,” the analysts at Econsult state.

There are two ways in which deficits could be financed, either through using previously accumulated balances or borrowing.

Econsult warns however that cash balances have already been depleted and further, unlikely that the P17 billion budget deficit could be financed through borrowing.

The Annual Borrowing Programme (ABP) published by the government in April projected an increase in net domestic borrowing to P13 billion in 2024/25 but this was based on projected deficit of P8.7 billion.

It is stated that the expanded deficit would require a further increase in net domestic borrowing to perhaps P19 billion, which is far beyond the appetite of domestic financial institutions, even with the increased domestic investment requirements for pension funds.

It is further said some external borrowing may be feasible, but would be very expensive if undertaken from commercial sources.

“Such a rapid increase in borrowing, whether from domestic or external sources, would be a sign of fiscal instability,” it is said.

The Econsult analysts are of the view that the projected P102 billion expansionary budget is not feasible and achievable as revenues are expected to under-perform and the consequent borrowing target cannot be financed hence some cutbacks in spending will be required in the current financial year.

The development budget has been increased to P29 billion, up from P14 billion in 2022/23 and the analysts say spending this much on development projects would not be wise, given that most of them have not been subjected to proper appraisal.

They believe that the execution of the development budget should be focused on high-return projects as the IMF has stated in the 2024 Article IV Mission.

“Our assessment is that the expenditure budget for 2024/25 will need to be cut by some P8 billion (around 8 per cent), reflecting expected revenue shortfalls, and that most of this will be achieved by postponing or cancelling development projects. Essentially, the shortfall in diamond revenues during 2024 has to be accommodated through reduced spending rather than increased borrowing,” the analysts state. Ends