1. Bifm Economic Review 4th Quarter 2007
Economic Review
Summary of
with developments in the international improvement in confidence that has been
economy – economic slowdown and rising evident over the past 18 months. The
Economic inflation - impacting adversely on Botswana. improvement is particularly striking for firms
Developments
focused on the domestic economy, of which
Review of 2007
77% reported that current business
Output & Business Confidence conditions were satisfactory, compared with
Dr Keith Jefferis No GDP data have been published since the only 21% in September 2005. An even higher
proportion (85%) expect business conditions
end of 2006 and so we are in the usual New
Chairman of Year “black hole” with regard to information to improve through 2008. While the survey
Bifm Investment on overall economic growth; although the surprisingly shows declining confidence
CSO has undertaken to produce and publish amongst exporters, this may mainly reflect
Committee qu arte rly GDP d ata prom ptly , this
commitment has generally not been fulfilled.
the small size of the exporter sample in the
survey.
However, growth indicators suggest that A number of factors lie behind this upturn
there has been a strong recovery, with the in business conditions and confidence.
growth of business credit, government Domestically, government spending has been
By most accounts the economic conditions
spending and non-mining electricity ramped up, with expenditure in the first nine
in 20 0 7 re pre sen te d a sign ific an t
consumption all rising sharply during the months of 2007 rising by 22% compared to
improvement on 2006. Inflation was down,
year (see Figure 1). Other indicators tell a 2006. Most of this increase was in
exports grew strongly, government improved
similar story: applications for business trading development spending, which rose by 60%
its ability to spend its budget, and business
licences in the second half of 2007 rose by over the first nine months of 2006. This may
confidence was up. Due to lack of data we
13.5%, while non-mineral exports were up show that government has managed to
don’t really know what was happening to
121% in the first nine months of 2007, both overcome some of the implementation
economic growth and employment, but it is
compared to the same periods in 2006.
fair to assume that both should have constraints that have held back development
performed reasonably well. So far, Botswana The improvement in business conditions is projects in the past. While a high proportion
has been relatively immune from the impact shown in the results of the Bank of of development spending flows out of the
of the turmoil in major financial markets and Botswana’s biannual Business Expectations country (e.g. expenditure on construction
the sub-prime crisis. Looking forward to Survey. The latest results, for the second half materials and HIV/AIDS drugs), it nonetheless
2008, however, things may not be so rosy, of 2007, show a continuation of the stimulates the domestic economy through
Figure 1: Inflation Figure 2: Business Confidence Index
(% of firms rating current business conditions satisfactory)
Survey Date
All Exporters Non-exporters
Source: BPC, BoB, Econsult Source: BoB
Source: BoB, CSO, Econsult

2. 2 Economic Review
employment and expenditure on locally
Figure 3: Export Growth, 2006 –7 (Jan – Sep)
supplied goods and services. One of the
200&
weaknesses of the Botswana economy is that
the domestic private sector still remains 150%
heavily dependent upon government
spending – something that has to change in 100%
the longer term – but it means that govern-
50%
ment can boost economic activity through
increasing spending in the short term, which 0%
seems to have been happening recently.
-50%
Outside of this, the upsurge of mineral
prospecting activity, the implementation of
new mining and minerals processing projects, Source: CSO, Econsult
and the likelihood of further large mining-
related projects in the medium term, have benefitted from recovery from the Foot & Botswana beef in the EU, and would have led
shown dynamism in one sector of the Mouth Disease outbreak in 2006, as well as to the ending of beef exports to Botswana’s
economy that is not dependent upon drought (encouraging cattle sales), and a most lucrative market, which would have been
government spending. Important ongoing supply response to higher prices. Nickel and disastrous for the Botswana Meat Commission
projects include the construction of the new copper benefitted from higher world (BMC), Botswana’s cattle farmers and the rural
Diamond Trading Company (DTC) facility and commodity prices, especially earlier in the economy.
the opening of several new diamond cutting year. Textiles benefitted from strong demand
factories in Gaborone, the construction of Nevertheless, EPAs have been controversial
growth in the region and internationally, and
the Norilsk Nickel Activox refinery near in some quarters. One of the main concerns
success in utilising the opportunities offered
Francistown, and the Diamonex diamond has been in respect of EU demands for
by international trade agreements such as progressively liberalised access to developing
mine near Lerala, all of which are providing
the US Africa Growth and Opportunity Act country markets (in fact this is not specifically
an important boost to economic activity in
(AGOA). All exports benefitted from improved an EU demand, but is a requirement if the
their respective areas. Looking further ahead,
international competitiveness under the EPAs are to be consistent with WTO rules).
agreement is close to being reached on the
crawling peg exchange rate regime. This is not relevant in Botswana’s case, as
Mmamabula coal/power project, and changes
to the Mines & Minerals Act and the Electricity As a result of good export performance, South Africa already has such an agreement
Supply Act to accommodate the project have combined with a slower rate of growth of with the EU (the SA-EU Trade & Development
now been passed. imports, the balance of payments continued Co-operation Agreement), which in practice
to run a healthy surplus, estimated at P10.2 applies to Botswana due to its membership
Trade & Balance of Payments of SACU. Hence, in practical terms, the interim
billion for the first nine months of 2007
Externally, the regional and international (compared to P10.3 bn for the whole of EPA involved no further concessions on
economic environments have been supportive 2006). The foreign exchange reserves have Botswana’s part. A second concern relates
for much of the year, with buoyant global continued to rise, reaching P58.5 billion (US$ to the EU’s desire to include services and
economic growth as well as strong growth 9.7bn) at the end of September, an estimated “new generation” trade issues (such as
in the Southern African region. This has 32 months of import cover. intellectual property and public procurement)
helped Botswana’s trade performance. Total in the EPAs; these issues are not included in
exports for the first nine months of the year One important trade development that the interim EPA and will be addressed as full
were up 37% (in pula terms) over the same occurred at the very end of 2008 was the EPAs are negotiated.
period in 2006. What is interesting is the signing of an interim Economic Partnership
Inflation & Monetary Policy
sources of this growth. Although diamonds Agreement (EPA) between Botswana and the
remain by far the largest export, at around European Union (as did Lesotho, Namibia, For most of the year, inflation developments
65% of the total, the growth of diamond Swaziland and Mozambique). The interim EPA were positive; the inflation rate declined
exports over this period was only 19%. The provides for improved access for Botswana sharply from 8.5% at the end of 2006, and
more dynamic export sectors were meat (up beef to the EU, with reduced tariffs (zero by March was below 7% and hence within
86%), nickel (& copper) (up 118%) and compared to 5% under the previous Cotonou the Bank of Botswana’s inflation objective
textiles (up 182%). These performances Agreement) and no quotas. Failing to sign the range. However, towards the end of the year
reflected a variety of factors; the meat sector EPA would have led to much higher tariffs on inflationary pressures started mounting, and

3. 3 Economic Review
by December it was back up to 8.1%. This not appear that the two were linked. By the What are the implications for Botswana? As
was driven primarily by developments in middle of 2008, valuations on the BSE had a highly trade-dependent economy, the
global food and energy markets. By the end reached unrealistically high levels; for instance, impact of changes in global economic activity
of 2007, international oil prices had risen by price/earnings (p/e) ratios for the commercial are potentially far-reaching. The USA is the
over 80% from their low point in early bank shares that dominate the BSE were largest market for Botswana’s exports, as
January 2007, and there were also sharp over 30, and the domestic market as a whole the major world consumer of diamonds and
increases in food commodity prices, notably had a p/e ratio in the low 20s. Many the primary market for Botswana’s textile
for fooodgrains (maize, wheat etc.) and dairy commentators argued that a correction was exports. Any slowdown in US growth,
products, with The Economist food overdue, regardless of international especially if led by a drop in consumer
commodity price index up 37% over the developments, and this appears to have been expenditure, would negatively affect
year. The impact of these developments was what has happened. With p/e ratios for the Botswana’s exports. However, if such
felt globally, and most countries experienced banks at just over 20, and for the market as problems are largely confined to the USA
rising inflation. Although Botswana’s relative a whole at 15.5 at the end of the year, and are short-lived, then other sources of
position was not affected – by November valuations are now more realistic. The prices economic growth (Europe and major
the inflation differential between Botswana of dual listed mining shares on the foreign developing countries) will help to cushion
and major trading partners had fallen to its board of the BSE followed similar trends, the impact. But if US recession leads to a
lowest level for some time – the increase in rising by 33% between January and August sharp slowdown in global economic activity,
inflation was nonetheless unwelcome. but then falling by 13% through to with the impact widely felt, then Botswana’s
Fortunately, underlying inflation remains export earnings could fall significantly. The
December, largely reflecting trends in
lower, with the trimmed mean core inflation value of copper-nickel exports has already
international metals prices.
measure falling to 7.4% in December. been adversely affected by falling metals
The Outlook for 2008 prices in the second half of 2007, and this
On the monetary policy front, the Bank of
would be intensified by a global recession.
Botswana maintained its inflation objective The beginning of 2008 has been characterised
As a result, Botswana’s three major exports
range of 4%-7% for 2007, along with a by unusually high levels of uncertainty in the
(diamonds, copper-nickel & textiles), are
medium term objective of 3%-6%. Once global economy. The sub-prime crisis in the
vulnerable to a US-led global slowdown. This
inflation fell within the range, the Bank felt US has spread internationally, and although
would be compounded be a weakening
able to reduce interest rates by 0.5% in it was initially hoped that this would be short-
dollar, the currency in which all three of
June, leading to a reduction in the Bank Rate lived and contained, the impact has persisted.
those exports are priced, further reducing
to 14.5%. This was maintained until the end Moving into the New Year, fears of recession
export earnings.
of the year, despite concerns about rising in the USA are intensifying, with many
inflation and domestic demand pressures. commentators rating the chances of recession The tightening of credit conditions and
Of particular concern was the growth of at 50-50. Two scenarios can be envisaged. increase in risk aversion in major financial
bank credit, which increased from 18.6% If the US does not slip into recession, but markets, even if prolonged, should have no
annually at the end of 2006 to 27.8% in simply experiences a period of slower (or major influence on Botswana. As the country
November 2007, and remained outside of zero) growth, global economic activity will is a net creditor, and the government does
the BoB’s target range for credit growth of temporarily weaken and growth will fall not borrow on international markets, there
11-14% throughout the year. below trend. Nevertheless, the impact would will be little direct impact, although projects
be short-lived and, supported by a likely requiring major loan finance – such as the
The Botswana Stock Exchange (BSE)
easing in monetary policy around the world, Mmamabula Energy Project – might find
experienced a “year of two halves”, with a
global growth would rebound in the second raising such loans more difficult, or more
continuation of 2006’s rapid growth in the
half of the year. However, if the US does expensive. Notwithstanding the tightening
Domestic Companies Index (DCI) through
slide into recession, with a period of negative of international liquidity, domestic financial
to August, during which time the index rose
economic growth, job losses and a markets should remain highly liquid.
by 60%. From August onwards, however,
the situation was reversed, and by the end contraction in real incomes, this is likely to Domestically, the main economic problem is
of the year the DCI had declined by 15% have a widespread impact on the world likely to be inflation, with several nasty shocks
from its peak; over the year as a whole, the economy. Global growth would slow due in the first half of the year. Rising inflation
index was up by 36%. The decline in the significantly and the existing credit market may in turn lead to higher interest rates. As
BSE DCI coincided with the decline in stock problems would intensify. In this scenario, a in 2007, there will be continued pressure
markets around the world, especially the global slowdown could persist well beyond from high food and oil prices, and domestic
major developed markets. However, it does the end of 2008. fuel prices are likely to be the main driver of

4. 4 Economic Review
Figure 4: Petrol and Crude Oil Prices Figure 5: Inflation
f’cast
Petrol (lagged 4 months) Crude Oil
Source: Econsult , Dept. of Energy Affairs, US EIA Source: BoB, Econsult
Botswana inflation in the coming months. South Africa, the source of around 70% of is likely to change in 2008. Expect a much
Fuel prices are adjusted on a monthly basis Botswana’s electricity. A new supply contract more hawkish tone in the Monetary Policy
to reflect the cost of crude oil on international between South Africa’s Eskom and the Statement to be released in February, and
markets as well as refining and transportation Botswana Power Corporation (BPC) came into increases in interest rates in the first half of
costs. Domestic price changes therefore effect on 1 January 2008, and is much less the year, even though with inflation being
reflect international crude price changes, favourable to Botswana than the previous primarily driven from outside of Botswana,
albeit with a lag and an element of contract, both in terms of prices and stability the potency of monetary policy is limited.
stabilisation. As Figure 4 shows, domestic of supply – the result of which is that Botswana
petrol prices generally reflect international is now much more exposed to both tariff The changed electricity supply situation is
crude prices with a lag of around 4 months. increases and supply disruptions from South not just a price threat, but could hinder
As a result, the recent sharp increase in Africa than it had been previously. In addition, investment and growth as well. With the
international oil prices from $70 to $100 a BPC needs to generate funds to contribute to virtual certainty that Botswana will increasingly
barrel towards the end of 2007 has not yet the financing of new domestic generating experience interruptions in supplies from
been reflected in domestic pump prices. capacity. Substantial electricity price increases South Africa over the next five years, and
While crude prices went up by 58% during are likely in 2008, and although electricity costs with no new domestic supply capacity due
2007, domestic pump prices only rose by only have a weight of 1.5% in the CPI basket, online before 2011, the problem is serious,
20%, even with December’s substantial price they feed through widely to other prices and especially for the energy-intensive mining
hike. Should crude prices remain at current will push up inflation further. sector that is the bedrock of the economy.
levels, domestic fuel prices would have to To date, little public information has been
rise from the current level of P5.60 a litre The combination of these developments
provided by BPC on these problems and how
(for petrol in Gaborone) to nearly P7 to fully means that inflation will continue to rise from
they are going to be addressed, and a more
reflect this – a further increase of 20% or the December level of 8.1%, and could easily
informative approach by BPC and the
more. Fuel has a weight of around 7% in reach double digits by mid-year if international
oil and food prices remain high and there Government would help the private sector
the new CPI basket, so this alone would
are substantial increases in BHC and BPC to plan appropriately.
nearly 1.5% directly to inflation, which would
be compounded by the impact on higher tariffs. On the positive side, it is unlikely that Botswana’s financial markets should remain
transport costs, public transport fares etc. oil prices will rise much further from current relatively immune from the turmoil in global
levels – in the absence of higher levels of financial markets in 2008. More reasonable
Other possible inflation shocks could come geopolitical instability in the Middle East –
from domestic electricity prices and Botswana valuations on domestic stocks should
as a slowdown in global growth will put encourage a resumption of buying activity
Housing Corporation (BHC) rentals. The latter
downward pressure on oil prices. Hence it is
have not been adjusted for four years, and and the DCI should bottom out in the first
possible that the direct impact of oil prices
BHC has been lobbying Government to approve quarter. In the bond markets, expectations
on inflation will be short-lived, although the
a rental increase – although the magnitude of are high that Government will announce a
indirect impact via other costs could be
any such increase should be small given that programme of regular bond issues to coincide
longer-term.
private sector housing rentals have been largely with the maturity of the BW002 bond on 1st
stagnant over this period, and BHC rentals are Although the BoB maintained unchanged March. This would help to boost liquidity in
supposedly market-related. Perhaps a more interest rates at the last meeting of the the bond market and support the yield curve,
serious threat arises from increases in electricity Monetary Policy Committee in 2008, despite which in turn provides a foundation for bond
tariffs. Electricity prices are rising steeply in rising inflation and credit growth, this situation issues by the private and parastatal sectors.

5. 5 Economic Review
Feature:
on the basis that this represents the average The Need to Adjust
level of government revenues expected
This point was made strongly in a recent IMF
Fiscal
during the remainder of NDP 9, leading to
publication, which considered the impact
a balanced (and therefore sustainable)
of declining diamond production and the
Sustainability budget.
move underground on the government. The
Issues in NDP10 However, the long-term prospects are for
much lower levels of government revenues
anticipated dramatic decline in diamond
revenues between 2021 and 2029 is shown
as a proportion of GDP. Current and recent in Figure 6. This shows that diamond revenues
revenues are high due to the exceptionally will grow at a healthy rate over the next
Introduction high profitability of the diamond industry decade, after which time they will decline
and the high rate at which those profits are sharply as production goes underground,
Government is currently in the process of and in just over 20 years from now, by 2029,
taxed. In the medium term, production and
preparing National Development Plan 10 will fall to zero as known diamond reserves
profits at these mines will decline as
(NDP 10), which will run from the 2009/10 are depleted.
production moves underground and costs
financial year until 2015/16. NDP10 will cover
rise. While some new diamond mines are
an important period in Botswana’s economic The implications of this are clear: (i) efforts
expected to open, these will be much smaller
development, and will have to address issues to diversify the economy must be intensified,
than the existing mines, have a relatively and (ii) the government budget must be
of high unemployment, slow economic short life, and are unlikely to be nearly as
diversification, high levels of dependency placed on a sustainable adjustment path to
profitable as the Debswana mines. a much lower revenue level. The earlier this
upon government, and budget sustainability. Furthermore, as the economy diversifies – adjustment begins, the less traumatic and
In this feature we address this latter issue, in whether into other mining activities or into drastic it will be. But even a smooth
particular the fiscal issues that NDP 10 will non-mining activities – tax revenues will adjustment requires considerable cuts, with
need to address to ensure smooth adjustment decline in relation to the size of the economy budgeted expenditure falling by up to 1%
to lower mineral revenues in future. as enterprises taxed at more “normal” rates of GDP each year for the next 15 years.
Revenue Prospects become more important. In the long term,
the government’s tax and other revenues However, the current starting point of the
In recent years the government budget adjustment process is not as bad as it could
will most likely decline to around the average
outturn and trends have been mixed. A few have been, because government spending
in sub-Saharan Africa of 25%-30% of GDP.
years back the budget was in deficit, for the
This will require a major (downward) (i) For instance, in South Africa government revenues account for
first time in many years, due to rapidly rising 26% of GDP
adjustment in the level of government
expenditure and weak revenues, and there (i) IMF (2007) Botswana: Selected Issues and Statistical Appendix.
spending, which will have to grow more
were genuine concerns that budget trends The projections are based on data from the Ministry of Mineral
slowly than the economy as a whole. Resources and Water Affairs and Debswana.
were unsustainable. As a result expenditure
had to be restrained, and a new Fiscal Rule Figure 6: Projected Revenues from Diamonds
was introduced in the Mid-term Review of 7000
NDP 9. The current budget position is more
6000
favourable, due to improved revenues and
reduced spending, and in the last two
5000
financial years (2005/06 and 2006/07) there
have been significant surpluses. However,
4000
reduced spending has been due more to an
Diamond revenue
inability to spend available resources than to in millions of dollars
3000
a budgeted reduction in spending, and should
not therefore be seen as a planned outcome.
2000 Mining goes
underground before
While the immediate budget position is Recycling of existing waste resources are totally
(higher production of lower- depleted
reasonably favourable, the position is much 1000 quality diamonds as
underlined by a lower price
less positive in the medium and long term. trend)
The Fiscal Rule introduced in the Mid-Term 0
2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029
Review of NDP 9 specifies that government
Source: IMF, 2007
expenditure should be set at 40% of GDP,

6. 6 Economic Review
has recently been significantly below primarily as a resource to build up a capital infrastructure in increasingly remote rural
budgeted levels due to underspending and asset that can provide long-term annuity areas. At the same time, allocations to
lack of implementation capacity. Although income. The basis for this is already in place, recurrent spending may be insufficient to
expenditure has been budgeted at 40% of in the form of the Government Investment maintain existing infrastructure. Roads are a
GDP following the Fiscal Rule, actual spending Account (GIA) at the Bank of Botswana, and case in point: a combination of poor
was only around 31-32% of GDP in the the Pula Fund component of the foreign management and insufficient resources
2005/06 and 2006/07 fiscal years. But the exchange reserves. However, the balance in means that maintenance of the existing
long term need for much lower spending these accounts, especially the GIA, would infrastructure is inadequate, while resources
means that the emphasis now and during need to rise sharply if the resulting annuity are being devoted to building new roads in
NDP 10 should not be on ramping up income is to be meaningful.
areas with very low traffic volumes. This is
government spending to match revenues, There will also need to be a change in unlikely to represent rational allocation and
but to make government expenditure more budgetary principles, with allocations from management of scarce resources. Hence
efficient and focused on long-term mineral revenues to long-term savings made NDP 10 needs to ensure greater efficiency
sustainability. actively before spending decisions are made, in the use of public financial resources,
rather than as a passive residual depending especially as the availability of such resources
Budgetary Principles for NDP 10
on budget outcomes, as at present. It also will decline in coming years.
In the short-to-medium term this means the means that the Government’s accumulated
Government should be spending less than it savings (balances at BoB) and the nation’s Key initiatives could include: re-introducing
is earning, and accumulating the balance – savings (the foreign exchange reserves) should effective project appraisal techniques and
i.e., returning to the days of significant budget be viewed as a resource to facilitate and reducing the number of politically driven
surpluses. This has two benefits. First, it cushion the adjustment process rather than development projects; introducing proper
facilitates the smooth adjustment of as a resource to finance a higher level of project management skills in the public sector,
expenditure levels to lower revenues in the spending in the short term. including parastatals; taking better account
long term. Second, it means that government of the recurrent expenditure implications and
A second important fiscal issue to be
(and the nation) can accumulate significant resource needs stemming from development
addressed in NDP10 relates to the balance
savings balances that can be used to finance projects; improving productivity and efficiency
between recurrent and development
future expenditure and supplement other in the public sector workforce, if necessary
spending. The NDP 9 MTR specified a target
sources of revenue as mineral revenues of 30% of total spending allocated to by downsizing, and terminating ineffective
decline. Essentially this means building up development spending, in order to boost the activities; transferring activities to the private
reserves (both government savings and overall national investment rate. Looking sector and contracting out under perform-
national foreign exchange reserves) that can further ahead, this may not be appropriate. ance related management arrangements;
be used as a capital fund that will generate Many public sector investment projects are and making better use of international best
a permanent future income flow without arguably yielding very low economic (and practice techniques in public sector resource
consuming the capital base of the fund. This social) returns, especially those involving the allocation and expenditure decisions in both
involves treating current mineral revenues provision of very expensive physical the recurrent and development budgets.
Bifm Bots wana Limited
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