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Country Report

Botswana

May 2006

The Economist Intelligence Unit 26 Red Lion Square London WC1R 4HQ United Kingdom

Botswana at a glance: 2006-07

OVERVIEW The government under the presidency of Festus Mogae will remain firmly in power throughout the forecast period, although factional rivalry is likely to continue within the ruling Botswana Democratic Party. Diversification of the economy away from diamond mining will remain a major policy goal. Real GDP growth will fall to 4% in national accounts year 2006/07 (July-June) as mining growth slows, then rise to 4.6% in 2007/08 as new diamond and copper-nickel mining capacity comes on stream. Average inflation will increase to 14.5% in 2006; inflationary pressures due to the devaluation of the pula in May 2005 and high world oil prices were further stimulated by the intro-duction of school fees in January 2006. However, inflation will slowly drift downwards from the middle of the year, and if, as the Economist Intelligence Unit expects, oil prices fall by around 8% in 2007 and inflation in South Africa remains subdued, inflationary pressures will ease further, and we forecast an average rate of 6.6% for the year. The trade surplus will narrow in 2006 as growth in the value of imports, owing to a spurt in imported consumer goods following the ending of the freeze on civil servants' pay and to higher capital spending by the government and mining companies, outstrips that of exports. In 2007, as additional mining capacity begins to come on stream, boosting exports, the trade surplus should widen. The deficit on the services account will narrow in 2006 and turn into a surplus in 2007 owing to increased revenue from tourism, and the surplus on the current transfers account will widen in both years owing to higher payments from the Southern African Customs Union. As a result of these trends, the current-account surplus is fore-cast to narrow to 13.3% of GDP in 2006, then widen to 13.5% of GDP in 2007.

Key changes from last month

Political outlook • There has been no change to the political outlook.

Economic policy outlook • There has been no change in the economic policy outlook.

Economic forecast • There is no change to the economic forecast.

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Botswana 1

Country Report May 2006 www.eiu.com © The Economist Intelligence Unit Limited 2006

Contents

Botswana

3 Summary

4 Political structure

5 Economic structure 5 Annual indicators 6 Quarterly indicators

7 Outlook for 2006-07 7 Political outlook 8 Economic policy outlook 10 Economic forecast

14 The political scene

18 Economic policy

21 The domestic economy 21 Economic trends 22 Agriculture 23 Mining 24 Manufacturing 25 Financial and other services

26 Foreign trade and payments

List of tables 10 International assumptions summary 13 Forecast summary 18 Government finances 22 Gross domestic product 26 Balance of payments

List of figures

13 Gross domestic product 13 Consumer price inflation

Botswana 3


Botswana May 2006

Summary

The government under the presidency of Festus Mogae will remain securely in power throughout the forecast period, although factional rivalry is likely to continue within the ruling Botswana Democratic Party (BDP). Diversification of the economy away from diamond mining will remain a major policy goal. Real GDP growth will fall to 4% in national accounts year 2006/07 (July-June) as mining growth slows, and rise to 4.6% as new mining capacity comes on stream. The trade surplus is forecast to narrow in 2006 as imports surge, then widen again in 2007 as mineral imports increase in line with new production capacity. Largely owing to these trends, the current-account surplus is forecast to narrow to 13.3% of GDP in 2006, before widening to 13.5% of GDP in 2007.

Botswana's opposition parties have started formal unity negotiations. Factionalism within the BDP may have started to subside. Backbench BDP MPs have defeated the government's attempt to restrict the sale of alcohol. A group of British parliamentarians has supported the government's policy of moving the San people (Bushmen) from the Central Kalahari Game Reserve.

The government has produced an expansionary budget for fiscal year 2006/07 (April-March). A pay award to civil servants may erode some of the competitiveness gains of the devaluation. The Bank of Botswana's handling of monetary policy seems to lack coherence.

Real GDP grew by 8.4% in 2004/05, although non-mining GDP grew by only 1.9%. Doubts have been raised about the accuracy of the consumer price index. Heavy rains have been a mixed blessing for farmers. The problems of the Botswana Meat Commission have continued. DiamonEx's new mine at Martin's Drift is expected to begin operation in early 2007. African Copper is moving ahead with its Dukwe project. LionOre is planning new investment in Tati Nickel. Plans to exploit the Mmamabula coal reserves are proliferating. The Botswana Development Corporation is supporting several new manufacturing projects. A new commercial bank has been licensed. The government and the Botswana Building Society have reached a compromise in their dispute. A limit on the holding of Treasury bills has fuelled a bull run on the stock exchange.

Preliminary estimates from the Bank of Botswana show a record current-account surplus in 2005 of P8.1bn (US$1.6bn), up from P1.4bn in 2004, owing to a 35% increase in export revenue. This reflects high commodity prices and the impact of the devaluation in May 2005.

Editors: Roger Boulanger (editor); Pratibha Thaker (consulting editor) Editorial closing date: May 8th 2006 All queries: Tel: (44.20) 7576 8000 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule

Outlook for 2006-07

The political scene

Economic policy

The domestic economy

Foreign trade and payments

4 Botswana


Political structure

Republic of Botswana

Unitary republic

Roman-Dutch law; cases in rural areas are heard by customary courts

National Assembly consisting of 57 members elected by universal suffrage, the president, the attorney-general and four members appointed by the president; a 15-member House of Chiefs advises on tribal matters

October 2004 (legislative); next legislative election due in October 2009

President, chosen by the National Assembly

The president, his appointed vice-president and cabinet (reshuffled in November 2004)

Botswana Democratic Party (BDP; the ruling party); Botswana National Front (BNF); Botswana Congress Party (BCP); Botswana People's Party (BPP); New Democratic Front (NDF); Botswana Alliance Movement (BAM)

President Festus Mogae Vice-president Ian Khama

Agriculture Johnnie Swartz Communications, science & technology Pelonomi Venson Education Jacob Nkate Environment, wildlife & tourism Kitso Mokaila Finance & development planning Baledzi Gaolathe Foreign affairs & international co-operation Mompati Merafhe Health Sheila Tlou Labour & home affairs Moeng Pheto Lands & housing Ramadeluka Seretse Local government Margaret Nasha Minerals, energy & water affairs Charles Tibone Presidential affairs & public administration Phandu Skelemani Trade & industry Neo Moroka Works & transport Lesego Motsumi

Linah Mohohlo

Official name

Form of state

Legal system

National legislature

National elections

Head of state

National government

Main political parties

Key ministers

Central bank governor

Botswana 5


Economic structure

Annual indicators

2001a 2002a 2003 a 2004 a 2005b

GDP at market prices (P bn) 31.9 36.7 39.9 48.8 56.1

GDP (US$ bn) 5.5 5.8 8.1 10.4 11.0

Real GDP growth (%)c 1.5 9.5 3.4 8.4 4.5

Consumer price inflation (av; %) 6.6 8.0 9.2 7.0 8.6a

Population (m) 1.8 1.8 1.8 1.8 1.8

Exports of goods fob (US$ m) 2,315 2,319 3,024 3,696 4,614a

Imports of goods fob (US$ m) -1,604 -1,642 -2,127 -2,864 -2,824a

Current-account balance (US$ m) 618 143 483 288 1,584a

Foreign-exchange reserves excl gold (US$ bn) 5.9 5.5 5.3 5.7 6.3a

Total external debt (US$ m) 400.0 488.0 514.0 529.4 b 518.8

Debt-service ratio, paid (%) 1.7 2.0 1.2 1.3 b 1.1

Exchange rate (av) P:US$ 5.84 6.33 4.95 4.69 5.11a

a Actual. b Economist Intelligence Unit estimates. c National accounts years July-June.

Origin of gross domestic product 2004/05a % of total Components of gross domestic product 2004/05a % of total

Agriculture 2.1 Private consumption 27.8

Mining 38.0 Public consumption 22.8

Manufacturing 3.6 Gross fixed capital formation 20.4

Construction, water & electricity 7.0 Change in stocks 14.4

Services (incl government) 44.2 Exports of goods & services 49.8

Financial services 10.5 Imports of goods & services -35.1

Main exports fob 2005 % of total Main imports cif 2005 % of total

Diamonds 70.1 Machinery & electrical equipment 16.3

Copper-nickel 9.8 Food 13.7

Textiles 4.7 Fuel 13.3

Vehicles & parts 2.4 Vehicles & transport equipment 12.5

Meat & meat products 1.3 Chemical & rubber products 11.9

Destination of exports 2005 % of total Origin of imports 2005 % of total

Europe 77.0 SACUb 85.1

UK 75.7 Europe 6.5

SACUb 9.0 UK 1.3

Zimbabwe 4.1 Zimbabwe 1.5

a National accounts year July-June. b Southern African Customs Union.

6 Botswana


Quarterly indicators 2004 2005 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 QtrCentral government finance (P m) Revenue & grants 5,048.3 3,777.0 3,871.1 4,186.8 5,901.3 4,882.4 n/a n/aExpenditure & net lending 3,913.7 4,461.4 3,388.3 4,329.4 4,371.9 4,778.3 n/a n/aBalance 1,134.7 -684.5 482.9 -142.6 1,529.4 104.1 n/a n/aPrices Consumer prices (Nov 1996=100) 171.0 176.6 178.8 181.4 183.5 188.1 195.5 201.9Consumer prices (% change, year on year) 6.4 6.9 6.7 7.7 7.3 6.5 9.3 11.3Financial indicators Exchange rate P:US$ (av) 4.73 4.83 4.71 4.51 4.47 4.94 5.46 5.58Exchange rate P:US$ (end-period) 4.66 4.67 4.73 4.28 4.61 5.50 5.43 5.51Bank rate (end-period; %) 14.25 14.25 14.25 14.25 14.25 14.00 14.25 14.50Lending rate (av; %) 15.75 15.75 15.75 15.75 15.75 15.53 15.67 16.00M1 (end-period; P m) 3,041 3,523 3,391 3,626 3,550 3,878 4,390 3,838M1 (% change, year on year) 11.6 18.2 16.4 28.5 16.7 10.1 29.5 5.8M2 (end-period; P m) 11,468 12,601 12,462 12,731 13,250 13,105 14,534 13,967M2 (% change, year on year) 11.7 26.6 17.7 16.0 15.5 4.0 16.6 9.7Stockmarket index (end-period; 1989=100)a 2,641.3 2,844.1 2,902.9 2,888.7 3,021.4 3,275.6 3,468.7 3,559.1

Foreign trade (P m) Exports fobb ( 16,268 ) n/a n/a n/a n/a Diamonds 3,155 2,661 4,077 3,240 3,743 3,402 5,438 3,938Imports fobb ( -10,529 ) n/a n/a n/a n/aTrade balance ( 2,939 ) n/a n/a n/a n/aForeign reserves (US$ m) Reserves excl gold (end-period) 5,424 5,163 5,359 5,661 5,955 5,846 6,207 6,309

a Domestic companies index. b Balance of payments basis.

Sources: IMF, International Financial Statistics; Bank of Botswana, Botswana Financial Statistics, Annual Report.

Botswana 7


Outlook for 2006-07

Political outlook

After several attempts, the ruling Botswana Democratic Party (BDP) appears to be getting to grips with factional infighting and the president, Festus Mogae, and his government are expected to remain firmly in power throughout the forecast period. Mr Mogae has apologised for any offence he caused by openly supporting his deputy, the vice-president, Ian Khama, against Ponatshego Kedikilwe in the contest for BDP president in 2003. For its part, the faction led by Mr Kedikilwe and Daniel Kwelagobe has pledged to support efforts to unify the party. Teams from the leadership have been touring constituencies, and the capture of a local council seat from the opposition Botswana Congress Party (BCP) in an April by-election was seen as an early fruit of greater harmony in the party. However, the Kedikilwe-Kwelagobe faction has pointedly refused to disband and will continue to put pressure on Mr Mogae to accommodate its supporters both in the party and government, where the cabinet is dominated by the other main BDP faction led by Mompati Merafhe and Jacob Nkate. There is ample scope for the president to reshuffle his cabinet to remove non-performing ministers, and if he does not soon move in this direction the new-found unity could quickly start to dissipate.

Senior party members will increasingly jockey for position in the run-up to the 2007 party congress, at which Mr Khama will step down as party chairman in anticipation of succeeding Mr Mogae as both state and party president in 2008. Backbench members of parliament (MPs) may grow increasingly restive, particularly if the economy shows no signs of improvement, and have demonstrated their power by forcing the government to withdraw measures to restrict the opening hours of bars and nightclubs—an apparent attempt to tackle a number of alcohol-fuelled social problems. Mr Khama, who is generally disdainful of parliament and has recently provoked MPs by opposing their demand for a pay increase, may need to be more accommodating to the Kedikilwe faction if his succession to Mr Mogae, although virtually assured, is to proceed smoothly.

Although the agreement among the main opposition parties not to stand against each other at by-elections resulted in several successes in late 2005, including the election to parliament of the leader of the Botswana National Front (BNF), Otsweletse Moupo, the traditional hostility between the BNF and the BCP is never far from the surface and erupted in early 2006 when elements in the BNF openly criticised the ongoing negotiations for a more formal unity agreement between opposition parties. The BNF leadership, while insisting that the dissenters were not representative, has itself at times appeared lukewarm towards the negotiations, and Mr Moupo continues to be dogged by suggestions that he is controlled by hardline Marxists in the party. For the moment the situation is controlled by the negotiations, which cover both a share-out of parliamentary constituencies between each of the four participating parties and a common policy programme, and are scheduled to be completed by November. But valuable momentum has been lost and there is

Domestic politics

8 Botswana


plenty of scope for hostility between the opposition parties to flare up, putting paid to any idea of a viable opposition challenge to the BDP in 2009.

Botswana's relations with its major trading partners will remain good. The country will continue to benefit from its reputation for political and economic stability and for the efforts that it is making to tackle HIV/AIDS. However, the long-drawn-out court case, in which a group of San (Bushmen) are challenging their removal from the Central Kalahari Game Reserve, will continue to attract negative publicity. The national mood had seemed to swing in favour of some form of negotiated agreement, but so far, buoyed up by support from a group of British parliamentarians, the government has maintained a firm line in refusing to back down. Mr Mogae has signalled the priority he gives to regional unity by openly criticising European Union sanctions against the Zimbabwe government, but this will do nothing to shield the country from the social consequences of the disastrous economic situation in Zimbabwe.

Economic policy outlook

Although the government will continue to pursue largely prudent policies in 2006-07, it is under increasing pressure to be seen to be taking the initiative in restoring economic confidence. This is especially necessary following the 12% devaluation of the pula at the end of May 2005, which shook confidence and was widely (although wrongly) interpreted as a sign of desperation on the part of the authorities. The devaluation suggests that the government may be prepared to press on with some difficult policy decisions. However, for it to be successful, other structural reforms will have to be carried out, including the long-delayed privatisation programme, labour-market reforms, and striking a better balance between attracting investors and promoting redistribution. The government may face difficulties in pushing necessary reforms through parliament, where MPs are restive and appear to be more interested in a populist agenda

The Ninth National Development Plan (NDP 9; April 2003-March 2009) reflects the goals of the government's long-term policy document, Vision 2016, which contains ambitious goals for economic growth and poverty reduction. A mid-term review (MTR) of NDP 9 was carried out in late 2005, and its proposals were approved by parliament in December. The main policy objectives of NDP 9, which are likely to be only partly successful owing to capacity constraints, a shortage of skilled labour and overambitious goals, are: economic diversification, employment creation and poverty alleviation, maintaining macroeconomic stability and financial discipline, and developing the country's human resources (which includes the fight against HIV/AIDS). The diversification of the economy away from diamond mining will remain the main policy goal. However, the plethora of official agencies trying to attract foreign investment, as well as excessive bureaucracy and small market size, will constrain progress. The long-delayed privatisation of Air Botswana may now take place in 2006, but the government's privatisation masterplan, published in September 2005, although listing the enterprises that are ready for privatisation,

International relations

Policy trends

Botswana 9


gives no clear timetable for action, increasing the likelihood of further delay and confusion in this area.

On February 6th the minister of finance and development planning, Baledzi Gaolathe, delivered his annual budget speech to the National Assembly. Mr Gaolathe's estimate for the budget outcome in fiscal year 2005/06 (April-March) is a surplus of P1.58bn (US$294m), compared with an original budget surplus of P112m (US$21m)—revenue was 5.5% over budget and expenditure was 1.6% under budget. Mr Gaolathe ascribed the higher than expected revenue in 2005/06 (21% higher than in 2004/05) mainly to P1bn higher mineral revenue, owing to higher diamond production and prices and favourable movements in the exchange rate, while blaming the underspend (although total expenditure was still 16% higher than in 2004/05) on capacity constraints.

According to Mr Gaolathe, many of the proposals in the 2006/07 budget are based on the mid-term review of NDP 9. These include a new fiscal rule, which sets an upper limit of 40% of GDP on government spending, and rebalancing the budget in favour of development spending. The budget projects an 11% year-on-year increase in total revenue (three-quarters of the increase being a result of higher receipts from the customs pool of the Southern African Customs Union—SACU) and a 15% increase in total expenditure, producing a surplus of P923m. In accordance with the recommendation of the mid-term review, development expenditure is projected grow by 36%, from 22% to 26% of total expenditure, and recurrent expenditure, just 10% up on the estimate for 2005/06 once the cost of the 8% civil-service salary increase is included, is in effect capped in real terms. However, if there is no improvement in the execution rate of spending budgeted funds the surplus could easily be higher, and Mr Gaolathe prepared the ground for this by emphasising the role of private-sector inefficiencies in previous underspending. Therefore, the Economist Intelligence Unit now forecasts a surplus of 2.5% of GDP in 2006/07, falling to 1.2% of GDP in 2007/08 as the government continues to pursue fiscal expansion to help to boost the economy, particularly in the development budget where cutbacks have negatively affected the local construction industry.

On February 17th the Bank of Botswana (the central bank) raised the benchmark bank rate by 50 basis points to 15% in response to a sharp increase in inflation to 16.6% in January, more than double the bank's 4-7% target range. The surge in inflation (up from 11.4% in December) was mainly owing to the reintroduction of fees in secondary schools and came just as it appeared that the inflationary pressures caused by the devaluation of the pula in May 2005 were starting to abate. Year-on-year inflation rose further over the next two months to reach 17% in February and 17.7% in March.

Since the devaluation, the central bank has struggled to maintain confidence that it has control over domestic monetary conditions, as analysts have questioned the wisdom of a series of interest-rate increases—the bank rate was raised by 25 basis points in both August and October 2005—which will do little to restrain the inflationary effects of the devaluation but will add to the pressures on the already struggling private sector. At the same time, the financial sector is still coming to terms with the new system which restricts

Fiscal policy

Monetary policy

10 Botswana


direct holdings of Bank of Botswana certificates (short-term securities which the bank uses to absorb liquidity) to commercial banks. Although the bank is concerned about inflationary pressures arising from the expansionary government budget, to the surprise of many its annual monetary policy statement presented in February retained the 4-7% inflation target for 2006 which is clearly not now achievable. In practice, however, attention is likely to focus increasingly on the newly introduced medium-term (three-year) target of 3-6%, but the secrecy that surrounds the bank's interest-rate decisions will continue to hamper effective communication on policy.

Economic forecast

International assumptions summary (% unless otherwise indicated)

2004 2005 2006 2007

Real GDP growth World 5.1 4.6 4.3 4.1

US 4.2 3.5 2.8 2.5

South Africa 4.5 4.9 4.7 5.1

Exchange rates ¥:US$ 108.1 110.1 113.2 103.0

US$:€ 1.244 1.245 1.261 1.348

Rand:US$ 6.45 6.36 6.30 6.70

Financial indicators US$ 3-month commercial paper rate 1.48 3.49 5.24 4.88

€ 3-month interbank rate 2.13 2.15 2.90 3.69

Commodity prices Oil (Brent; US$/b) 38.5 54.7 60.0 55.3

Nickel (US$/lb) 6.3 7.0 6.7 5.9

Food, feedstuffs & beverages (% change in US$ terms) 8.5 -0.5 4.0 -4.2

Industrial raw materials (% change in US$ terms) 21.0 10.5 11.7 -15.8

Note. Regional GDP growth rates weighted using purchasing power parity exchange rates.

We forecast that world GDP growth (on a purchasing power parity basis) will slow from 4.6% in 2005 to 4.3% in 2006 and 4.1% in 2007. Growth in the key market for Botswana's diamonds, the US, will slow from 3.5% in 2005 to 2.8% in 2006 and 2.5% in 2007, but demand will remain significant and any slackening is likely to be offset by the burgeoning market for diamond jewellery in China, one of the world's fastest-growing economies, which is also fuelling high prices for other metals mined in Botswana. In South Africa, the main market for Botswana's non-traditional exports, rising domestic demand will drive growth of 4.7% in 2006 and 5.1% in 2007. Oil prices are forecast to remain high over the forecast period, to the detriment of the country's import costs.

According to official figures released in February—the first new data on economic growth since June 2004—real GDP grew by 8.4% in national accounts year 2004/05 (July-June), although that was mainly the result of real growth of 18.2% in the mining sector, driven by diamond production. This very high rate of growth contrasts with a disappointingly low rate of growth, 1.9%, in non-mining GDP. Mining output, which accounts for around 40% of GDP, has been

International assumptions

Economic growth

Botswana 11


boosted by record output at the giant Jwaneng diamond mine, and promising results from prospecting activity have accelerated plans for a new, although much smaller, mine, now scheduled to open in early 2007. There will be further growth in mining as the Mupane gold mine contributes a full-year's production to GDP, plans for increasing copper and nickel output are accelerated in reaction to high world demand, and high world oil prices together with emerging energy shortages in Southern Africa, stimulate interest in exploiting Botswana's huge coal reserves, although the various plans to expand domestic electricity generation capacity will not come into effect during the forecast period.

Although the devaluation of the pula has already had a positive impact on some non-mining sectors—tourism has been boosted and farmers have been receiving higher prices in local currency terms for their cattle exports—any wider stimulus for the growth and diversification of the Botswana economy will not be seen straight away, especially given the need for further structural reform and the negative impact of the devaluation on domestic demand. There is also some concern that the 8% civil-service pay award, which will affect wages throughout the economy, may lessen the competitive gains of the devaluation. Construction activity could be boosted by government spending and, despite the difficulties of establishing manufacturing industry in Botswana, several new projects are in the pipeline and downstream diamond-related manufacturing is expected to be boosted by the agreement with De Beers to transfer some of its marketing and sales activities to Botswana.

Growth in the services sector is expected to remain robust. The commercial banks have continued to perform strongly, despite adverse trading conditions, but efforts to develop Botswana as an international financial services centre appear to have stalled. The transfer of De Beers' diamond sorting activities to Botswana will also provide a further boost to the services sector, although no timetable has been announced and the government has been lobbying hard to ensure regional support for the project. Mining activity is likely to remain the chief stimulus to GDP growth, although at a very much slower rate than in 2004/05, and we estimate real GDP growth in 2005/06 of 4.5%, owing to continuing buoyancy in the sector, slowing to 4% in 2006/07. In 2007/08, as new diamond and copper-nickel capacity comes on stream, real GDP growth is forecast to rise to 4.6%.

The effect on the consumer price index (CPI) of secondary school fees, which were reintroduced in January 2006, bumped up year-on-year inflation in that month to 16.6% (although some economists have questioned whether the impact of the fees on inflation was as great as the CPI suggested). Inflation rose again in February, to 17% year on year, this time mainly owing to rising food prices, and further to 17.7% in March. The likelihood of a gradual depreciation of the currency, following the introduction of a crawling-peg mechanism for determining the exchange rate, will cause continued upward pressure on import prices, although this will be mitigated by subdued inflation in South Africa. Inflation will remain high in the first half of 2006, but once the effects of the devaluation drop out of the calculation it will begin to subside, although from a high level because of the extra kick to inflation caused by the reintroduction of school fees in January. As a result, we forecast an average

Inflation

12 Botswana


inflation rate of 14.5% in 2006. The effect of the school fees will drop out in January 2007 and inflation is forecast to fall to an average rate of 6.6% in 2007.

Nearly a year after the devaluation of May 2005 rumours of a further devaluation have faded, and the authorities' insistence that the introduction of the crawling-peg mechanism to adjust the exchange rate was intended to prevent the need for such drastic steps in the future has gained credibility. However, the new mechanism is still widely misunderstood, which is not helped by either the authorities' failure to say what they expect the rate of crawl to be or the current wide divergence between inflation as measured by the CPI and the central bank's target range, and there has been a marked increase in hedging activities in the foreign-exchange market. Despite this, we expect the crawling peg to operate over the forecast period. The advantages of the new system are that it will keep the exchange rate in line with fundamentals and improve competitiveness, although the divergence between actual and targeted inflation, if it persists, could increase pressure for a further devaluation. The South African rand, a key determinant of the pula's value, is expected to depreciate gradually against the US dollar over the forecast period, averaging R6.30:US$1 in 2006 and US$6.70 in 2007, although a sharper fall is possible. Taking this into account, we forecast that the pula (which averaged P5.11:US$1 in 2005) will weaken further, to P5.60:US$1 in 2006 and P5.84:US$1 in 2007.

Botswana's main exports grew strongly in 2005, owing to high world commodity prices and increased production of diamonds, copper-nickel and gold. The growth was led by record production by Debswana (the 50:50 joint venture between the government and De Beers), and the trade balance is estimated to have nearly doubled, to US$1.5bn. In the short term the main impact of the devaluation will be on imports, particularly given the lack of domestically produced alternatives. The value of imports is expected to rise sharply, at least in the first half of 2006, especially as the constraint on imported consumer goods caused by the effect of the devaluation on overall purchasing power has been eased by the pay increase for civil servants. Increased capital spending in 2006 and 2007, by the government and mining companies in particular, will also suck in imports. The outbreak in April of foot-and-mouth disease in farms along the Zimbabwe border will disrupt beef exports which had been expected to grow following the 40% increase in January in prices paid to farmers by the Botswana Meat Commission.

The trade surplus is therefore forecast to fall in 2006, but it will widen in 2007 when exports rise strongly as additional capacity in diamond and copper-nickel mining begins to come on stream. We expect the services account to move into surplus in 2007. The capacity to provide services domestically continues to grow, particularly in the financial sector, and tourism, as well as mining, will benefit from the devaluation. Movements on the income account will depend on the state of the international financial markets, where the country's foreign-exchange reserves and most pension funds are invested—such returns generate nearly all income credits (although the account is also influenced by imputed flows based on retained earnings), and their growth will follow stockmarket trends. Profit transfers from Debswana to De Beers will form the main income

Exchange rates

External sector

Botswana 13


debits; although over the forecast period these will be limited by the company's investment in new plant and facilities. Botswana's large share of the imports within SACU will maintain a steady inflow of payments into the current transfers account from SACU's pool of customs and excise revenue. These, together with rising donor assistance for HIV/AIDS programmes, will help to increase the current transfers surplus in 2006-07. In consequence of these trends, we forecast that the current account will remain in surplus, at 13.3% of GDP in 2006 and 13.5% of GDP in 2007.

Forecast summary (% unless otherwise indicated)

2004 a 2005 a 2006b 2007b

Real GDP growthc 8.4 4.5 d 4.0 4.6

Industrial production growthc 14.4 7.5 d 4.2 4.3

Gross fixed investment growthc 0.3 5.7 d 6.9 7.4

Consumer price inflation (av) 7.0 8.6 14.5 6.6

Consumer price inflation (year-end) 7.8 11.4 10.9 7.6

Commercial bank prime rate (av) 15.8 15.7 20.6 15.4

Government balance (% of GDP) 1.2 2.8 d 2.5 1.2

Exports of goods fob (US$ m) 3,696 4,614 4,698 4,988

Imports of goods fob (US$ m) -2,864 -2,824 -3,078 -3,294

Current-account balance (US$ m) 288 1,584 1,541 1,635

Current-account balance (% of GDP) 2.8 14.4 d 13.3 13.5

External debt (year-end; US$ m) 529 d 519 d 543 564

Exchange rate P:US$ (av) 4.69 5.11 5.60 5.84

Exchange rate P:¥100 (av) 4.34 4.64 4.95 5.67

Exchange rate P:€ (year-end) 5.80 6.50 7.51 7.94

a Actual. b Economist Intelligence Unit forecasts. c National accounts years July-June. d Economist Intelligence Unit estimates.

Botswana Sub-Saharan Africa

Gross domestic product(% change, year on year)

Botswana Sub-Saharan Africa

Consumer price inflation(av; %)

0

1

2

3

4

5

6

7

8

9

10

2001 02 03 04 05 06 07

6

7

8

9

10

11

12

13

14

15

2001 02 03 04 05 06 07

14 Botswana


The political scene

In February leaders of the four main opposition parties, the Botswana Alliance Movement (BAM), Botswana Congress Party (BCP), Botswana National Front (BNF) and Botswana People's Party (BPP), held an apparently successful meeting to establish a framework for negotiating a wider unity agreement, aiming to build on their successful co-operation in the final months of 2005, when they inflicted a number of by-election defeats on the ruling Botswana Democratic Party (BDP; October 2005, The political scene; January 2006, The political scene). However, when the negotiations subsequently began, it was clear that tensions between the parties, and in particular the uneasy relationship between the BNF and the BCP, had worsened. The spark for a renewed war of words between the two parties, which between them dominate opposition politics in Botswana, was a speech by Mokgweetsi Kgosipula, a former secretary-general of the BCP who defected to the BNF in late 2005. In January, describing other opposition parties as splinter groups, he declared that negotiations were a waste of time and that the other parties should disband and join the BNF.

Predictably, this provoked a furious response from the BCP. Dumelang Saleshando, the party's lone member of parliament (MP), dismissed the excuse that Mr Kgosipula had been airing his personal views by retorting (together with some more colourful allusions) that the BNF should not be run "like a jungle", that the BCP had been formed precisely to get away from such behaviour, and that under the cover of freedom of speech there was a concerted plan among elements in the BNF to undermine his party. In turn, this provoked Moeti Mohwasa, the BNF's publicity secretary, to say that Mr Saleshando should be disciplined for offensive language and talking to the press. The relationship was further soured by the BCP's decision to admit the New Democratic Front (NDF) as a group member of the party. The NDF—like the BCP an offshoot of the BNF—had pointedly not been invited to participate directly in the negotiations.

The dispute spread quickly, and Otsweletse Moupo, the BNF president, had to appeal for calm at a party rally disrupted by BCP supporters complaining about Mr Kgosipula. Nevertheless, campaigning, unsuccessfully, to retain the presidency of the BNF youth league in mid-April, Gabriel Kanjabanga declared that the only acceptable form of unity was for all opposition candidates to campaign under the BNF banner.

Not surprisingly, in such an atmosphere, a variety of conspiracy theories started to emerge. Among the more plausible was that hardliners in the BNF, such as Mr Kgosipula, had been caught off guard by the willingness of the BCP to enter into unity negotiations but were now fighting back with a plan, if necessary, to remove Mr Moupo; the least believable was that Mr Kgosipula had evidence that the BCP was involved in an Israeli-funded plot to destabilise the BNF. A more reasonable theory was that the BCP leadership was bluffing and merely appearing to follow its mandate to pursue unity, but in reality hoping to pro-voke the BNF into dropping out (before his election as party president in July 2005, Mr Saleshando's father, Gilson, was highly critical of unity proposals). It was also clear that the affair had regional as well as ideological dimensions:

The opposition parties start formal negotiations

Conspiracy theories proliferate

Botswana 15


leaked reports from a BNF leadership forum held in March suggested that opposition to unity talks was concentrated in northern constituencies, where the party had not fared well in the 2004 general election and would be unlikely to be allocated many winnable seats under any future agreement.

Coming soon after the leadership forum and the publication of another article by a leading BNF academic questioning the whole basis of opposition co-operation, the refusal at short notice by the party to sign a "people's unity charter" as the first tangible product of the negotiations, was widely seen as confirmation that the party's attitude to unity had cooled. Mr Moupo did not attend the subsequent leaders' meeting and press conference, leaving his deputy, Kathleen Letshabo, to be portrayed as an increasingly isolated moderate in the party. Moreover, rumours of an impending purge increased when it was revealed that a pro-unity BNF MP, Robert Molephabangwe, had been disciplined for speaking at a BCP rally without permission. However, despite being put on the defensive, the party's objections to the flowery wording of the charter, which had evidently been drafted at very short notice with little time for consultation, seemed genuine enough, and the scale of Mr Kanjabanga's defeat at the hands of Nelson Ramoatwana, the mayor of Gaborone and a lea-dership loyalist, suggested that support for the dissidents had been exaggerated.

By the end of April, the programme for negotiations seemed to be broadly back on track, with a timetable covering most of 2006 to reach agreement not just on constituency allocations (this was scheduled to be done by July) but also on a policy programme. But the proponents of opposition unity were disappointed that valuable momentum had been lost and that much of the euphoria and goodwill from the successes of 2005—in particular Mr Moupo's victory in the Gaborone West-North by-election—was now badly eroded. Commentators were quick to suggest that the BDP's success in regaining the council ward at Pitshane-Molopo in the southern Barolong constituency reflected the half-hearted commitment of other opposition parties to support the BCP candidate—a BCP spokesman accepted that his party's campaign had been complacent, but denied this reflected divisions between the parties.

Needless to say, the BDP watched these developments with barely disguised glee, at one stage entering the fray at the height of the exchanges between Mr Saleshando and Mr Mohwasa to offer advice on how to run a political party. The BDP had initially appeared uncertain how to react to the novel experience of a serious opposition: first, seriously miscalculating in the Gaborone West-North by-election by choosing an overtly populist candidate with no political roots (with the added disadvantage of facing trial on a rape charge); and then being surprised and upset by the result (January 2006, The political scene). However, the BDP remains a formidable political machine where retaining power is the clear priority, and early in the New Year began to show signs of resolving the problems of internal factionalism which have preoccupied the party since the 2004 election. The announcement of a leadership weekend retreat in February was initially greeted with scepticism—a similar event in December had failed to make progress. However, following the retreat, the faction led by Ponatshego Kedikilwe and Daniel Kwelagobe,

The BNF refuses to sign a unity charter

BDP factionalism starts to subside

16 Botswana


declared itself satisfied with progress in its quest for greater representation in party structures, and the faction subsequently announced that it would participate in all activities aimed at unifying the party.

In March it was announced that teams drawn from across the leadership would tour constituencies, and the victory at the local by-election in Barolong was seen as an early success for this initiative. The party's National Council meeting in April, where Mr Mogae repeated his apology made at the retreat for any offence caused by his open backing of the vice-president Ian Khama when he defeated Mr Kedikilwe for the post of party president in 2003, was a further opportunity to show publicly that peace had broken out in the party and to concentrate on belittling the opposition. However, the Kedikilwe-Kwelagobe faction pointedly resisted the instruction that it should disband, privately complaining that Mr Mogae's words needed to be followed by more concrete action including cabinet posts for its supporters. Nevertheless, despite renewed rumours about an impending reshuffle and obvious scope for replacing less competent ministers, there has been no move to satisfy their demand.

A poll shows that Mr Mogae remains popular among voters

Despite continued criticism of the president, Festus Mogae, within the BDP, he remains popular among voters. According to a poll conducted by Afrobarometer, 70% of those questioned approved of his performance. (The poll of 1,200 was conducted in collaboration with the University of Botswana and with funding from the Canadian development agency.) Mr Mogae's rating was up from 64% in 2005 and 59% in 1999, and goes against the general trend of declining popularity among African leaders. This provided food for thought for his critics, who allege in particular that by his frequent foreign trips he neglects the concerns of ordinary voters. There was an outburst of public concern for his safety following an emergency landing in Greece en route to a state visit in Sweden owing to a technical problem with the presidential jet, and his high approval rating may reflect popular appreciation of his commitment to fighting for Botswana's interests abroad. The poll also revealed satisfaction with the government generally, which is credited with good management in most areas, although particular concern was expressed about high unemployment. The press, however, have not been deterred from criticising Mr Mogae for failing to begin a countrywide speaking tour, which had been promised for 2006, and for the cabinet's decision (apparently against the president's wishes) to replace the presidential jet.

Since the 2004 general election, when the number of constituencies was increased by 40%, cabinet decisions have been subject to more effective scrutiny by parliament (before 2004 a majority of MPs were in the cabinet), and the independence of backbench BDP MPs, most of whom are supporters of the Kedikilwe-Kwelagobe faction, was demonstrated in March when their opposition forced the government to withdraw plans to reduce the opening hours of bars and night clubs. Although Botswana clearly suffers from alcohol-related social problems including drunken driving, violence against women and the spread of HIV/AIDS, the amendment to the liquor regulations, which would have banned Sunday opening and restricted opening times on other days, was not well thought out, apparently ignoring the historical lessons about how such measures fail to control these problems. An attempt to reduce the

A backbench revolt scuttles new alcohol regulations

Botswana 17


impact on the tourist industry by exempting hotels from the measures smacked of elitism, as did the exemption of the bar in parliament. There was almost universal support for the private motion from a BDP MP, Botsalo Ntuane, that the government should seek further consultation before implementing the amendment. Even the cabinet did not seem inclined to support the policy, and when Neo Moroka, the minister of trade and industry, spoke in the debate he immediately conceded that the regulations would be put on hold pending consultation. The government was certainly embarrassed to be forced into this retreat, and the episode raises questions about how the normally painstaking consultative process of policymaking in Botswana had allowed such a deficient set of measures to proceed in the first place. Critics were able to argue quite reasonably that if existing laws—on drinking and driving, for example—were properly enforced then many of problems associated with alcohol abuse could be effectively tackled, and despite official denials it was widely believed that Mr Khama, whose disapproval of alcohol is well known, was the moving force behind the proposed new liquor regulations.

Normally criticised for his lack of interest, bordering on disdain, for parliamentary business, Mr Khama, in one of his rare contributions in March, provoked his fellow MPs by criticising them for extravagant salary demands. The debate on the bill to give MPs an 8% pay increase should have been fairly routine—the increase matched that awarded to civil servants in the February budget speech—but many speakers argued that they deserved much more, prompting Mr Khama, reportedly against the advice of his cabinet colleagues, to deliver a lecture on how many others were much worse off, reviving memories of a similar speech on the same issue after the 1999 general election when he had likened his colleagues to vultures. MPs from all parties responded in kind, quoting details of Mr Khama's own remuneration and perks and accusing him of hypocrisy. However, judging by the response in local newspapers, public opinion appeared to be on the side of Mr Khama.

Following a fact-finding mission in March, a group of British parliamentarians declared their support for the Botswana government over the controversial policy of removing San (Basarwa or Bushmen) from the Central Kalahari Game Reserve (CKGR). This came as welcome relief for the government which constantly has to defend itself against the international campaign orchestrated by a London-based charity, Survival International (SI). First People of the Kalahari, a local pressure group which is behind the long-running case in the High Court challenging the removals, had made accusations of ill-treatment and poor living conditions in settlements outside the reserve, and a debate in the British House of Lords had been highly critical of the government. Before setting off for Sweden, where he was accompanied by prominent Basarwa, Mr Mogae criticised De Beers, normally a reliable ally, saying that it wanted the government to end the resettlement in order to preserve diamond exports, and raised the race issue, saying that SI's attitude was that a European non-governmental organisation was more likely to be believed than a black African government. Giving a lecture in Norway, he reiterated that resettling the San had nothing to do with mining, but rather the emerging conflict between

Mr Khama criticises MPs' salary demand

British parliamentarians support Botswana over CKGR

18 Botswana


wildlife conservation and the mushrooming of human settlements in the reserve as a result of the provision of social services.

Speaking on the occasion of the visit to Botswana in April by Horst Köhler, the German president, Mr Mogae openly criticised the European policy of sanctions against the Zimbabwe government. Mr Mogae's visit to Namibia later in the month, during which it was announced that Botswana was to lease land at the Namibian port of Walvis Bay to provide dedicated support for its exports, was seen as finally drawing a line under a period of tense relations between the two countries arising from a series of border disputes in the 1990s. However, while promoting solidarity between Southern African governments, the social problems arising from the chaotic situation in Zimbabwe remained all too apparent: a BDP MP criticised widespread prejudice among his countrymen against Zimbabweans, who are commonly blamed for rising crime in Botswana, and a recent television documentary produced by the British Broadcasting Corporation (BBC) repeated allegations that Botswana police and immigration officials were taking bribes from Zimbabweans seeking to enter the country.

Economic policy

As was widely expected, the government responded to the stagnating domestic economy with an expansionary budget for fiscal year 2006/07 (April-March). The budget, presented to parliament by the minister of finance and development planning, Baledzi Gaolathe, on February 6th, projected a surplus of P923m (US$163m), compared with an estimated surplus of P1.6bn in 2004/05. Since the bulk of revenue comes from external sources, the planned 15% increase in spending over the revised estimates for 2005/06, if realized, would be expected to have a major impact on domestic demand.

Government finances (P m; fiscal years Apr-Mar)

2005/06a 2006/07b % change

Revenue & grants 21,697 24,144 11.3

Minerals 10,889 11,389 4.6

Customs 3,496 5,300 51.6

Income tax & VAT 4,627 5,039 8.9

Grants 220 363 65.0

Expenditure & net lending 20,122 23,221 15.4

Recurrent 15,796 17,234 9.1

Wages & salaries 5,436 5,998 10.3

Development 4,450 6,035 35.6

Balance 1,575 923 -41.4

a Revised estimates. b Budget estimates.

Source: Ministry of Finance and Development Planning, Annual Economic Report, 2006.

The groundwork for the budget was laid in the mid-term review of the government's Ninth National Development Plan (NDP 9; April 2003-March 2009), which called for a readjustment of the balance between recurrent and capital spending. In accordance with this, the development budget was

Mr Mogae criticises Zimbabwe sanctions

An expansionary budget seeks to boost the economy

Botswana 19


increased by 36%, with the emphasis on education and road building, and recurrent expenditure was in effect capped—once allowance had been made for salary increases, its nominal growth was only 9%, well below current inflation.

Mr. Gaolathe insisted (although he gave little detail on this point) that efficiency gains would make the allocation to recurrent expenditure sufficient to cover spending commitments, including the maintenance of existing infrastructure. The rapid growth of GDP in 2004/05 (see The domestic economy: Economic trends) allowed the government to claim that the budget was also consistent with a new fiscal rule set by the mid-term review that limits public spending to a maximum of 40% of GDP.

As well as outlining government spending plans, Mr. Gaolathe, drew attention to other major development projects that are planned for the next five years. These included:

• quadrupling the capacity of Morupule power station at an estimated cost of P3.2bn (US$600m);

• a new P22bn export power station, to which the government may contribute about P5bn, using coal from the Mmamabula coalfields in eastern Botswana; and

• investment by De Beers and Debswana of about P6.5bn on several projects, including the headquarters in Gaborone for the new Diamond Trading Company, where De Beers' sorting operations currently handled in London are to be transferred.

Although taking a resolutely positive line about the prospects for economic development, which was widely welcomed by both business and trade union leaders, Mr Gaolathe was careful to warn of potential obstacles. In particular, the local private sector may not have sufficient capacity to absorb such large increases in spending, and the minister was clear that the objective of giving preference in the awarding of contracts to citizen-owned companies would not be allowed to impede the effective implementation of the government’s investment programme. However, such statements have been made in the past and, despite some changes announced in the budget to streamline the tendering process for government projects, there is little evidence that problems with capacity constraints, in both the government and private sectors, will be successfully overcome.

The budget speech also announced an 8% salary increase for civil servants effective from April 1st. The increase in the cost of living since the last pay award in 2004 is estimated at 15.6% and the 8% increase is below both what workers had been hoping for and the 10% recommended by the National Economic, Manpower and Incomes Council. Nevertheless, although it was always unlikely that the pay freeze would continue through 2006, it is clear that an increase of this magnitude will significantly erode any gains to competitiveness brought about by the May 2005 devaluation of the pula. The likelihood of similar pay increases spreading throughout the economy increased when the government raised minimum wages, also by 8%, from May 1st. The civil service award (which was also applied to pensions and government

Budget pay award may erode competitiveness

20 Botswana


allowances) was based on a new formula by which salary increases for government workers will be set at a maximum of half the increase in the cost of living, with any additional increase being financed by productivity improvements. According to the budget speech, this formula had been approved by parliament during the debate in November 2005 on the mid-term review of NDP 9; however, it is not clear in the review where this is covered.

Partly to compensate for the increased cost of living since they were last adjusted in 2001, tax thresholds were raised in the budget so that the maximum rate of 25% for personal income tax becomes applicable on incomes of P120,000 per year (US$22,000; the previous figure was P100,000). A variety of other changes to income tax legislation were also announced, including combining the two-tier company tax into a single rate, introducing withholding tax on interest from residents’ bank accounts, clarifying various issues relating to the taxation of trade in securities, and broadening the range of permissible activities (and hence preferential tax treatment) for companies operating under the jurisdiction of the International Financial Services Centre. However, these appeared more like piecemeal changes rather than the result of the comprehensive review that had been promised at the time of the 2005 budget.

Looking forward, Mr Gaolathe announced that a Tax Administration Bill is to be drafted to consolidate the existing separate legislation covering income tax, value-added tax (VAT) and the Botswana Unified Revenue Service. Mr Gaolathe also announced several proposed changes to VAT; however, despite demands from MPs for measures to lessen the burden of VAT on poorer people, he stressed the government’s commitment to maintaining it as a broad-based tax with a low tax rate. Although a few items were added to the list of exempt goods and services (passenger transport, donations and condoms) and to the list of zero-rated goods (millet, wheat, sugar, maize cobs, and some agricultural inputs), this seems likely to have only a modest impact.

School fees distort CPI

When year-on-year inflation leapt from 11.4% in December 2005 to 16.6% in January, leading to a 50-basis-point increase in the Bank Rate, the Central Statistics Office (CSO) attributed 4.2% of this increase to the recent introduction of school fees at government secondary schools. However, since these fees were a new item it was not clear how their introduction had been included in the calculation of the consumer price index (CPI). There was no official explanation of this, but a former deputy governor of the Bank of Botswana, Keith Jefferis, raised doubts about the accuracy of the index, noting that the government expects to raise only P36m (US$6.4m) from the fees in fiscal year 2006/07 (April-March), which is a much smaller proportion of household expenditure than the 1.2% weight secondary school costs have in the CPI (hitherto this had comprised only the cost of school uniforms). According to Mr Jefferis, with a more realistic CPI weighting the introduction of secondary school fees would have added less than 1 percentage point to inflation. More broadly, he argues that the CPI basket, which was last revised in 1996, has become so outdated that inflation is likely to be significantly overestimated, as no account is taken of shifts in demand to new and generally cheaper products.

Only modest tax changes are made

Botswana 21


As inflation rose sharply in early 2006 and amid confusion surrounding the accuracy of inflation data reported by the Central Statistics Office, the Bank of Botswana (the central bank) struggled to retain the confidence of analysts that its monetary policy was appropriate. In January a commentary on centralbanknews.com, an on-line news service, had described the bank as having been humiliated by the May 2005 devaluation and the subsequent upward revision of the target range for inflation from 3-6% to 4-7%. When inflation jumped from 11.4% in December 2005 to 16.6% in January, mainly owing to the impact on the consumer price index of the introduction of school fees, and the bank responded by a further increase in interest rates, raising the bank rate from 14.5% to 15%, it was openly criticised by Standard Chartered Bank's chief economist Rhazia Khan, who argued that the impact of the school fees was contractionary for the economy and therefore of itself anti-inflationary.

There was further confusion about the direction of monetary policy when changes were announced that restricted the holding of Bank of Botswana certificates (the equivalent of Treasury bills; January 2006, Economic policy) to commercial banks. The presentation in February of the Bank of Botswana’s annual monetary policy statement provided an opportunity to clarify matters, although opinion was divided whether the bank's decision to maintain the inflation target for 2006 at 4-7% reflected its anti-inflationary resolve or a loss of touch with reality. At the same time, the bank introduced a new medium-term (three-year) target range of 3-6%, although its purpose was unclear, as was that of the bank in maintaining both the existing single-year target and the intermediate target for commercial bank credit growth, which also remained unchanged at 11-14%.

The domestic economy

Economic trends

According to new data released at the time of the budget, real GDP growth in national accounts year 2004/05 (July-June) was 8.3%, compared with a revised figure of 3.4% (down from the previous estimate of 5.7%) for 2003/04. However, these figures were heavily influenced by the performance of the mining sector: whose real growth was lowered to 0.3% in 2003/04 (compared with the previous estimate of 7%) and rebounded to 18.2% in 2004/05. Excluding mining, overall growth was 1.9%, and only 1.3% if general government activity is also excluded, a clear indication of the depressed state of the private sector. Construction, which grew by just 0.7%, and trade, which contracted by 7%, were among the poorly performing sectors. This is in line with other evidence, including a new business expectations survey published by the Bank of Botswana (the central bank), that these sectors have been particularly hard hit by the slow-down in domestic demand.

The manufacturing sector also contracted, by 2.6%, although this appeared more surprising given the rapid growth of textile exports. A similarly gloomy picture was apparent in data for employment. Although in his budget speech the

High growth in 2004/05 conceals weakness

Central bank fails to clarify monetary policy

22 Botswana


minister of finance and economic development, Baledzi Gaolathe, was keen to stress that growth in formal sector jobs of 2.8% in the year to March 2005 was higher than the population growth rate, more than 95% of the estimated 8,000 newly created jobs were in the civil service.

Gross domestic product (% change, year on year; national accounts years Jul-Jun)

2003/04 2004/05

Agriculture 2.8 3.3

Mining 0.3 18.2

Manufacturing 0.8 -2.6

Water & electricity 6.4 3.3

Construction 2.1 0.7

Trade, hotels & restaurants 11.6 -6.9

Transport & communication -3.4 5.6

Financial & business services 2.4 4.1

General government 5.1 3.6

Social/personal services 7.0 -0.5

Total GDP 3.4 8.3

Excl mining 5.6 1.9

Source: Ministry of Finance and Development Planning, Annual Economic Report, 2006.

Agriculture

Torrential rains from early in the New Year dramatically eased the water shortages in southern Botswana, and the main Gaborone dam went from being less than one-quarter to more than three-quarters full in a matter of days. The rise in water level was so rapid that there were concerns about the impact on the structure of the dam wall. Public concern switched from drought to flooding, although the restrictions on water use, in place since late 2004, are still in force. However, such an abundance of water was a mixed blessing for farmers, as cattle owners struggled to locate their livestock in some remote areas and crops were washed away.

Despite the 40% increase in prices paid to farmers for their cattle (January 2006, The domestic economy: Agriculture), which has contributed to inflation in recent months, a mood of gloom continued to surround the Botswana Meat Commission (BMC), and parliament scheduled an emergency debate to discuss its future. The price increase, which is being financed by a P240m (US$44m) concessional loan from government, failed to produce an immediate response from farmers and the number of cattle delivered to the BMC's abattoirs remains at a very low level. In part this has been owing to the wet weather, but, more fundamentally, feedback from farmers has revealed lack of confidence in the BMC management—Ghanzi Farmers' Association publicly declared no confidence in the BMC management—and concern about the costs and administration needed to meet the stringent requirements for exports of beef to the EU. One of the problems facing the BMC is the uncommercial approach of farmers—the bulk of its supply comes from subsistence farmers. A leaked consultant’s report revealed that far more than price increases would be needed to convert the BMC into a viable operation, including the closure of the

Heavy rains are a mixed blessing for farmers

Problems continue at the Botswana Meat Commission

Botswana 23


Francistown abattoir, which would be politically unpalatable, and the chairman of the commission has called for direct government subsidies to cover the cost of running the abattoir. Then, in late April, both the Lobatse and Francistown abattoirs were forced to close—and some exports were recalled—as the EU and others banned meat imports from Botswana because of a suspected outbreak of foot-and-mouth disease along the border with Zimbabwe, where the disease is believed to be endemic.

Mining

Prospecting activity in Botswana remains at a high level, reflecting both the country's favourable investment environment (January 2006, The domestic economy: Mining) and the continued strength of world metal prices. In 2005 848 prospecting licences (of which 574 were for diamonds) were in operation, compared with 694 in 2004. In its quarterly update in April DiamonEx, a junior mining company jointly listed in both Australia and Botswana that has been prospecting a site at Martin’s Drift in eastern Botswana (once mined on a trial basis by De Beers) confirmed that a new mine was expected to start production in early 2007. Producing around 330,000 carats/year for ten years and employing about 200 people, the mine will be a medium-scale producer in global terms, although small in Botswana: its scale will be similar to the existing Damtshaa mine, the smallest of the four mines operated by Debswana, and will add only about 1% to existing national production. By early May, a mining licence had still to be formally approved, but the government is believed to be strongly supportive of the project as part of an effort to encourage diamond producers other than De Beers. Financial projections indicate a healthy cash flow and capital payback within only three years, reflecting DiamonEx's more cost-effective approach than that of De Beers which has a less impressive record in operating smaller mines.

African Diamonds, a Dublin-based exploration company listed on the London and Botswana stock exchanges, which is in a joint venture with De Beers, has continued to report encouraging results from its prospecting in the area of Debswana's existing Orapa mine; considerable interest has been generated by the discovery of significant quantities of very rare, and valuable, Type II diamonds. There are no indications when mining is planned to begin.

African Copper, a London-based company listed on the Toronto, London and Botswana exchanges, has continued preparations for developing a mine on its Dukwe property north of Francistown, causing its share price to surge on the Botswana Stock Exchange. With an initial investment of US$38m, the planned mine will produce 25,000 tonnes/year of copper concentrate; start-up is planned for late 2007-early 2008. Its other prospecting activities in north-west Botswana have also been extended. In March the company successfully arranged financing of the equivalent of P250m from a regional bank.

LionOre Mining International, a Toronto-based nickel-mining company listed on the Toronto, London, Australian and Botswana exchanges, which owns 85% of Tati Nickel, looks set to invest heavily in improved recovery technologies to

DiamonEx mine is to start production in 2007

High prices stimulate other mining developments

24 Botswana


boost output at its Phoenix mine from 14,000 t/y to 25,000 t/y by 2009. It is also considering reopening the previously abandoned Selkirk mine, as well as possible joint ventures elsewhere in Botswana.

Despite the considerable interest in new coal mining operations to exploit Botswana’s huge and largely undeveloped reserves (estimated at over 20bn tonnes, although of low quality), the only confirmed project is the expansion of the existing Morupule mine to supply the nearby power station where production capacity is to be quadrupled. However, plans for the Mmamabula export power station have advanced, and discussions are being held with the South African government on an agreement to secure a market for the electricity generated. In March the Coal Investment Corporation (CIC), whose wholly owned subsidiary, Meepong Resources, owns the rights to Mmamabula East and Mmamabula South coal resources, successfully listed on the Toronto Stock Exchange and looked set to list on the Botswana Stock Exchange. However, there are indications of opposition to the project from trade unions in South Africa.

In January there were reports of a plan to construct a rail link to transport coal for export to a new port facility in Namibia. Also in January Kumba Resources, South Africa’s largest coal mining company, announced that it had agreed a joint venture with Magaleng, a Botswana company which holds the prospecting licence over the Mmamabula Central coal resource to develop the resource to supply 2m-2.5m t/y of thermal coal to power stations in South Africa. In both cases the proposals seem to be credible, but they are clearly at a very early stage of development, with considerable obstacles to be overcome. Botswana may have reasonable hopes of benefiting from the currently huge demand for coal (both domestic and for export) in South Africa, especially since the Mmamabula coal deposit is an extension South African Waterburg field which is already serviced by necessary transport infrastructure (although this will need to be upgraded). However, as with the export power station project, there have already been signs of pressure to keep any new coal mining development—and hence job creation—on the South African side of the border.

Manufacturing

In talking up the prospects for accelerated development in the private sector, the budget speech (see Economic policy) referred to several proposed manufacturing ventures under the auspices of the Botswana Development Corporation (BDC). Most advanced is Tannery Industries Botswana, a joint venture between the BDC and several partners which intends to process hides collected from across the country as well as purchasing the existing tannery operated by the Botswana Meat Commission. Also in the pipeline are projects for manufacturing lead ingots from scrap metal, table and sanitary china products, T-shirts and glass. Details of another project to manufacture tin cans using technology and technical assistance from Germany were also revealed. In March it was announced that Lazare Kaplan International (LKI), a company based in New York, had been granted a licence to cut and polish diamonds in Botswana. LKI was active in Botswana until the mid-1990s before selling its

Proposed coal mining developments multiply

BDC supports several new manufacturing projects

Botswana 25


interests in a joint venture with the BDC. LKI's return to Botswana obviously anticipates the establishment of a regional diamond marketing operation by De Beers' Diamond Trading Company (DTC) in Gaborone, and the company has appointed Alfred Dube, until recently Botswana’s ambassador at the United Nations, as the managing director of Lazare Kaplan Botswana.

Financial and other services

A press release from the Bank of Botswana (the central bank) on February 8th announced the award of a licence to transact commercial banking business in Botswana to a new bank, Bank Gaborone. This brings the number of commercial banks in Botswana to six. Bank Gaborone is majority-owned by Capricorn Holdings, a Namibian banking company, although local investors hold a significant stake: Patrick Balopi, the speaker of the National Assembly, is among the non-executive directors. During the first quarter of 2006 Botswana's existing banks, all of which are subsidiaries of major international banks, announced their results for 2005. All reported a successful year, as continuing gains in efficiency offset slower income growth. Shares in First National Bank surged on the news of its results. In the first four months of 2006 they rose by 35%, and the bank has overtaken Barclays (the dominant bank in Botswana) to have the largest market capitalisation on the Botswana Stock Exchange.

BBS climbs down over government share redemption

The struggle between the government and the Botswana Building Society (BBS) over the latter's attempt to redeem the government's shares in the society and thus prevent their sale to a third party has seen further developments (January 2006, The domestic economy: Financial and other services). Despite winning a High Court ruling that the redemption of the government’s shares was legal, the BBS management has backed down and not only reinstated the government as a shareholder but also accepted government-nominated representatives on an expanded board, including one as board chairman. This was agreed in April at an extraordinary general meeting, initially called on the initiative of Botswana Insurance Fund Management (BIFM), which had expressed concern at the way the management had handled the affair and called for the removal of the board. Initially defiant—making antagonistic statements to the press, this time directed at BIFM, and attempting to schedule the extraordinary meeting until much later in the year to give it time to mobilize support among shareholders—the management eventually yielded. However, given the bitterness surrounding the affair, and with the new board mandated to examine issues of corporate government, it remains to be seen whether the compromise will last in the longer term and whether the government will revert to its original plan to auctions its shares.

When the Bank of Botswana announced that from March 2006 holdings of Bank of Botswana certificates (BoBCs; the equivalent of Treasury bills, which the bank uses to absorb liquidity) would be restricted to commercial banks only (January 2006, Economic policy), a large amount of liquidity was left seeking a home—before the announcement almost two-thirds of BoBCs were held by or on behalf of other buyers. Optimists suggested that this could kick-start developments in the local money market, but one immediate consequence

A new commercial bank is licensed

Restriction on holding BoBCs causes share prices to soar

26 Botswana


was to fuel a further bull run on the Botswana Stock Exchange, and by the end of April the domestic company index had risen by 16% since the start of the year (compared with a 23% rise during the whole of 2005). It also seemed likely that much of the displaced funds would simply be re-routed into BoBCs via commercial bank deposits, although figures showing the extent of this effect have yet to be published.

Foreign trade and payments

Preliminary estimates from the Bank of Botswana (the central bank), in its publication Botswana Financial Statistics for February, show a record current-account surplus in 2005 of P8.1bn (US$1.6bn), up from P1.4bn in 2004. This was mainly owing to a much larger trade surplus—P9.1bn compared with P3.9bn in 2004—which in turn was driven by a 36% increase in exports from P17.3bn in 2004 to P23.6bn, with exports benefiting from booming commodity prices and the impact on pula revenue of the May 2005 devaluation. The overall balance-of-payments surplus for 2005 was estimated as P7bn, a figure slightly lower than the current-account surplus and reflecting continued external portfolio investment by Botswana pension funds. These latest current-account figures for 2005 are a revision to figures published by the Ministry of Finance and Development Planning at the time of the budget in February. When it publishes its annual report in late May, the Bank of Botswana is expected to provide details of trade patterns in 2005. It may also explain its revised estimate of the overall balance in 2004, which is now given as a deficit of P272m, compared with the figure quoted by the bank in December 2005—a surplus of P575m.

Balance of payments (P m unless otherwise indicated) 2004a 2005 b % change

Exports 17,345 23,579 35.9

Imports 13,441 14,432 7.4

Trade balance 3,904 9,147 134.3

Services balance -204 -42 -79.4

Credits 3,511 4,259 21.3

Debits 3,715 4,302 15.8

Income balance -4,817 -3,744 -22.3

Credits 1,066 2,226 108.8

Debits 5,883 5,971 1.5

Current transfers balance 2,469 2,736 10.8

Credits 3,487 3,828 9.8

Debits 1,018 1,092 7.3

Current-account balance 1,352 8,096 498.8

US$ m 288 1,584 450.0

Capital account balance 149 161 8.1

Financial account balance -1,556 -880 -43.4

Errors & omissions -217 -341 57.1

Overall balance -272 7,036 -

US$ m -58 1,377 -

a Revised estimates. b Preliminary estimates.

Source: Bank of Botswana, Botswana Financial Statistics, February 2006.

Current-account surplus in 2005 is a record

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