The document provides an economic review for Botswana, including the following key points: 1) The pula has appreciated against the rand but depreciated against the US dollar, adding uncertainty for producers. 2) Botswana's inflation continued to decline in the third quarter but risks remain from fuel prices and South African inflation. 3) Exports have been growing faster than imports, leading to a positive trade balance, however some discrepancies exist in trade data reported by different sources.

1. Bifm Economic Review 3rd Quarter 2006
Economic Review
has appreciated by 7% against the rand regression analysis yields not just the rate
Summary of (to R1.20=P1) and depreciated by 16% of crawl but also the “secret” weights of
Economic against the US dollar (to P6.4=$1). While
there is not much that can be done about
currencies in the basket. It is not clear why
the government is unwilling to disclose
Developments this, it adds to the uncertainty facing
producers and traders.
these details; fears of inviting speculative
attacks on the pula are unfounded, as there
Dr Keith Jefferis, There are several reasons for the rand’s
many other factors that would discourage
speculation even if the crawl and basket
Chairman of weakness: in May, it was affected by
general negative sentiment towards
weights were disclosed. In any case, any
serious speculator would have worked out
Bifm Investment emerging markets, as well as the peaking
of some commodities prices. More recently,
the basket and crawl details themselves.
Committee however, it has been affected by factors
more specific to South Africa rather than
As Moody’s noted in their 2006 review of
Botswana’s credit rating, “international
I
emerging markets in general, as concerns experience has shown that crawling
have been rising about the current account exchange rates work best when the rate
deficit, which had risen to around 6% of of crawl is pre-announced”. In line with
ntroduction GDP. The rand weakened as capital inflows international best practice and in the
Good data on recent economic growth is proved insufficient to finance the growing interests of promoting transparency and
scarce at present; the last data on GDP deficit at prevailing exchange rates, understanding of the exchange rate
issued by the Central Statistics Office (CSO) reinforced by some negative sentiment mechanism, it is high time that the rate of
for the year 2004/05 is now more than 15 towards the currency. While many of South crawl and the basket weight components
months old, and thus of little guide to Africa’s exporters will be happier with the were publicly disclosed.
recent economic developments. With no exchange rate closer to R8 than R6 to the
Trade and External Developments
new GDP data expected until the Budget dollar, the rapid movements in the currency
in February 2006, we are in something of have raised fears of rising inflation and Monitoring of international trade
a “black hole” with regard to real activity increases in interest rates. developments has been made easier by a
data. Other evidence presents a mixed recent innovation by the CSO, the
Botswana’s exchange rate mechanism also
picture, suggesting a slow pickup in activity, publication of monthly trade statistics
went through a small change in July, when
with the major increase in government within a relatively short period after the
the crawling peg was adjusted. For 12
development spending provided for in the end of the month (for instance, the latest
months from its introduction in June 2005,
2006 Budget only slowly making its impact data covers the period to July 2006, and
the pula crawled downwards against the
felt, perhaps reflecting continued was published in September). This makes
basket at an annual rate of 5.1%; since
implementation constraints. Our the trade data amongst the most up-to-
July 10th, the crawl has been adjusted
commentary this quarter focuses on date macroeconomic economic data
downwards to an annual rate of 3.9%.
exchange rate, trade, inflation and banking available in Botswana (after data on
This presumably reflects the expected
sector developments. inflation from the CSO and credit growth
closing of the gap between Botswana and
from BoB), and marks a commendable
Exchange Rates trading partner inflation rates, and the
improvement on the previous situation
stabilisation of the real effective exchange
Recent months have seen considerable when trade data was only available with
rate.
exchange rate volatility, driven by the rand a very long lag.
weakening sharply against the US dollar – The effectiveness of the crawling peg is,
however, hampered by a lack of The Monthly Trade Digest provides detailed
falling from R6.15 to the dollar at the end
transparency over its operation, as the information on Botswana’s imports and
of April to R7.67 at the end of September.
government has been unwilling to disclose exports, and has been made possible by
Given the nature of the pula basket
mechanism, the pula has shared in this details of the rate of crawl or how it is
volatility; over the same period, the pula determined. Nevertheless, it is fairly easy
to work out - simple econometric continue...

2. 2 Economic Review
the automation of data collection at border some 11%. The composition of the P38m million over 6 months, which is what
posts by the Department of Customs & remaining 10% of exports is quite the CSO data indicates.
Excise. It reveals some interesting facts diversified, with clothing, beef, electrical
about Botswana’s main exports (see Table & mechanical machinery, vehicles & parts, Whereas the CSO data is collected from
1). As is well known, diamonds dominate iron & steel products, and confectionary border post customs declarations, the BoB’s
exports, with 79% of the total over the 6 (mostly chewing gum) each accounting for data is collected directly from exporting
months from February to July 2006 (for significant proportions of non-diamond companies, which in many cases are sole
some reason the January data has not been exports. exporters of the commodity in question. It
published), and copper- nickel is the next seems likely that the BoB data is the more
most important export, accounting for Nevertheless, there are some puzzles in the accurate, and that the CSO data is perhaps
data. Perhaps most importantly, there are being affected by the inaccurate
major differences between the data classification of exports on customs
Table 1: Botswana’s Top 20 Exports by published by the CSO and that published declaration forms. While the CSO initiative
Category, February-July 2006 by the Bank of Botswana (BoB). Amongst is commendable, more work needs to be
the most serious of these is the apparent done by the CSO and the Department of
Rank Trade Category Exports % of
Pmn non-diamond under-recording of gold and soda ash Customs & Excise on ensuring the accuracy
exports exports by the CSO. BoB data indicates of published data.
1 Diamonds 8,950 that Botswana exported P242 million of
soda ash and P92 million of gold over the Notwithstanding the concerns over the
2 Copper-nickel 1,275 53.9% first six months of 2006, making them accuracy of some of the trade data, some
approximately the 4th and 8th biggest interesting trends are revealed, which are
3 Clothing 352 14.9%
exports respectively, but these items are generally positive. Exports have been
4 Meat (beef) 144 6.1% recorded at much lower levels in the CSO growing steadily over the past 3 years, and
data. There are also major discrepancies at a much faster pace then imports (see
5 Machinery 111 4.7%
between BoB and CSO data on exports of Figure 1). While much of this growth is
6 Vehicles & parts 99 4.2% diamonds and copper-nickel in some driven by diamonds, exports of other
months; for instance, BoB recorded commodities have also grown rapidly.
7 Iron & steel products 55 2.3%
diamond exports of P1 337 million in April Exports generally exceed imports, and as
8 Sugar confectionary 44 1.9%
2006, whereas the CSO recorded only P360 a result, Botswana’s trade balance is positive
(chewing gum)
million. Finally, some of Botswana’s recorded in most months (see Figure 2).
9 Printed items 41 1.7% exports are odd: the 9th largest export
(unused stamps & Data on the rest of the balance of payments
banknotes) category is “printed items”, which
(BoP) (e.g. trade in services, transfers,
comprises mostly unused stamps and
10 Plastics 41 1.7% investment and capital flows) are not yet
banknotes; while there is undoubtedly
available on a regular basis – it would be
11 Cereal products 36 1.5% some interest in these from collectors
(pasta & biscuits) helpful if at least quarterly BoP data could
worldwide, it seems highly unlikely that
the value of such exports amounts to continue...
12 Personal effects 30 1.3%
13 Paper articles 22 0.9%
Fig 1: Exports & Imports
14 Hides & skins 15 0.6% 3,500
15 Pharmaceutical prods. 15 0.6% 3,000
(animal vaccines)
2,500
16 Salt etc. 14 0.6%
2,000
P million
17 Mineral fuels, oils 11 0.5%
1,500
18 Beverages 10 0.4%
1,000
19 Food residues, 7 0.3%
animal fodder
500
20 Optical etc. 6 0.3%
equipment 0
2004 A J O 2005 A J O 2006 A J
Imports Exports Exports trend Imports trend
Source: CSO Monthly Trade Digest.
Note: major sub-categories in italics

3. 3 Economic Review
Fig 2: Balance of Trade Fig 3: Foreign Exchange Reserves
2,000 45,000 9,000
1,500
40,000 8,000
1,000
35,000 7,000
P million
500
US$mn
P million
0 30,000 6,000
-500
25,000 5,000
-1,000
-1,500 20,000 4,000
03
2001
02
05
04
2004 A J O 2005 A J O 2006 A J
06
20
20
20
20
20
Pula (lh axis) USD (rh axis) Source: BoB
be provided by the Bank of Botswana, and consumers. It is interesting to note that August. The main driver of the decline is
the improved availability of trade data clothing and footwear has had the lowest the falling away of the impact of the 2005
should facilitate this – but movements in rate of price increases of any category in pula devaluation. It is expected that
the foreign exchange reserves provide some Botswana’s CPI basket over the past 3 inflation will continue to fall for the next
indication of what is happening. The years, due mainly to imports from China, few months (see Figure 4) and should end
reserves have been growing rapidly in pula and without this Botswana inflation would the year in single figures, before stabilising
terms, and in July 2006 reached have been even higher. The negative impact between 7% and 8% by the middle of
P44 billion, exceeding their previous peak of the restrictions on Botswana is 2007. There are some risks to inflation,
of P41 billion reached back in December something that should be taken up by the arising from the rebalancing of Botswana
2001. Part of the pula value increase has government within the framework of the Telecommunications tariffs as well as from
been driven by exchange rate changes, but SACU Agreement. higher international inflation. South African
even in US dollar terms, the reserves have headline inflation reached 5.4% in August,
been rising strongly, to $7.5 billion (see While the quota restrictions on Chinese up from 3.3% in April, while producer
Figure 3). The reserves are now equivalent clothing imports are likely to have a price inflation reached 9.2% in August.
to around 24 months of imports of goods negative impact on Botswana – and most Both are likely to increase further due to
and services. likely on South Africa as well – South Africa higher import prices resulting from rand
is not alone in adopting such measures. weakness since May.
Botswana’s recent trade experience – with Botswana has various import bans in place
exports rising faster than imports – (for instance on bread, poultry, sugar in Inflation has also been driven upwards
contrasts with that of South Africa, which retail packs etc.). Economically, these are during the year by higher international oil
has experienced a widening current account counterproductive as they penalise prices, but price pressures from this source
deficit. Partly in response to this, as well consumers in general (through higher prices may now be abating. Benchmark crude oil
as concerns about import competition and restricted choice) and benefit only a prices have fallen by 25% from their peak
facing South Africa’s struggling textile & few, protected producers, and make the in August (see Figure 5) in US dollar terms,
garment industry, quota restrictions have economy less competitive. Furthermore, and although the fall in pula terms has
been introduced on imports of garments such measures are not permitted under been less (20%), due to pula weakness
from China into South Africa. While these the SACU agreement, to which Botswana against the dollar, this should be enough
quotas do not officially apply to Botswana, is a signatory, as this clearly rules out to bring the recent cycle of fuel price
they will effectively apply in practice, due unilaterally-imposed import restrictions increases to an end. Whether fuel prices
to the nature of the customs union (SACU). between member states for protectionist will come down in the near future is,
This is likely to be problematic for purposes. however, less certain: the Ministry of Trade
Botswana, which will face higher clothing and Industry’s price stabilisation fund has
prices as a result (as low-price imports from Inflation and Monetary Policy been depleted as oil prices have been rising,
China are restricted), thereby penalising and the opportunity provided by falling
Inflation continued to decline in the third
prices may be used to rebuild the fund.
quarter, as expected, reaching 10.7% in
continue...

4. 4 Economic Review
Fig 4: Inflation – Actual and Forecast Fig 5: Oil Prices, 2006 (Brent Crude)
16% 100 500
95
14%
90 450
12% 85
Pula/Barrel
80 400
US%/Barrel
10%
75
8% 70 350
65
6%
60 300
4% 55
50 250
2%
0%
Brent spot USD Brent BWP
Furthermore, there may still be fuel-related as, if inflation remains consistently outside would be no longer be allowed to do so,
price rises to come, from higher public the upper end of the range, there is unlikely has resulted in a major inflow of funds to
transport fares. to be any significant reduction in interest the banking system. The deposit base of
rates. Prior to the introduction of the the banking system increased by 58%, or
The impact of rising fuel prices on inflation crawling peg, when the exchange rate was P8.2 billion, over the four months from
could, however, be reduced by a partial fixed against the basket, the inflation range March to June, with total banking assets
decontrol of fuel prices. At present, fuel was set with reference to expected foreign and liabilities up by 44% over the same
prices are fixed by government, meaning inflation (an average of Botswana’s trading period. The vast bulk of this deposit inflow
that competition plays no role in price partners’ inflation rates), so that if achieved, – P7.8 billion - has been used by the banks
determination, and nobody is allowed to inflation within the range would lead to a to purchase BoBCs. As a result, while the
charge less than the regulated price. If constant real effective exchange rate, thus composition of BoBC holdings has
government wishes to retain some measure supporting international competitiveness. changed, the total of BoBCs outstanding
of consumer protection it could do so by With a crawling peg, the inflation target has continued to rise (see Figure 6). This
fixing maximum prices only, and allowing range should be adjusted upwards to reflect is to be expected, as changing the BoBC
fuel retailers to compete by cutting prices this, both because expected inflation is ownership rules does not change the
if they wished. Even though prices might higher and also because a higher inflation amount of liquidity that needs to be
only come down by a few thebe per litre, rate is consistent with a constant real absorbed from the financial system; liquidity
this would help to reduce the impact of effective exchange rate, due to the is driven by the growth of foreign exchange
higher fuel prices and make the economy compensation provided by the crawl. In reserves net of absorption by government
more competitive. fact, a range extending up to 9% would budget surpluses, which are in turn driven
be consistent with real exchange rate by the balance of payments and fiscal
Although inflation is likely to keep falling
stability, given the current rate of crawl of policy.
for the next few months, it is unlikely to
around 4% and expected foreign inflation
fall far enough to enter the Bank of Bank credit growth has picked up strongly
of around 5%. A higher upper end to the
Botswana’s current target range of 4%- since the beginning of the year (see Figure
range would also enable lower interest
7%. The reason is that imported inflation 7), reaching 13.7% growth in the year to
rates, and therefore be supportive of higher
provides an underlying rate of around 5%, August. Both credit to households and to
economic growth.
to which the crawling exchange rate peg private businesses show higher growth (at
adds another 2%-3%. In current Banking and the Financial Sector 15.9% and 18.1% respectively), while
circumstances, these factors mean that credit to parastatals has contracted sharply.
inflation is unlikely to fall below 7%-8%. The banking sector has experienced Higher credit growth may reflect several
significant changes in recent months. The factors, including an improved business
This raises questions as to whether the Bank of Botswana’s announcement that climate and increased household borrowing
chosen range of 4%-7% (falling to 3%- only banks would be permitted to hold following the April public sector pay rise.
6% for the medium term) is appropriate BoBCs after March 1, and that the private
sector and non-bank financial institutions
continue...

5. 5 Economic Review
Fig 6: Distribution of BoBC Holdings, 2006 Fig 7: Credit Growth Rates
50%
40%
June
30%
20%
10%
Feb
0%
-10%
0 3,000 6,000 9,000 12,000 15,000
Value (Pmn)
Banks – own Banks – customers Other financial insts. Other private Total Private Business Households
It may also be being driven by the inflow mid-2005; both of these changes strongly
of funds into the banks following the BoBC favour the banks.
changes, providing the banks with more
resources to finance lending. Further High banking sector profits continue to
increases in credit growth may be of attract new entrants to the banking sector. Bifm Botswana Limited
Asset Management. Property Management.
concern from an inflation perspective, if The newly-established Bank Gaborone Private Equity. Corporate Advisory Services.
the upper end of the BoB’s target range commenced retail operations in September Private Bag BR 185, Broadhurst, Botswana
Tel: +(267) 395 1564. Fax: +(267) 390 0358.
for credit growth (currently 11%-14%) is 2006, and other applications for banking Website: www.bifm.co.bw
breached. licences are under consideration by the
Bank of Botswana. Bank Gaborone is a
Bank profits have risen sharply in the first subsidiary of Capricorn Holdings of
half of 2006, up by around 20% over the Namibia, owner of Bank Windhoek, one
same period in 2005. This has been driven of the largest Namibian banks. Bank
by faster credit growth, higher interest Windhoek has introduced innovative
rates, the changes in the BoBC system, and products catering to the low-income
the wider bid-offer spread on foreign banking market in Namibia, and it is to be
exchange dealing introduced by BoB in hoped that Bank Gaborone follows a similar
strategy in Botswana, where more than
half of the adult population remains
unbanked.