Botswana's economy has remained resilient despite global financial turbulence. Inflation has risen due to higher food and fuel prices, and is projected to increase further. Economic growth remains positive but low, with quarterly GDP data confirming recovery but at 3.3% annual growth in 2006. Government revenues met targets but spending was well below budget, resulting in a large budget surplus. Non-diamond exports grew strongly while the diamond sector saw modest growth. Monetary policy remains unchanged despite inflation concerns due to external factors beyond Botswana's control.

1. Bifm Economic Review 3rd Quarter 2007
Economic Review
markets, and neither the stock market nor to 7.2% in August and 6.8% in September.
Summary of the money market experienced any of the The main culprits behind the rise in inflation
Economic volatility afflicting markets elsewhere in the
world. More generally, as an emerging market
were food prices and transport costs, which
between them account for 40% of the
Developments with good economic fundamentals, strong consumer price index basket. Over the six
months to September, food prices were up
foreign reserve levels, limited dependence
Dr Keith Jefferis upon external credit and a sound financial
sector, Botswana is well placed to withstand
19% at an annual rate, and transport costs
up 14%, with particularly large increase for
bread and cereals, dairy products and fuel.
Chairman of turbulence in credit markets elsewhere.
(See Figure 1)
Bifm Investment Turning to the domestic economy, economic
developments have generally been positive, The causes of higher inflation are largely
Committee with signs of higher growth and continued outside of Botswana’s control. The prices of
food and fuel are determined on world
trade diversification, although inflation
markets, and so it is not just Botswana that
remains a concern. The government has
is suffering from rising inflation, as higher
recorded a substantial fiscal surplus for
food and fuel prices affect almost all
The past few months have seen turbulence 2006/07, although this was largely
countries. Nor is there likely to be much relief
in financial markets around the globe. unplanned. Positive external assessments
from these price pressures in the short term;
Markets in major industrialised countries have been received from Moody’s, the IMF,
food prices, especially for grains and cereals,
experienced a “credit crunch” as normal the World Bank and Transparency
are being pushed up by demand for biofuels
liquidity flows dried up, risk aversion increased International.
amongst other things, and it will take a
and many financial institutions took large while for higher prices to encourage greater
Inflation and Monetary Policy
losses on assets that turned out to have been foodgrain production. Oil prices are being
overvalued or overpriced. Although emerging While the early months of 2007 were kept high due to a very fine balance between
markets shared in the initial turmoil, the characterised by a steady decline in inflation, supply and demand as well as geopolitical
impact on many has been short lived and prompting a 0.5% cut in interest rates in concerns, which also leads to volatility;
most emerging markets have come through June, the experience in recent months has a sharp reduction in international oil prices
the crisis unscathed. Botswana has felt little been mixed. After declining to 6.3% in April, in August led to hopes of fuel price reductions
or no impact, partly because financial markets the lowest figure for two years, inflation then but this was follow by a spike to the highest
are reasonably independent from global rose to 7.5% in July before dropping back ever levels in September.
Figure 1: Inflation by Group Figure 2: Inflation
(6 months to September, annualised)
25%
16%
20%
14%
15%
12%
10%
10%
5%
8%
0%
-5% 6%
n ar n n c. g p. b. s rt ls d th 4%
tio we tio tio is sin ui to em po ote Foo eal
ica f uca rea M Hou eq l & ll it rans & h H
un g & Ed ec H ho
H o A T r.
2%
m
m thin
R & c st
Co Clo rn Al Re 0%
Fu
2002 2003 2004 2005 2006 2007 2008
Source: CSO, Econsult Source: BoB, CSO, Econsult

2. 2 Economic Review
Figure 3: Real GDP growth (annual) Figure 4: Growth Indicatiors (year-on-year)
12% Real business credit Real govt.exp.
Electricity cons. (non-mining)
10%
Real gov. exp, business credit
30% 16%
8% 25%
Electricity consumption
14%
6% 20% 12%
4% 15%
10%
10%
2% 8%
5%
0% 0%
6%
-2% -5% 4%
-10% 2%
02
2
3
20 4
03
2
3
20 4
04
2
3
20 4
05
2
3
4
06
2
3
4
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
-15%
20
20
0%
02
03
04
05
06
07
20
20
20
20
20
20
GDP Non-mining GDP
Source: CSO, Econsult Source: BoB, BPC, Econsult
Although causes of higher inflation are however, been improved by the recent Government Budget
largely global, recent developments are publication by the Central Statistics Office Preliminary data on government revenue and
nonetheless discouraging. Inflation forcasts (CSO) of quarterly GDP data up to the end spending for the 2006/07 financial year
now suggest that it will increase above of 2006. While this still falls some way behind shows revenues more or less in line with
the Bank of Botswana’s 4%-7% objective the CSO’s stated objective of making the projections contained in the February
range as it rises towards 8% in early 2008 quarterly data available within 90 days of 2007 Budget, but – as anticipated – a major
(See Figure 2).External price pressures may the end of the relevant period, it is expenditure shortfall. The result was a budget
also be reinforced by domestic price nevertheless a step forward, and it is to be surplus of P7.6 billion, or an estimated 12.2%
developments, as administered prices (for hoped that the improvements will continue. of GDP, the largest deficit (in relation to the
telecommunications, Botswana Housing size of the economy) since the late 1980s.
Corporation rentals, water and electricity) What does the new data tell us? First, growth
Expenditure grew by 11% over the previous
are likely to increase. There is also some remains volatile, especially in the mining
year, only a small increase in real terms, and
domestic demand pressure, with credit sector, with considerable quarter-to-quarter
was 13% below the amount provided in the
growth rising steadily to reach nearly 23% variations that can obscure longer-term
revised budget for the year. Development
in August, well above the BoB’s desired range trends. Second, the data confirm
spending only grew by 6.6%, and at P4.03bn
of 11%-14%, along with some evidence that the economic recovery that has been taking
was 28% below the figure projected for the
government spending growth is picking up. place over the past year or so, a development
year (P5.6 bn). This suggests that major
that we had earlier highlighted based
problems remain in implementation capacity.
As a result of the turnaround in inflation, on other growth indicators such as
(See Figure 5)
and buoyant domestic credit growth, it is business credit and electricity consumption.
unlikely that June’s cut in interest rates will Third, although there are signs of recovery, By contrast, revenue was buoyant, with most
be followed by any more rate reductions over growth nevertheless remains low; annual categories showing healthy increases over
the next six months, even though real interest growth was only 3.3% in 2006 (with 2005/06. The 28% increase in non-mineral
rates in Botswana remain high. 3.2% for non-mining growth), which is income tax receipts suggests either that
still below the rates required for a steady the economy is more buoyant than the
Economic Growth
i n c re a s e i n l i v i n g s t a n d a rd s a n d GDP growth figures indicate, or that tax
Keeping track of economic growth in employment opportunities. (See Figure 3) compliance is improving, or both. The fact
Botswana has often been difficult in view that VAT collections only increased by
of the frequency with which GDP data However, the quarterly GDP data is still
13% suggests that the larger rise in income
are published – in the past, data have been somewhat outdated, in that it is nine months
tax collections is due to improved compliance,
made available only once a year, typically old and only runs to the end of 2006. which reflects positively on the newly-
more than six months after the end of Other growth indicators suggest that the established Botswana Unified Revenue Service
the relevant time period. The data have recovery has continued to gather pace during (BURS). (See Figure 6)
therefore been more useful for historical 2007, and that current growth is probably
purposes than for tracking current or recent some way above the end-2006 figure. Government spending has been declining,
growth developments. Data availability has, (See Figure 4) relative to GDP, and in 2005/06 and 2006/07

3. 3 Economic Review
was the lowest for many years. The very adjustments in the parameters of the pula countries, continued to be stable, thereby
large drop in government spending, relative basket mechanism relating to the rate supporting international competitiveness.
to the size of the economy, between 2002/03 of crawl and the weights of currencies
and 2005/06 most likely accounts for a large in the basket. Such changes are not The benefits of the exchange rate policy are
part of the slowdown in economic activity officially disclosed and it is left to market showing up clearly in the trade data. In the
over this period. In 2005/06 and 2006/07, observers to spot them from daily exchange first half of 2007, total exports were up 37%
spending was well below the “fiscal rule” rate movements. It is not clear why the over the same period in 2006. However, this
of 40% of GDP introduced in the mid-term government is so reluctant to officially reflects quite different export performances
review of NDP 9. This under-spending is not disclose information that can in any case be across different commodities and sectors.
necessarily a bad thing (although an determined through statistical analysis of The dominant diamond sector performed
unplanned underspend probably means that publicly available data. In its 2006 Article relatively badly – exports were only up 7%,
actual spending is not in line with priorities). IV Report on the Botswana economy, the which is more or less flat in real terms.
Government mineral revenues are projected IMF “urged the authorities to announce the Non-diamond exports were up 141% over
to drop sharply between 2018 and 2029, weights and the rate of crawl for the the same period, and as a result increased
and an adjustment will be required to much exchange rate”, as this would help to reduce from 22% to 39% of total exports over
lower levels of government spending uncertainty and stabilise expectations of this period, indicating significant export
than we have at present. This long-term future inflation (which is greatly influenced diversification. Much of this increase was
adjustment process will be easier, and less by exchange rate developments). Similar due to a sharp jump in nickel/copper exports,
painful, the earlier it starts. Taking a long sentiments have been expressed in the past which were up 162% due to mainly to higher
term perspective, government should not by Moody’s Investors Services in their credit prices. However, even if this is excluded, the
attempt to raise spending significantly rating reports. remaining exports also grew rapidly, by
above present levels, but should instead 123%, with textiles, meat and miscellaneous
focus on spending more efficiently. Notwithstanding the lack of transparency manufactured goods all growing strongly.
Spending restraint would also help to relieve regarding the exchange rate, the pula basket (See Figure 7)
inflationary pressures. mechanism has continued to serve Botswana
well. During the third quarter of the year Other Economic Developments
Despite the low spending growth for the the pula depreciated slightly (0.3%) against Air Botswana Privatisation
2006/07 financial year as a whole, there the rand, but appreciated against the US In early October it was announced that the
appears to have been a pick-up in spending dollar (by 2%) and depreciated against the proposal to privatise Air Botswana through
growth in recent months, with spending euro (by 3.1%), as the dollar weakened on the establishment of a new airline as a
in the year to June 2007 up 16% over the international markets. The overall nominal partnership between Airlink of South Africa
previous year. effective exchange rate (NEER) depreciated and the Government of Botswana had
by 0.5%, reflecting the impact of the crawling been shelved. This marks the third time that
Exchange Rates and International Trade peg. The real effective exchange rate (REER), the proposed privatisation of Air Botswana
Exchange rate policy has continued broadly which adjusts the nominal exchange rate for has failed. The proposal had run into severe
unchanged, but there appear to have been inflation in Botswana and in trading partner political opposition, and seems to have
Figure 5: Budget Balance Figure 6: Government Revenue & Spending
9, 000 18% 50%
8, 000 16%
7, 000 14%
6, 000 12% 45%
% of GDP
P million
% of GDP
5, 000 10%
4, 000 8%
40%
3, 000 6%
2, 000 4%
1, 000 2% 35%
0 0%
-1, 000 -2%
-2, 000 -4% 30%
/00
1
2
3
/04
5
6
7
19 6
/97
19 8
19 9
20 0
20 1
/02
20 3
20 4
20 5
/06
/07
0/0
/0
2/0
4/0
/0
/0
/9
/9
/9
/0
/0
/0
/0
/0
99
01
03
05
06
95
96
97
98
99
00
01
02
03
04
05
06
0
0
0
19
20
20
20
20
20
20
20
19
19
20
20
P mn % of GDP Revenue Spending
Source: BoB, Econsult Source: BoB, Econsult

4. 4 Economic Review
Figure 7: Export Growth, 2006-7, H1
200%
150%
100%
50%
0%
-50%
So rts
Di ash
ds
M old
y
el
l
s
cs
Te l
s
r
t
ta
e
he
ea
de
ile
Iro iner
ck
ste
sti
on
pa
To
G
M
Ot
xt
Hi
Ni
da
Pla
am
h
&
&
ac
n
esl
hic
Ve
Source: CSO
foundered on essentially nationalistic concerns back by over-priced and inefficient air improved fiscal position, and encouraging
regarding the effective control of the transportation. The main hope for improved signs of economic diversification taking
proposed new airline by a South African air travel within Botswana and internationally place. Negative factors cited include the
entity, as well as the inevitable job losses that now rests with the anticipated liberalisation eventual levelling off and decline of diamond
would have resulted from the winding up of process which should permit additional production, continued high levels of
Air Botswana. It is now intended that Air airlines to fly both domestically and poverty and unemployment, and the
Botswana will be recapitalised by the internationally in competition with the impact of HIV/AIDS.
Government, presumably to finance the incumbents, in contast with the existing
The IMF’s Article IV report for 2006 also
acquisition of new aircraft as well as to meet situation which gives Air Botswana
paints a positive economic picture, although
ongoing operating losses, and will remain a domestic monopoly and restricts the
the very long lag between the IMF team’s
under Government control. Although number of airlines on international routes.
visit (in June 2006) and the publication
privatisation is said to remain the ultimate
External Assessments of the report (in July 2007) indicates
objective, these developments leave both
disagreements between the IMF and the
the Air Botswana privatisation and the A number of external assessments of the
Government of Botswana over its content.
broader privatisation process in disarray. Botswana economy have been released in
While supportive of the overall economic
recent months, which provide an interesting
As for Air Botswana, its future remains in framework, the IMF takes the view that much
perspective on current economic conditions.
doubt. Although some of its losses result tighter policies could have been pursued
These include the Moody’s Investors Services
from the financial burden of poor to prevent the increase in inflation in
credit rating, the IMF Article IV Country
management decisions taken in the past 2005-6, either through much higher interest
Report, the World Bank “Doing Business”
(such as excessive aircraft leasing costs), rates or a slower rate of crawl for the
assessment and Transparency International’s
the fact is that it remains too small to be exchange rate. More generally, the IMF takes
Corruption Perceptions Index.
commercially viable and maintain an efficient the view that exchange rate policy should
service. The Airlink proposal dealt with The Moody’s credit rating review focus on restraining inflation and should not
this problem through the planned integration maintained Botswana’s investment grade be directly concerned with competitiveness
of the Botswana airline’s activities into credit ratings (A2 for foreign currency and and the level of the real exchange rate, and
a larger operation, enabling substantial A1 for local currency), which remain the comments that the present policy framework
savings on overhead costs and significant highest in Africa. The good news is that the includes the pursuit of a range of objectives
efficiency gains that would have resulted outlook on the foreign currency rating was that may be mutually inconsistent. The IMF
in a more competitive and viable entity. raised to positive (from stable), which also recommends that government spending
Abandoning the proposal suggests that suggests that an upgrade might be possible should be gradually reduced (relative to GDP),
improving efficiency and competitiveness over the next 12-24 months. The 2007 both in anticipation of the anticipated decline
is less of a priority than it should be, which Moody’s report was more positive than some in diamond revenues over the next 15-20
is unfortunate as the development of of their past reports, due to continued years, and to prevent the inflationary impact
Botswana’s tourism sector is being held large balance of payments surpluses, an of excessive spending.

5. 5 Economic Review
Figure 8: Botswana-World Bank “Doing
Business” Survey, 2007
Paying Taxes
Closing a Business
Getting Credit
Registering Property
Doing Business
Employing Workers
Enforcing Contracts
Starting a Business
Protecting Investors
Dealing with Licenses
Trading Across Borders
0 20 40 60 80 100 120 140 160
Rank (out of 178 countries)
Source: World Bank
While the IMF’s comments may be technically in detail on specific aspects of the business to be paid to facilitating other aspects
correct, it is important to note that in recent environment, based on measurable indicators of trade (such as reducing bureaucracy
years the policy framework has served such as the number of days it takes to open and border post hassles) to compensate.
Botswana well. Although inflation has a business, the costs of hiring and firing The poor ranking on business licences could
recently been much higher than desirable - workers, and the ease of access to credit. also be resolved through appropriate
albeit temporarily - it is unlikely that a much Many countries now target an improvement deregulation and is an unnecessary “own
tighter monetary policy would have been in their business climate and country ranking goal”. Botswana’s better performances come
very effective at bringing inflation down a as measured in the WBDB report as a specific from the tax system (with relatively low tax
great deal. In the pre-crawling peg days policy objective. Botswana has always done rates), the ease of closing a business (which
the exchange rate was used as a nominal quite well in the WBDB report, generally encourages business flexibility and innovation)
anchor for inflation in the way that the IMF ranking in the top third of countries globally. and getting credit.
suggests, and did not succeed in bringing In 2007 Botswana ranked at number 51 (out
inflation down to international levels, Transparency International released their
of 178 countries), a slight deterioration from
but did cause competitiveness problems 2007 Corruption Perceptions Index in
number 48 in 2006 and 44 in 2005 (although
through an overvalued real exchange rate, September. At number 38 in the world (out
the number of countries ranked has also
thus inhibiting growth and diversification. of 179 countries), Botswana was rated the
increased over this period so the rankings
The real depreciation that the devaluations least corrupt country in Africa, a position it
are not entirely comparable from year to
and crawling peg have achieved has has held for 12 years running. Botswana’s
year). In Africa, Botswana has consistently
facilitated the rapid growth of non-traditional ranking was largely unchanged from its
ranked fourth, after Mauritius, South Africa
exports. The IMF’s points should be viewed 2006 position (37), although this marked a
and Namibia. Botswana’s ranking puts it at
as a guide to future policy choices that will slight deterioration from its 31st position in
similar levels globally to Romania, Taiwan,
have to be made, rather than as a proposal 2005. Botswana’s very good ranking on
Italy and Slovenia.
for a change of policy in the short term. corruption measures also feeds into the
Nevertheless, it will be necessary to guard Botswana’s rankings vary considerably across Index of African Governance 2007
against the macroeconomic and financial the sub-categories from which the released for the first time by the Mo Ibrahim
imbalances that could arise from the present overall assessment is constructed. As Figure Foundation, which also considers Safety &
policy combination. 8 shows, the worst rankings are related to Security, Rule of Law, Participation and
international trade and dealing with licenses. Human Rights, Sustainable Economic
The annual World Bank Doing Business Trade constraints relate mostly to Botswana’s Opportunity, and Human Development.
(WBDB) report has become an increasingly landlocked position and the resulting high Botswana’s overall ranking in this index is
important assessment of the business costs and delays of shipping across borders, number 3 (after Mauritius and Seychelles),
environment in different countries. It focuses and illustrate that more attention has the highest in mainland sub-Saharan Africa.
Bifm Botswana Limited
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