- Botswana's GDP growth was -0.8% in 2005/06, mainly due to declines in the mining sector, though underlying non-mining growth has been picking up slowly. - Inflation has declined steadily since early 2006 to 7.4% in January 2007 due to falling oil prices, faster than expected. - Exchange rates have stabilized due to a slightly reduced crawling peg, restoring competitiveness, while foreign exchange reserves have more than doubled since 2003. - Exports have become more diversified away from diamonds in recent years, though diamond exports still account for the majority, and exports are growing faster than imports.

1. Recent Economic
Developments & Prospects
March 8, 2007
Keith Jefferis
Structure of Presentation
Botswana Economic Developments
Economic Growth
Exchange Rates, Trade etc.
Inflation and Interest Rates
Government Budget
2007 Prospects
1

2. Economic
Growth
Growth Developments
Economic growth data released
just after 2007 Budget
For the first time in many years,
the real GDP growth figure was not
mentioned in the Budget speech
Growth in 05/06 was minus 0.8%
2

3. GDP growth
16
Growth data
14
disappointing, but not
12
all bad:
Mainly driven by mineral
10 sector developments –
8 volatile due to overlapping
6 calendar and national
accounts years
4
Underlying mineral growth
2 performance steady and at
0 a reasonable rate
-2 Prospects for
improvements in non-
diamond mineral sector
6
8
0
2
4
6
/9
/9
/0
/0
/0
/0
growth
5
7
9
1
3
5
'9
'9
'9
'0
'0
'0
Growth of Diamond Production
25%
20%
15%
10%
%
5%
0%
-5%
-10%
2
3
20Q4
2
3
20Q4
2
3
20Q4
2
3
20Q4
2
3
20Q4
2
3
01
02
03
04
05
06
4
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
20
3

4. Growth Developments
Outside of mining sector, growth
performance mixed.
Strong growth in transport, hotels &
restaurants
Negative growth in manufacturing,
construction, agriculture
Year to year volatility
Concern over quality of GDP data
Growth by Sector
Hotels & restr
Transport
Soc. & Pers. Serv.
Government
Water & Elec
Fin. & Bus. Serv. '05/06
Trade '04/05
Manufacturing
Construction
Agriculture
Mining
-20 -10 0 10 20 30 40
4

5. Growth Developments
Major revisions to GDP data in some
sectors, notably:
Agriculture
Social & personal services
Transport
Manufacturing
Most recent GDP growth estimates
highly provisional
Growth by Sector 2004/05: Original &
Revised
Total
Soc & pers serv
Government
Fin & bus serv
Revised
Transport (2007)
Trade, hotels etc Original
Construction (2006)
Water
Manufacturing
Mining
Agriculture
-20 -10 0 10 20
5

6. Growth Developments
GDP data difficult to interpret, due
to:
Revisions
Adjustment items not allocated to
sectors
Making allowances for these factors,
overall growth in non-mining GDP
appears to be picking up slowly
Growth of Non-Mining Value
Added
10
8
% growth
6
4
2
0 '96/97 '97/98 '98/99 '99/00 '00/01 '01/02 '02/03 '03/04 '04/05 '05/06
Non-min. 5.6 6.9 7.6 4 4.1 5.8 7.9 4.9 2.4 2.7
NMPS 4.7 6.2 7.9 3.4 3.4 5 5.1 4.7 1.2 2.5
NMPS = non-mining private sector (i.e. excludes government
6

7. GDP Growth
15 GDP Non-min. NMPS
12
% grow th
9
6
3
0
-3
97
98
99
00
01
02
03
04
05
06
6/
7/
8/
9/
0/
1/
2/
3/
4/
5/
'9
'9
'9
'9
'0
'0
'0
'0
'0
'0
Evidence for Economic Recovery?
GDP data (to June 06)
Growth indicators in positive
territory
BoB Business Expectations survey
Jump in confidence in 2006H2
compared to 2006H1;
Confidence now over 50% for first time
Much improved confidence amongst
non-exporters
7

8. BoB Business Confidence Survey
80%
70%
60%
50%
40%
30%
20%
10%
0%
2005H1 2005H2 2006H1 2006H2
Exporters Non-exporters All
Growth Indicators – Real Private
Business Credit
35% Strong signs
30% of business
25% recovery
20%
Real growth
15%
10%
5%
0%
-5%
-10%
-15%
00
01
02
03
04
05
06
07
20
20
20
20
20
20
20
20
8

9. Growth Indicators – Non-Mining
Electricity Consumption
20%
Quarterly consumption, y-o-y
Signs of recovery,
although weaker
15% & later
10%
growth
5%
0%
-5%
2000 2001 2002 2003 2004 2005 2006
Exchange
Rates
9

10. Exchange Rates
140
130
120
Index 1996=100
110
NEER
100 BWP/ZAR
90 BWP/USD
80
70
60 Crawling
50 peg
2002 2003 2004 2005 2006 2007
Exchange Rate Volatility
400%
350%
300%
250%
200%
150%
100%
50%
0%
2004 2005 2006 2007
10

11. Exchange Rates
BWP crawl reduced slightly as forecasts of
inflation gap closing and real exchange
rate stabilising
No transparency yet on rate of crawl or
basis for calculation, but would be
desirable to make exchange rates and
inflation more predictable
Crawl may be reviewed around mid-year
Real Effective Exchange Rates
1995-2006
125
120
Index 1996=100
115
110
105
100
95
Devaluations and crawling peg
90 have restored competitiveness
85
80
95
96
97
98
99
00
01
02
03
04
05
06
19
19
19
19
19
20
20
20
20
20
20
20
11

12. Exchange Rate Forecasts: 2006
Actual, Forecast,
end Dec-06 end Dec-07 Change
ZAR/USD 6.97 7.80 -10.6%
ZAR/BWP 1.157 1.167 0.9%
USD/BWP 0.166 0.150 -9.7%
Forecasts 2006-2011
Pula vs. ZAR
1.22
1.20
1.18
ZAR per BWP
1.16
1.14
1.12
1.10
1.08
1.06
1.04
1.02
05
06
07
08
09
10
11
2
3
4
2
3
4
Q
Q
Q
Q
Q
Q
20
20
20
20
20
20
20
12

13. Forecasts 2006-2011
Pula vs. USD, EUR
USD & EUR per BWP 0.19
0.18
0.17
0.16
0.15
0.14
0.13
0.12
0.11
0.10
05
06
07
08
09
10
11
2
3
4
2
3
4
Q
Q
Q
Q
Q
Q
20
20
20
20
20
20
20
USD/BWP EUR/BWP
Export Developments
Exports have become more
diversified (away from diamonds)
Wide range of non-diamond exports
Modest overall export growth from
2005 to 2005 (3% in USD terms)
13

14. Diamond Exports as % of Total
Exports
Rapid diamond
export growth
90%
85%
80%
75%
70% Exports have
become more
65% diversified
60% Temporary since 2001
diversification -
55% Hyundai
50%
82
84
86
88
90
92
94
96
98
00
02
04
06
19
19
19
19
19
19
19
19
19
20
20
20
20
Composition of Non-diamond Exports,
2006
Textiles
13% Other goods
14%
Meat etc.
7%
Salt & soda ash
6%
Machinery
3%
Gold
Nickel & copper
3%
50%
Vehicles & parts
2%
Iron & steel prods
2%
14

15. Change in Exports (US$), 2005-06
Other goods
Nickel & copper
Salt & soda ash
Meat etc.
Iron & steel prods
Total exports
Diamonds
Gold
Machinery
Textiles
Vehicles & parts
-80% -60% -40% -20% 0% 20% 40% 60%
Exports & Imports
Exports growing much faster
than imports – as devaluations
3500 intended
3000
P'000 per month
2500
2000
1500
1000
500
0
04
05
06
20
20
20
Exports Imports Import trend Export trend
15

16. Foreign Exchange Reserves (Pula)
Trade performance resulting in rapid growth of fx
reserves – more than doubled since late 2003.
50000 Import cover approx. 30 months
40000
30000
Pula mn
20000
10000
0
001
2
03
04
05
06
200
20
20
20
20
2
Inflation & Monetary
Policy
16

17. Inflation vs Forecast (as at July 06)
16% Inflation has declined
Actual steadily since peak of
14% 14.2% in April 2006
Forecast
12% Down to 7.4% in January
2007
10%
Decline has been faster
8% than expected, due
mainly to falling oil prices
6% BOB target range
New CPI index will help
4% more accurate
measurement of inflation
2%
0%
06
07
A
A
F
S
J
J
O
N
20 D
M
M
20
Crude Oil Prices (Brent)
100 500 Crude oil prices have
95 reversed most of 2006
90 450 gains
85 By end-Feb down 23% in
USD terms and 21% in
BWP/barrel
USD/barrel
80 400
75 BWP terms from 2006
70 350
peak
65 Impact of falling prices
60 300
reinforced by larger
55
weight for fuel prices in
new basket
50 250
ar , 2 6
2 6
n ,2 6
,2 7
g ,2 6
ct , 2 6
b ,2 5
,2 6
2 6
n ,2 6
b ,2 6
Ap 24 006
Ju 6, 06
7
2 6
2 6
M 21 00
Se 11 00
Fe 27 00
M 24 00
Ju 19 00
Au 14 00
D 03 00
Ja 29 00
Fe 26 00
23 00
O 08 00
00
N 06 00
D 01 00
1 0
r ,2
2
n ,2
ay ,
ov ,
ec ,
ec ,
Ja 30
l
ec
p
D
USD BWP
17

18. Inflation Forecast (Feb 07)
Actual F’cast
16%
14%
12%
10%
8%
6% BOB target range
4%
2%
0%
2002 2003 2004 2005 2006 2007
Monetary Policy
No interest rate changes since Feb 2006
Declining inflation favours rate reduction, but:
inflation still above BoB target range of range of
4%-7%, which is to be maintained in 2007
historically interest rates only reduced when
inflation close to target
inflation should fall within range in Q2 2007, but
only to around 6.5%
main concern now is credit growth – way above
range of 11%-14%
may see small reduction in rates (50bps) in next 2-
3 months, but not much after that
18

19. Real Prime Lending Rate
12%
Real prime rate
10% reaching recent
historical peak
8% Supports case for rate
reduction
6%
4%
2%
0%
19 8
99
00
01
02
03
04
05
20 6
07
9
0
19
20
20
20
20
20
20
20
Government Budget
2007
19

20. Govt Revenue & Spending
50% Budget now sustainable –
revenue and expenditure in line
with long-term trends
45%
% of GDP
40%
35%
30%
5
6
7
8
9
0
1
2
3
4
5
6
7
'9
'9
'9
'9
'9
'0
'0
'0
'0
'0
'0
'0
'0
Expenditure/GDP Revenue/GDP
Budget Balance
Large surpluses are
back!
10%
5%
% of GDP
0%
-5%
-10%
3
4
5
6
7
8
9
0
1
2
3
4
5
6
7
'9
'9
'9
'9
'9
'9
'9
'0
'0
'0
'0
'0
'0
'0
'0
20

21. Budget balance – actual vs. forecast
10%
actual
8%
6%
Budget balance more
4%
% of GDP
favourable than expected
2%
0%
-2%
-4% forecast
-6%
0
1
2
3
4
5
6
7
8
/0
/0
/0
/0
/0
/0
/0
/0
/0
99
00
01
02
03
04
05
06
07
19
20
20
20
20
20
20
20
20
Budgeted Expenditure
14,000 +36% Development
expenditure forecasts
12,000 for 2007/08 unrealistic
10,000 +36% +92%
8,000
P mn
6,000 2005/06
2007/08
4,000
2,000
0
Pers Other Development
emoluments recurrent
21

22. Allocation of Expenditure by
Function, 2007/08
Education
24%
Health
13%
Defence
8% Social & comm
welfare
Public order & 4%
safety Housing & urban
5% dev.
6%
Agric
3%
Gen admin Elec & water
16% Roads 4%
Other econ serv RSGs 2%
8% 7%
Economic Prospects
2007
22

23. Botswana Economic Prospects
2007
Slow resumption of growth
declining inflation and – hopefully –
interest rates;
positive impact of govt. salary increases
in 2006 & 2007
impact of higher government spending –
but slow
positive devaluation impact feeding
through – export-led growth
impact of reforms – telecomms etc.
major projects
Major Projects – Mining & Related
LionOre/Tati Nickel Activox refinery
(Cu/Ni/PGMs) (Francistown)
Diamondex mine early 2007 (Tuli Block)
African Copper 2008 (Dukwe)
Diamond aggregation/cutting
African Diamonds AK6 2007 (Orapa)
Mmamabula coal/power
Mount Burgess (zinc/silver); Discovery
(nickel/copper/silver) & A-Cap Resources
(uranium)
23

24. Botswana Economic Prospects
2007
Growth inhibited by:
Slow disbursement of govt. spending
Slow structural reforms, privatisation etc.
Skills shortages
Capacity constraints in region (e.g.
cement)
BEAC reforms
Focus on openness, competitiveness,
policy and mindset change, supported by
major projects
IMF growth forecasts
2006 4.2%; 2007 4.3%
SADC GDP Growth 2007
IMF Forecasts
15
Botswana f’cast growth (4.3%) below
10 SADC average (6.0%)
5
%
0
-5
-10
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24

25. Thank You
Email: info@econsult.co.bw
www.econsult.co.bw
25