Bifm Economic Review 4th Quarter 2006 Economic Review a result, inflation is currently being measured Bank of Botswana s desired range of 4% -Summary of by a combination of the old and new baskets, 7%, and there is unlikely to be any significant reduction in interest rates while this remainsEconomic which could introduce some unpredictability into the measurement of inflation through to the case. The prospects for any reduction inDevelopments September 2007, by which time the new basket will have been in operation for a full interest rates will be balanced by the resurgence in credit growth, which reached year. 14.9% over the 12 months to November,Dr Keith Jefferis, Having said that, inflation has continued its above the BoB s range of 11% - 14%. Recent growth has largely been driven by credit toChairman of steady decline, falling to 8.8% in November 2006, down from 9.2% in October (see the private business sector, at over 20%, while credit to households grew by 15% inBifm Investment Fig.1). There were a number of reasons for this, including the reduction in fuel prices, the year to November. Nevertheless, annual credit growth may begin to fall soon, asCommittee which now have a larger weight in the revised CPI basket. However, the softening of price shorter term (quarterly) growth rates have already peaked (see Fig.2). pressures was more broadly based than this, with 5 of the 12 CPI basket categories The reduction in inflation, while internationalI experiencing price reductions between and regional inflation has been rising, has October and November, and besides lower also helped to close the gap between fuel prices, there was a noticeable reduction Botswana s inflation rate and the average of ntroduction in food costs. While the reduction in inflation its trading partners (see Fig.3), thus supporting was anticipated, the weakness of international Botswana s international competitiveness.Economic conditions were substantially better oil prices means that the decline in inflationby the end of 2006 than they were at the Exchange Rates has been faster than expected. Our currentbeginning of the year, with declining inflation, Exchange rates have stabilised somewhat forecast is for inflation to continue to declinestrong exports, improved business confidence, recently, with the rand recovering much of during the first half of 2007, to around 7%,and several major investment projects given the ground that it lost against the US dollar although if there is a further significantthe go-ahead. These factors are likely to during the third quarter of 2006. The pula reduction in fuel prices inflation could fallpersist during 2007, which should see a ended the year at R1.16, and P6.03 to the below this level. In addition, although it iscontinued improvement in economic activity. US dollar, with the overall trade-weighted too early to assess the impact of the newInflation and Monetary Policy basket on inflation, the likelihood is that the exchange rate depreciating by 4.5% over new basket will itself lead to a reduction in the year (see Fig.4). Compared to ourThe Central Statistics Office (CSO) has forecasts a year ago, the pula (and rand) measured inflation.introduced a new Consumer Price Index (CPI) have been weaker than expected against thebasket, rebased to September 2006 and with While the continued decline in inflation isa much expanded coverage (see feature). As good news, it still remains well above the continue... Figure 1: Inflation Figure 2: Credit Growth Rates (quarterly, annualised)
2 Economic Review Figure 3: Botswana and Trading Partner Inflation Figure 4: Pula Exchange Ratesdollar, and as a result the pula has been Further investigation, however, reveals that revenues have been rapid growth in revenuesstronger against the rand. the underlying situation may not be quite so from the Southern African Customs Union encouraging. While overall employment has (which was expected) and from non-mineralGiven the volatility that characterises the increased by 203,000 over the ten years income tax receipts. On the spending side,rand, to which the pula is partially pegged, between the two Labour Force Surveys, more the poor performance of developmentpredicting exchange rate movements during than half of this increase (116,000) was due spending is clear — down 13% compared to2007 is a risky business — probably the most to a rise in employment in own farms, lands the previous year — especially when comparedreliable forecast is that forecasts will be and cattle posts . This in turn reflects last with a budgeted 38% increase in 2006/07wrong. The consensus of opinion is that the year s relatively good rains and the resulting as a whole.rand will on average weaken again during temporary increase in subsistence agricultural2007; however, South Africa s relatively The 2007 Budget, due to be delivered in activities. Whether this really counts aslarge current account deficit, and early February, will contain final revenue and employment , however, is questionable,dependence upon short term portfolio expenditure figures for the full 2005/06 fiscal as the survey methodology counts ascapital flows to finance it, may well cause year, as well as revised figures for 2006/07 employed someone who did one hour orthe rand to fluctuate widely again. Our and projections for 2007/08. Data for more of work over a seven day referenceforecast is that the pula will weaken by 2005/06 are likely to show a budget surplus period. Furthermore, the increase in recordedaround 10% against the dollar during 2007, larger than the P1.5 billion (3% of GDP) that agricultural employment contrasts with theto finish the year around 6.70, but will was indicated last year, and likewise a surplus results of other surveys, which show a long-remain fairly stable against the rand (at for 2006/07 larger than the P0.9 bn that term decline.around 1.16-1.17), albeit with some was initially estimated, with revenue abovefluctuations along the way. The rise in non-agricultural employment has budget and expenditure below. Given the been less impressive, although at 2.7% poor expenditure performance, the BudgetEmployment annual average growth, it has at least kept Speech will no doubt devote considerableThe Central Statistics Office has released pace with (or slightly exceeded) the growth attention to why government has beenpreliminary results from the 2005/06 Labour of the population and the labour force. unable to spend the additional resourcesForce Survey (LFS), providing data on Nevertheless, if it had not been for the provided for in 2006/07, especially foremployment and unemployment in fortunate rains during the LFS survey period, development projects, thus inhibiting theBotswana. The CSO is to be commended for recorded unemployment would most likely anticipated recovery in economic growth. Itgetting these preliminary results out quickly have remained between 20% and 30% of is likely that most of these projects will beafter the completion of the survey in June the labour force. carried forward to 2007/08, hopefully2006. The headline results of the LFS accompanied by concrete measures to Government Budgetprovide encouraging information: since the improve the efficiency of projectprevious LFS in 1995/96, overall employment Recent data on government revenue and implementation and public procurementhas been growing rapidly, at an average rate spending are patchy, but the data that are processes. No major policy initiatives areof 4.7% a year, which is substantially faster available suggest that revenues have been expected in the Budget, although there maythan the growth of the population and the rising at a steady pace, up 15.1% in the first be some indication of the likely response tolabour force. As a result, the measured half of the 2006/07 fiscal year (April- the report of the Business and Economicunemployment rate has declined, from 21.5% September) compared to the same period in Advisory Council (BEAC), which governmentof the labour force in 1995/96 to 17.3% in 2005/06 (see Fig.6). Expenditure rose by only is now considering.2005/06 (and compares with recorded 7.3% over the same period, leading to aunemployment rates of 19.5% in the 2001 half-year budget surplus of P2.1billionCensus and 23.8% in the 2002/03 HIES) (see (compared to a P1.3bn surplus in H1Fig.5). 2005/06). The main drivers of increased continue...
3 Economic Review Figure 5: Employment & Unemployment Figure 4: Government Revenue & Spending (quarterly) BoBProspects for 2007 developments will contribute positively 2006 should materialise in 2007. towards economic diversification.The likelihood of continued above-trend As a result it should be possible to sustainglobal economic growth, combined with On the macroeconomic front, inflation should economic growth in the 4%-5% range, notstrong economic performance in South continue to decline slowly and this will in particularly high by Botswana s historicalAfrica, should provide a supportive turn provide some room for lower interest standards but reasonably good by theenvironment for a continued improvement rates, which will in turn support investment standards of middle income developingin Botswana s economic growth and growth. However, it would not be countries. With population growth estimatedperformance. Recent movements in realistic to expect dramatic reductions incommodity prices have also been favourable, either inflation or interest rates during 2007. at barely over 1%, economic growth at thiswith falling oil prices helping to bring down Government finances are likely to remain rate will support a meaningful increase ininflation, and although other commodity healthy, and the increase in spending on real per capita incomes, as well as a reductionprices (notably copper and nickel) have also development projects that was expected in in unemployment and poverty.fallen, they remain above long-term levelswhich will support continued mineral Table 1: Key variables and forecastsexploration an development in Botswana.Three major mining-related projects (Tati 2006 2007Nickel mine expansion and Activox nickel actual / est. forecastrefinery near Francistown, the Dukwe copper Inflationmine, and the Martin s Drift diamond mine),as well as one or more diamond-cutting CPI average 11.6% 7.2%operations, will be implemented during CPI end of year 8.8% 7.0%2007, while final decisions will be taken onat least two others (African Diamonds AK7 Interest Ratesproject near Orapa, and the CIC Prime lending end of year 16.5% 16%Energy/International Power Mmamabula Exchange ratescoal mine and power station project). Thesewill all provide a boost for various related Rand per Pula end of year 1.16 1.17activities, including construction, utilities Pula per US$ end of year 6.03 6.67(water, electricity and telecoms), Economic Growth 4% 5%transportation as well as other suppliers ofgoods and services. Other exports should Source: Econsultcontinue the growth seen in 2006,supported by the improved competitivenessthat resulted from the devaluations of 2004and 2005, and textiles should benefit fromthe five-year extension to the developingcounty concessions under the US Africa Feature:Growth & Opportunity Act (AGOA)announced in late 2006. The economy The New Consumer Price Indexshould also benefit from the liberalisationmeasures in the telecommunications sector (CPI) Basketannounced in 2006. All of these see following pages
4 Economic ReviewFeature:The NewConsumer Price Index (CPI) BasketA new CPI basket was introduced inthe October 2006 CPI report from the CentralStatistics Office. The index has a base ofSeptember 2006=100, and replaces the old will help to make measured price changes more internationally comparable), and changes the way in which item substitution takes place. additions include new health items (X-rays, consultations with traditional doctors, hospital stays), transport (combi fares, car rental), recreational items (TV decoders, DVDs,index which had a November 1996 base. computers), education (college & university Table 2: CPI Basket CoverageThe new basket is derived from expenditure fees) and telecommunications (cellphonepatterns recorded in the 2002/03 Household New Old purchase and call charges, internet caf andIncome and Expenditure Survey (HIES), and Items in basket 384 256 home connections) and funeral costs. Sometherefore updated the previous basket which items have disappeared (e.g. telegrams andwas based on the 1993/94 HIES. Areas surveyed 46 21 safari suits). The main changes for item and Outlets surveyed 1235 550 group weights include much increased weightsAs we had previously commented, the old for fuel (petrol & diesel), restaurant meals,index and basket had become increasingly Price quotes obtained 30˚000 8 100 medical aid premiums, telecommunications,problematic as it became more and more leisure goods & services, and clothing. Theout of date, and hence less accurate when Coverage of prices in rural areas has been main reductions in weights have been forused to measure inflation. A particular enhanced, with 26 rural areas now surveyed, food and alcohol & tobacco. Notwithstandingproblem had the omission of items which compared to 5 in the old basket (see table 3). the latter, beer (consumed in various formshad recently become important in However, expenditure patterns are dominated and locations) remains the largest singleexpenditure patterns (e.g. cellphones and by urban areas (with a 47% weight in total consumption item. Within food consumption,airtime), but more generally the CPI basket spending) and urban villages (34%), while we are spending proportionately more onhad become less representative of rural areas account for only 19%. Given this, fruit and vegetables, and have shifted meatexpenditure patterns in the economy. Analysis and the expense involved in surveying prices consumption from beef to chicken.from other countries suggests that this type in rural areas, it is questionable whether suchof problem leads to an upward bias in a large increase in the geographical survey The treatment of rent in the CPI basket hasmeasured inflation, and hence it is likely that coverage of rural prices is justified. also been much improved. Previously, BHCthe old index was exaggerating Botswana s rentals were used as proxy for almost all Table 3: Geographical Coverage (No. of rentals, including private rentals, such thatinflation. A second problem had been areas surveyed) any change in BHC rents — an administeredexperienced when items in the basket had price determined by government — had abecome unavailable, requiring the ˚New Old disproportionate effect on inflation. In thesubstitution of new items, and there had revised basket, the weight of BHC rentalsbeen a number of errors (and subsequent Urban 5 5 has been reduced and that of private rentalsrevisions) in the inflation calculation resulting Urban village 16 11 significantly increased, to reflect morefrom such item substitution. appropriately the pattern of actual expenditure.In updating the basket, its coverage has been Rural 26 5 Overall, the new index marks a considerableconsiderably expanded in terms of numbers improvement over the old one, being moreof items included, the number of price quotes There has been extensive change in the items up to date, comprehensive and withobtained each month, and its geographical making up the basket, and their weights (see improved methodology. It should provide acoverage (see table 2). This should help the table 4). While the new basket contains 12 more accurate measurement of inflation.CPI to provide a more representative (and groups, like the old basket, the groups have Nevertheless, it would be particularly helpfulhence more accurate) record of price changes been re-arranged and because of the if the CSO continued recording andin the economy. The methodology of CPI changed item composition they are not fully calculating inflation using both the old andcalculation has been improved in various comparable between the two baskets. Manyways; specifically, it uses internationally new items have been introduced, reflectingagreed criteria for classifying items (which changed lifestyles and economic activities: continue...
5 Economic ReviewFeature:The New Consumer Price Index (CPI) Basketcontinuedthe new baskets over a period of, say, 12 months, so that a more accurate assessment of the divergence between the two could beobtained.Table 4: CPI Basket Weights (total 100) Old Basket New Basket (1996) (2006) ChangeIncreased WeightsClothing 5.84 7.52 29%Recreation 1.55 2.22 43%Telecommunications 1.60 2.97 86%Fuel (petrol, diesel, paraffin) 3.10 7.74 150%Medical aid premiums 1.16 5.18 347%Restaurant & take-away meals 0.35 3.08 780%Funeral expenses - 1.74 n/aReduced WeightsFood (excl. purch. meals) 25.18 21.84 -13% o/w fruit & vegetables 2.42 2.61 7.9% o/w beef 4.18 1.79 -57.2% o/w chicken 0.69 1.33 92.8%Alcohol & tobacco 13.49 9.29 -31% o/w beer (incl. chibuku) 9.57 8.21 -14%Rent 6.88 5.68 -17% o/w BHC 5.50 1.64 -70% o/w private 1.38 4.04 193% Bifm Botswana Limited Asset Management. Property Management. Private Equity. Corporate Advisory Services. Private Bag BR 185, Broadhurst, Botswana Tel: +(267) 395 1564. Fax: +(267) 390 0358. Website: www.bifm.co.bw