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Bifm Economic Review 2nd Quarter 2007 Economic Review Inflation and Monetary Policy we consider it likely that inflation will remainSummary of The second quarter of the year has seen within the 4%-7% range for the next 12Economic continued success in containing inflation, which declined to 6.3% in April from 6.5% months (see Figure 1). In June 2007 the Bank of Botswana (BoB)Developments in March, before rising slightly to 6.4% in May. This represents the lowest inflation level cut its benchmark interest rate - the Bank Rate - by half a percent to 14.5%, a relativelyDr Keith Jefferis, for two years. However, despite the decline in the annual rate of inflation, recent months modest cut given the sharp decline inflation over the past 12 months, from a peak ofChairman of have seen some cost pressures, particularly those arising from rising global and regional 14.2% in April 2006. The Bank of Botswana’s reluctance to reduce rates earlier was drivenBifm Investment food prices. Notably, the prices of bread, cereals, meat and dairy products have all by concerns about future inflationary pressures arising from domestic demand. ForCommittee exhibited sharp price increase in the last three months. The prices of alcohol and tobacco instance, the rate of bank credit growth, at 18.4% in April, is relatively high and well have also risen sharply. With foodstuffs above the BoB’s preferred range for credit accounting for 22% of the CPI basket, and growth of 11%-14%. Nevertheless, while alcohol and tobacco a further 9%, these there may be inflationary pressures, as noted trends, if sustained, will inevitably have a above, these are likely to come largely from significant impact on inflation going forward. regional and international food and oil prices, There are also concerns about rising which are largely beyond the control of international oil prices; although these have Botswana’s monetary policy. Tight monetaryThe second quarter of 2007 has seen generally not yet fed through to Botswana fuel prices policy also reflected a desire to suppress thepositive economic developments, with falling in a major way, if current international prices potential inflationary impact of the crawlinginflation, a cut in interest rates, good external are sustained then local prices will eventually peg exchange rate regime, which tends totrade performance and indications of rising have to rise. add to imported inflation.economic growth and confidence. However,economic assessments from the World Although there are inflationary concerns Prior to the recent cut, real (inflation adjusted)Economic Forum and the International stemming from food and oil prices, it is interest rates had reached their highest everMonetary Fund point to some economic encouraging that inflation has fallen within level in Botswana, and even after the rateweaknesses and urge reforms to improve the the Bank of Botswana’s 2007 objective range reduction remain well above real interestinvestment climate. Finally, although there of 4%-7% for the past three months. Going rates in neighbouring South Africa, whichare concerns about the slow pace of economic forward, our forecast is for inflation to remain has a similar inflation rate to that ofdiversification, trade data suggests that the at around current levels for most of 2007, Botswana. Whereas the real prime lendingdiversification policy has been more successful although rising food and fuel prices may rate in Botswana is now around 9%, in Souththan is sometimes believed. cause inflation to rise above this. Nevertheless, Africa it is only around 6%, notwithstanding Figure 1: Inflation Figure 2: Real Prime Lending Rate – Botswana and South Africa Source: BoB, CSO, Econsult Source: BoB, CSO, SARB, Stats SA, Econsult
2 Economic Review Figure 3: Business growth indicators Figure 4: Business Confidence Index (% of firms rating current business conditions satisfactory) Source: BoB, BPC, Econsult Source: Bank of Botswanathe fact that South Africa probably has higher private business sector was only 2.2%, so of its bi-annual business confidence survey,economic growth, and hence greater demand the increased growth rate is indicative of an carried out in March 2007 (see Figure 4).pressures, than Botswana (see Figure 2). With improvement in business conditions. The results of this survey (available in moresuch high real interest rates, there has been detail at www.bob.bw) show a marked Data on electricity consumption also suggestsincreasing concern in the private sector improvement in business confidence, with that recovery is well under way (see FigureBotswana’s growth is being unduly restricted the proportion of businesses rating current 3). Non-mining electricity consumption grewas a result, and the rate reduction will come business conditions satisfactory rising from by 10.6% in the year to April 2007, comparedas a welcome relief to firms and households. 52% in September 2006 to 66% in only 1.8% a year earlier.Economic Activity September 2007; even higher levels of A further indicator of the strength of confidence are recorded for expectedThe most recent GDP data, covering the economic conditions is the number of business conditions in the second half ofperiod to June 2006, indicated that growth applications for business licences under the 2007 and into 2008. It is also noticeable thatin the non-mining private sector was around Trade and Liquor Act. While this does not for the first time, confidence levels amongst2.5% during 2005/06. However, there are include all new businesses, it does include a firms selling primarily into the domesticno GDP data available covering the last twelve wide variety of trading businesses, and the market exceed confidence levels amongmonths, and so interpretations of recent number of applications provides an indication exporters.economic growth have to rely on other data. of new business activity. In the first half of 2007, the number of new licence applications External TradeOf this, data on bank lending to the private was 2 094, compared to 1 979 in the firstsector suggest that growth is healthy, with Botswana continues to benefit from a positive half of 2006, an increase of 5.8%. This iscredit up 10.6% in real terms over the twelve trade performance. Since 2003, exports have consistent with a healthy growth rate for themonths to April 2007. Although this is slightly increased at an average annual rate of 27%, non-mining private sector in the range oflower than the 15% real growth recorded while imports have increased at only 13% a 4%-6%.towards the end of 2006, 12 months ago year. Although much of this export growththe real growth rate of bank credit to the The Bank of Botswana has released the results has been driven by higher diamond exports, Figure 5: Export Growth, 2006 Q1 – 2007 Q1 Figure 6: The Most Problematic Factors (US$) for Business in Botswana As arts ds ds c p uip he cts ds les i t lt ld Pla lec e l -N ea & Tota sa pro on oo Go xti u q Cu M p rod h& Iro Diam rg Te So es & el ste e Ot l sti hic da n, h. Ve ac M Source: CSO Source: WEF
3 Economic Reviewnon-diamond exports have been growing at decline sharply thereafter (as productiona faster rate. The result has been rapidly moves underground). In view of the fiscalincreasing trade surpluses, which at P10 implications of declining diamond production,billion for the 12 months to March 2007, the government is urged to cut spending (asis equivalent to around 16% of GDP. a proportion of GDP) and broaden the tax base, and not to rule out possible futureThe commodities driving exports can be seenfrom Figure 5, which shows the growth of increases in tax rates. Secondly, the IMFexports by major commodity in the first quarter expressed concern regarding potentialof 2007 over the same period in 2006, conflicts between the objectives of monetarymeasured in US dollar terms. While total policy (using interest rates to fight inflation)exports increased by 22% over this period, and exchange rate policy (using the crawlingthere was extremely rapid growth – of over peg regime target the real effective exchange150% - for copper-nickel, meat, and textiles. rate), and urged that the first of theseDiamonds made a minimal contribution to objectives be given priority. The IMF alsoexport growth over this period. recommended that the exchange rate basket weights and the rate of crawl should beWorld Economic Forum Africa publicly disclosed. More generally, the IMFCompetitiveness Report said that consideration should be given toThe World Economic Forum has published tighter monetary policy to fight inflation. Itthe 2007 Africa Competitiveness Report also urged continued efforts to undertake(ACR), which amongst other things includes labour market reforms, implementan updated Global Competitiveness Index privatisation and improve the investment(GCI) and a Competitiveness Profile for each climate, in order to boost competitivenessAfrican country. and support economic diversification.In comparison with other countries in sub- There are some oddities in the IMF note,Saharan Africa, Botswana does well in the however, with sloppy or misleading use ofGCI rankings: as in the previous GCI (2005), economic data. For instance, it noted thatBotswana is rated third in sub-Saharan Africa the real effective exchange rate (REER) had(after South Africa and Mauritius). However, appreciated during 2006 as a result of higherperformance on a global scale is less good, inflation, whereas its own data published inwith Botswana rated at no. 83 (out of 128 the note showed that the REER hadcountries). Furthermore, relative global depreciated substantially – as intended,performance has slipped, as in the 2005-06 meaning improved competitiveness - as aGCI rankings, Botswana was rated at number result of the 2004 and 2005 devaluations.72 (out of 117 economies). Also, it quotes a 35% adult HIV prevalenceThe Competitiveness Profile also provides rate for Botswana from UNAIDS, whereas ininformation on the most problematic factors fact the actual (and correct) prevalence ratefor doing business, which for Botswana are cited by UNAIDS is 24%.shown in Figure 6. Interestingly, inefficientgovernment bureaucracy is rated the mostproblematic, with factors related to theworkforce (education and skills, work ethicand labour regulations) coming next. Alongwith access to finance, these factorsaccounted for nearly two-thirds of responses.IMF Article IV AssessmentOne June 28th the IMF released a PublicInformation Notice relating to its Article IVassessment of the Botswana economy. Asusual the IMF was generally positive in its Feature:assessment of the economy. However, it didraise some concerns and made suggestionsas to how economic management could beimproved. Amongst the key issues noted Is Economic Diversification See next pagewere that diamond production (and henceexport earnings and government revenues) Taking Place?would peak in around 15 years time and
4 Economic ReviewFeature:Is Economic Diversification Taking Place?There has been concern for a number of and of gross domestic expenditure. However, extent been achieved. In the early 1990s,years that Botswana’s economic diversification this share has been steadily declining; until exports of goods and services other thanstrategy has been unsuccessful, and that the the mid-1980s we imported around 60% of diamonds could only pay for around 30% ofeconomic structure remains overly dependent what we consumed and invested, whereas imports of goods and services, whereas byupon minerals, and upon diamond mining it is now down to around 40%, indicating 2006 non-diamond exports covered the costin particular. This concern is supported by that domestic production now accounts for of 61% of imports. This is another sign thatreference to data on Gross Domestic Product a greater proportion of what we consume there has been some diversification.(GDP), which points to three distinct periods (see Figure 9 overleaf). This is a sign ofof approximately ten years each over the past The contrasting stories told by GDP data and success, given that reducing dependence trade data are shown clearly in Figure 1030 years. Figure 7 shows trends in the non- upon imports has been one of the objectivesmining sector’s share of GDP and an “Index overleaf, which shows indices of of economic diversification. diversification, one using GDP data and oneof Diversification”. From the mid-1970s untilthe mid-1980s diversification declined, as the Further evidence of diversification success using export data (goods and services), overmineral sector grew rapidly and its share in can be found in the trade data. Export data the period 1992-2006. Although they showGDP expanded. From the mid-1980s until shows that the structure of exports is similar year-to year changes, the GDP seriesthe mid-1990s there was rising diversification, changing (and we know that because of the clearly shows a downward trend inas non-mining sector growth took off. From small domestic economy, diversification has diversification, while the export series showsthe mid-1990s to the present, however, an upward trend.* to be export-led). Firstly, goods exports havediversification appears to have declined once become more diversified. After a long period Why there is such a difference? Although inmore. where the share of diamonds in total goods principle they measure similar things, theInterestingly the period of increased exports rose, to over 80%, over the past few data sources for trade and GDP data arediversification was driven not by an increased years non-diamond exports have been quite different. The national accounts datashare of manufacturing in GDP (or of growing faster than diamond exports, and (used for GDP calculations) are primarilysecondary industry more generally), but by the share of diamond exports fell to 72% in derived from surveys (such as the survey ofincreased output of non-government services; 2006. A second trend has been the increasing firms). The quality of the resulting datathese grew from 12% of GDP in 1983/84 to importance of services exports; the share of depends upon both the quality of the sample30% of GDP in 1994/95, much of which was services in total exports (of goods and services) frame from which survey respondents arein turn due to the growth of banking, has been rising, with services exports growing selected, and the responsiveness of thoseinsurance and business services, as well as faster than both diamond and non-diamond surveyed. In recent years both have beentrade, hotels & restaurants (see Figure 8). goods exports, mostly reflecting the growth questionable, with an increasingly outdated of the tourism sector. register of economic establishments uponHowever, the picture may not be as gloomyas the GDP data suggests, as other data show One of the objectives of economic diversification which firm surveys are based, and problemsa somewhat different story. Historically, has been to reduce Botswana’s dependence *Index of Diversification = 1 – HHI (Hirschman-imports accounted for well over 50% of GDP upon diamond exports, and this has to a certain Herfindahl Index of Concentration). Figure 7: Trends in the Diversification of Economic Activity Figure 8: GDP shares (constant prices) Source:CSO Source: CSO
5 Economic Review Figure 9: Imports of Goods and Services Figure 10: Index of diversification, GDP and Export Measures Exports Diversification Index Diversification Index GDP (Current prices) GDP Exports Exports GDP Source: CSO Source: Econsultwith low response rates. the purposes of GDP calculations) should be import data shows no dramatic increase in very similar to the value of its exports. imports during the period when textileTrade data are different, however, as they However, as Figure 11 shows, this is no exports have shot up, so this is unlikely. It isare derived from customs records; in principle more likely that the GDP data are inaccurate longer the case. Until 2001, exports andevery shipment of goods entering or leaving gross output were very similar, as would be and are under-recording textile production.Botswana is recorded through customs expected. Since that time, however, textile If there is an “outdated sample bias” thisdeclarations, and at most border posts data exports have shown dramatic growth, as would lead to a systematic under-recordingcollection is now automated. Trade data are new firms have set up in business, many of of diversification in the GDP data (as the newnot based on sample surveys, and are much them taking advantage of export firms that characterise a successfullymore comprehensive. And at least for exports opportunities to the USA under the Africa diversifying economy are more likely to bethere is no reason to believe that there is Growth and Opportunity Act (AGOA). GDP missed out of production surveys). It mayany systematic bias in the recorded values, data, however, show only a minimal also lead to an under-recording of associatedso the data should be accurate. increase. One possible explanation for this economic trends, such as overall GDP growth is that these new firms are not being included and employment creation. Fortunately theA clear example of the contrast between in production surveys for GDP purposes. Central Statistics Office is undertaking aproduction (GDP) and export data can be Another possible explanation is that exports comprehensive updating of the Enterprisesseen in the textiles sector. Virtually all of comprise goods which are being imported and Establishments Register, which shouldBotswana’s textile production is exported, and “transhipped” rather than being lead to a more accurate recording of GDPso the sector’s gross output (recorded for produced in Botswana. However, textile and employment developments. Figure 11: Textiles production and Exports National accounts years *9 months Source: CSO 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