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  1. 1. Bifm Economic Review 4th Quarter 2005 Economic Review terms (and 20% in dollar terms) over the Six months after the devaluation we can nowSummary of same period in 2004; soda ash exports were assess its impact on prices. Over this period,Economic up 30%; and beef exports were up nearly 20% (all in pula terms). Comparative data is inflation has gone up by 5%; most of the increase is due to devaluation, but not all ofDevelopments not available for copper-nickel (due to revisions under way to the 2004 data), but it, and other factors have also played a part. The categories of commodities with theDr Keith Jefferis, the industry has also had a good year, due to higher prices; average copper prices in highest price increases over the past year are vehicle running costs (28%), fuel & powerChairman of US dollars were 28% higher in 2005 than in 2004, and average nickel prices were 7% (27%), communications (26%), tobacco (24%), fruit (23%) and vehicles (22%), withBifm Investment higher. Unfortunately data on other (non- much of these increases driven by non-Committee traditional) exports is not yet available for most of 2005. devaluation factors. Although these items account for only around one quarter of the CPI basket, they accounted for over half of Inflation annual inflation in November. There have The inflationary impact of the May also been some useful offsetting influences,Summary devaluation has continued to feed through, with particularly low price increases onEconomic conditions continued to be tight compounded by other effects such as higher foodstuffs (9%), housing (4%) and clothingduring the last quarter of 2005. Although fuel and telecommunications prices. However, & footwear (2%). The very low price increasethere had been signs of improving economic the most recent inflation data – for November on clothing is particularly significant, especiallyconditions in the first half of the year, the – is moderately encouraging, despite a slight as almost all items consumed are imported;recovery seems to have faltered. Inflation rise in overall inflation to 11.3%. The monthly price increases were, therefore, very lowcontinues to rise, although there is evidence increase in prices was very small, at 0.3%. despite the devaluation, largely reflectingthat underlying inflationary pressures are This was much lower than the monthly the impact of trade liberalisation andabating. 2006 should bring better economic increases over past six months (which increased imports from China – an importantconditions, but for firms to benefit they will averaged 1.4%), suggesting that the direct benefit for consumers that is often overlookedneed to adjust to the changing economic impact of the devaluation has finished coming in discussions of international trade.environment. through. continue...Economic GrowthThere has been no new data on economic(GDP) growth since June 2004, which meansthat 18 months have passed without anyaccurate information on the overall state ofthe economy. Our own index of economicconditions – as a proxy for economic activity– shows a somewhat depressing picture (seeFigure 1). Earlier in the year there had beenevidence of a pick-up in activity, but thisseems to have stalled around the middle ofthe year, suggesting that the embryonicrecovery has faltered.However, one sector of the economy thatappears to be doing well is exports. Data isagain incomplete, but it is clear that 2005was a good year for exporters, a trend thatwas emerging even prior to the Maydevaluation. In the first nine months of theyear, diamond exports were up 27% in pula
  2. 2. 2 Economic Review compounded by other developments, such as the slowdown in government spending growth in 2004 and 2005, and the inevitable fallout from past overinvestment, most notably – in Gaborone at least - in retail trading space. The extent to which this is reflected in a general economic slowdown is difficult to ascertain at present. Unfortunately we do not yet have sufficiently good data to give a firm view of what is happening to the economy; as noted above, the most recent GDP data is now 18 months old. Nor do we have data on employment, incomes or poverty levels that are recent enough to cover the period of the perceived crisis. The recent mid-term review of NDP9, released in December, projects GDP growth of 4.2% in 2004/05 and 2005/06, with a healthy 5.6% growth in the non-mining sectors of the economy.On the basis of current trends it is likely that the 2002/03 Household Income andinflation will stay at around current levels in Expenditure Survey as soon as possible. However, it remains to be seen whether thesethe coming months, perhaps rising to around projections are borne out in practice. Various Is there an economic crisis?12%, before falling in the second half of indicators suggest that while the mining2006 to around 6% by the end of the year Over the past few months there has been sector has done well in 2004/05, the rest of(see Figure 2). However, there is uncertainty much commentary and discussion on the the economy has indeed experienced a sharpover the impact of the re-introduction of fees question of “Is there an economic crisis?” in slowdown. When GDP figures are releasedat government secondary schools in January Botswana. To answer this, it is necessary to at Budget time in early February, the focus2006. School fees are a component of the identify the main economic developments should be on the performance of the non-CPI basket and, while their weight is small, that lie behind the question. These include mining private sector – as this is what impactsthe impact of this measure could be – either actual or perceived – a slowdown in mostly directly on incomes, employment andsubstantial, possibly adding 4-5% to inflation economic growth; rising inflation; continued poverty for the majority of the population –in 2006, depending on how the new fees high unemployment and poverty; generally as well as on the growth of the economy asare factored in to the CPI calculation. It would weak business conditions, with business a whole.be particularly unfortunate if the impact of closures and declining profits; and a squeezeschool fees on inflation delayed the reduction The last time that similar economic events on real incomes.of interest rates, which would otherwise be were experienced in Botswana was inappropriate in the light of the current Clearly, for many people economic conditions 1992/93, when the economy was in recessionweakness of the domestic economy and the are tight. Public sector employees - a – meaning that GDP actually shrank – withabsence of inflationary pressures from significant proportion of the labour force – GDP growth of minus 0.2% in that year, andgovernment spending. did not receive a pay rise this year, which, as well inflation hit 17%. As many people with inflation of over 11%, has led to a will recall, there were a couple of toughIt is worth noting that the CPI basket used substantial decline in real incomes. The years, but the economy recovered and infor inflation calculations is now very out of difficulties many people have faced in dealing due course growth rates of well over 5%date – the current index was rebased in 1996, with this have been compounded by a high were achieved. There is every reason tobased on data on consumption patterns level of consumer indebtedness, reflecting believe that the economy can recover thiscollected in 1993/94. Out of date CPI baskets an excessive level of borrowing relative to time around as well, at least if someare inaccurate – for instance, the Botswana incomes, as well as rising interest rates. appropriate policy measures are taken, andbasket does not include cellphones or airtime if some necessary adjustments take place in– and tend to over-estimate inflation. Based The squeeze on real incomes has had a both the public and private sectors. But, ason experience from other countries, negative impact on many businesses, which the experience of the early 1990s showed,Botswana’s inflation rate is probably being have been unable to generate sufficient the adjustments can be as painful as theoverestimated by around 1% as a result of turnover to maintain profits, especially given slowdown that makes them necessary.the outdated basket, indicating the urgency the higher costs resulting from the continue...of updating the CPI basket on the basis of devaluation. In some sectors this has been
  3. 3. 3 Economic ReviewThese adjustments must respond to a number even though it may not feel that way, and Inflation and interest rates should comeof inevitable changes taking place in the this makes us internationally uncompetitive, down, and the benefits of devaluation shouldeconomy. One of these is the slowdown in resulting in slow growth. While the start feeding through. The fact that thethe rate of growth of government spending devaluation has, for the time being, reduced increase in inflation (5%) has been– inevitable because the very rapid expansion costs in international terms, in the long run substantially less than the amount of theof government spending that has been the adjustment that is needed is an increase devaluation (12%) means that most of theexperienced in the past was not sustainable. in productivity, otherwise the country will be competitiveness gains that the devaluationGovernment spending in Botswana is already faced with slow growth, high inflation and was intended to achieve have, so far at least,very high, at around 40% of GDP, relative a weak currency. been preserved, and the real exchange rateto what might be expected in a country of has been depreciated to a more competitive Prospects for 2006Botswana’s income level (in South Africa and level. The importance of doing so is illustratedMauritius, for example, with similar income It is too early to tell whether these necessary in Figure 3, which shows the relationshiplevels, government spending amounts to adjustments are taking place, or to conclude between the real effective exchange rate25% of GDP). The mid-term review of NDP9 what the impact of economic policy measures (REER) and real non-diamond exports; asstates that under a new “fiscal rule”, such as the devaluation has been. As noted expected, a lower REER is associated withgovernment spending will not be permitted above, we do not have up to date GDP or the export growth that is necessary forto grow faster than the economy as a whole, employment data, nor is there sufficient economic diversification – a point that criticsand will therefore be capped at 40% of GDP, recent data on exports and imports, so we of devaluation tend to ignore.which will result in a long-term balanced cannot evaluate the impact on trade,budget. Sectors (such as construction) that economic growth or employment. Although Even with current economic activities, therehave been dependent for growth upon a it is early days and the positive impact of a are new economic opportunities arising allrapid expansion of government will therefore devaluation would typically take 6-12 months the time, and dynamic firms can find themneed to adjust to a greater focus on the to start feeding through, the lack of high and take advantage, thus creating jobs andprivate sector as a source of business. quality, up-to-date economic data is driving growth. But they are not the same increasingly a problem in evaluating the as the opportunities that were there in theAnother inevitable change taking place is an past, and firms that stick to old markets and impact of policy measures, and the allocationadjustment of the relative attractiveness of ways of doing business will stagnate. Activities of resources to improve data availabilityinvesting in different sectors of the economy. where these such opportunities are likely to should be a major government priority;Historically, private sector investment has emerge include new mining projects without this, economic policymakingbeen focused on property and other activities (following the extensive prospecting currently becomes like driving in the dark withoutdependent on the domestic economy, with taking place, and supported by the rise in headlights.export activities – at least outside of the global commodities prices), tourism (whichmining sector – appearing relatively Nevertheless, there are good prospects forunattractive. This is not what Botswana needs improved economic conditions in 2006. continue...to generate long-term growth, which has tobe export-led, as government and thedomestic economy do not have the capacityto lead long-term growth. One of the reasonsfor the devaluation was to change theseincentives and make investment in exportingactivities more attractive, by making theexport of goods and services more profitable(and other domestically-focused sectors, suchas property, less profitable).The third necessary adjustment is to bringincome levels into line with productivity. Onereason for slow growth in recent years is thatby international standards, costs in Botswanaare too high. Some cost factors areunavoidable, such as distance from seaports.Others can be dealt with, by regulatoryreforms to reduce the costs of doing business.But at the root of the problem is productivity:relative to the value of what is produced,wages and salaries in Botswana are high,
  4. 4. 4 Economic Reviewappears to already be Botswana’s second residence permits and companylargest export after diamonds), and a range formation;of manufacturing ventures and other service 8. ensure that education and training isactivities. focused on the needs of the economy,While the devaluation was necessary to so that graduating students have useful,support such export-led growth, it is not productive skills and an appropriate worksufficient, and there is a range of structural ethic;bottlenecks in the economy that will holdback investment and employment growth. 9. pursue trade liberalisation within theThese bottlenecks need concerted policy context of the regional and internationalinterventions from government if they are trade agreements of which Botswana isto be removed. Below we list 10 policy a member, and avoid protectionistproposals that will support Botswana’s measures;transition to a higher growth path: 10. as all of the above are in the national1. ensure that boosting competitiveness interest and will contribute to citizen (through lowering costs and raising empowerment, do not allow special productivity) is the fundamental interest or lobby groups to influence benchmark against which all government policy making through the use of policy initiatives are assessed; spurious arguments to delay or impede essential reforms.2. maintain fiscal balance, matching spending with revenues (in the medium term) and cutting back government spending on inefficient, low priority activities or projects with low economic or social returns; Bifm Botswana Limited Asset Management. Property Management. Private Equity. Corporate Advisory Services.3. ensure that monetary policy balances Private Bag BR 185, Broadhurst, Botswana the need to contain inflation and the Tel: +(267) 395 1564. Fax: +(267) 390 0358. Website: www.bifm.co.bw need to support growth through productive investment in the economy;4. ensure that exchange rate policy maintains a stable, competitive real exchange rate;5. reduce the scope of government activities in the economy, support the private sector, and harness private sources of capital and investment through initiatives such as privatisation and public-private partnerships;6. implement across the board economic liberalisation to remove regulatory impediments that restrict business activity and push up costs, focusing initially on the most heavily regulated sectors, such as the beef industry, air passenger transport and telecommunications, and the removal of unnecessary business licensing regulations;7. deal aggressively and constructively with bureaucratic constraints to investment, such as the availability of land, work and