1. Bifm Economic Review 4th Quarter 2005
Economic Review
terms (and 20% in dollar terms) over the Six months after the devaluation we can now
Summary 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 of
Developments 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 the
Dr 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 & power
Chairman 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%), with
Bifm 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 on
Economic conditions continued to be tight compounded by other effects such as higher foodstuffs (9%), housing (4%) and clothing
during the last quarter of 2005. Although fuel and telecommunications prices. However, & footwear (2%). The very low price increase
there had been signs of improving economic the most recent inflation data – for November on clothing is particularly significant, especially
conditions 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 low
continues to rise, although there is evidence increase in prices was very small, at 0.3%. despite the devaluation, largely reflecting
that underlying inflationary pressures are This was much lower than the monthly the impact of trade liberalisation and
abating. 2006 should bring better economic increases over past six months (which increased imports from China – an important
conditions, but for firms to benefit they will averaged 1.4%), suggesting that the direct benefit for consumers that is often overlooked
need to adjust to the changing economic impact of the devaluation has finished coming in discussions of international trade.
environment. through. continue...
Economic Growth
There has been no new data on economic
(GDP) growth since June 2004, which means
that 18 months have passed without any
accurate information on the overall state of
the economy. Our own index of economic
conditions – as a proxy for economic activity
– shows a somewhat depressing picture (see
Figure 1). Earlier in the year there had been
evidence of a pick-up in activity, but this
seems to have stalled around the middle of
the year, suggesting that the embryonic
recovery has faltered.
However, one sector of the economy that
appears to be doing well is exports. Data is
again incomplete, but it is clear that 2005
was a good year for exporters, a trend that
was emerging even prior to the May
devaluation. In the first nine months of the
year, diamond exports were up 27% in pula

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 and
inflation will stay at around current levels in Expenditure Survey as soon as possible. However, it remains to be seen whether these
the 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 mining
2006 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 sharp
over the impact of the re-introduction of fees question of “Is there an economic crisis?” in slowdown. When GDP figures are released
at government secondary schools in January Botswana. To answer this, it is necessary to at Budget time in early February, the focus
2006. 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 impacts
the impact of this measure could be – either actual or perceived – a slowdown in mostly directly on incomes, employment and
substantial, 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 as
are 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 squeeze
school 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 in
appropriate in the light of the current Clearly, for many people economic conditions 1992/93, when the economy was in recession
weakness of the domestic economy and the are tight. Public sector employees - a – meaning that GDP actually shrank – with
absence of inflationary pressures from significant proportion of the labour force – GDP growth of minus 0.2% in that year, and
government 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 tough
It is worth noting that the CPI basket used substantial decline in real incomes. The years, but the economy recovered and in
for 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 to
based on data on consumption patterns level of consumer indebtedness, reflecting believe that the economy can recover this
collected in 1993/94. Out of date CPI baskets an excessive level of borrowing relative to time around as well, at least if some
are inaccurate – for instance, the Botswana incomes, as well as rising interest rates. appropriate policy measures are taken, and
basket 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, as
on 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 the
overestimated 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 Economic Review
These adjustments must respond to a number even though it may not feel that way, and Inflation and interest rates should come
of inevitable changes taking place in the this makes us internationally uncompetitive, down, and the benefits of devaluation should
economy. One of these is the slowdown in resulting in slow growth. While the start feeding through. The fact that the
the 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 the
of government spending that has been the adjustment that is needed is an increase devaluation (12%) means that most of the
experienced in the past was not sustainable. in productivity, otherwise the country will be competitiveness gains that the devaluation
Government 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 rate
to what might be expected in a country of has been depreciated to a more competitive
Prospects for 2006
Botswana’s income level (in South Africa and level. The importance of doing so is illustrated
Mauritius, for example, with similar income It is too early to tell whether these necessary in Figure 3, which shows the relationship
levels, government spending amounts to adjustments are taking place, or to conclude between the real effective exchange rate
25% of GDP). The mid-term review of NDP9 what the impact of economic policy measures (REER) and real non-diamond exports; as
states that under a new “fiscal rule”, such as the devaluation has been. As noted expected, a lower REER is associated with
government spending will not be permitted above, we do not have up to date GDP or the export growth that is necessary for
to grow faster than the economy as a whole, employment data, nor is there sufficient economic diversification – a point that critics
and 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, there
have been dependent for growth upon a it is early days and the positive impact of a are new economic opportunities arising all
rapid expansion of government will therefore devaluation would typically take 6-12 months the time, and dynamic firms can find them
need to adjust to a greater focus on the to start feeding through, the lack of high and take advantage, thus creating jobs and
private 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 the
Another inevitable change taking place is an past, and firms that stick to old markets and
impact of policy measures, and the allocation
adjustment of the relative attractiveness of ways of doing business will stagnate. Activities
of resources to improve data availability
investing 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 policymaking
been focused on property and other activities (following the extensive prospecting currently
becomes like driving in the dark without
dependent 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 (which
mining sector – appearing relatively Nevertheless, there are good prospects for
unattractive. This is not what Botswana needs improved economic conditions in 2006. continue...
to generate long-term growth, which has to
be export-led, as government and the
domestic economy do not have the capacity
to lead long-term growth. One of the reasons
for the devaluation was to change these
incentives and make investment in exporting
activities more attractive, by making the
export of goods and services more profitable
(and other domestically-focused sectors, such
as property, less profitable).
The third necessary adjustment is to bring
income levels into line with productivity. One
reason for slow growth in recent years is that
by international standards, costs in Botswana
are too high. Some cost factors are
unavoidable, such as distance from seaports.
Others can be dealt with, by regulatory
reforms 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 Economic Review
appears to already be Botswana’s second residence permits and company
largest export after diamonds), and a range formation;
of manufacturing ventures and other service
8. ensure that education and training is
activities.
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 work
sufficient, and there is a range of structural ethic;
bottlenecks in the economy that will hold
back investment and employment growth. 9. pursue trade liberalisation within the
These bottlenecks need concerted policy context of the regional and international
interventions from government if they are trade agreements of which Botswana is
to be removed. Below we list 10 policy a member, and avoid protectionist
proposals that will support Botswana’s measures;
transition to a higher growth path: 10. as all of the above are in the national
1. 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