1. Bifm Economic Review 3rd Quarter 2005
Economic Review
firms to fully pass on higher import costs to For the rest of the year and into the first
Summary of consumers. quarter of 2006, inflation is expected to be
Economic Nevertheless, inflation is likely to remain high
some 3%-4% above the upper end of the
Bank’s inflation objective range. The Bank
Developments for some time, especially with fuel costs adding
further upward pressure to prices. Our forecast
noted that “monetary policy will respond to
any significant rise in inflation above the upper
is for inflation to rise slightly from current
Dr Keith Jefferis, levels, and to remain around 10%-11% until end of the revised objective” and that “overall
inflation in the short run will only be allowed
Chairman of the second quarter of 2006, when it should
drop fairly quickly to around 6%-7% (see to rise by around 2 percent without meeting
increased policy resistance”.
Bifm Investment Figure 1), although much depends on fuel
price developments over the coming months. Following the increase in inflation to 10% in
Committee A key question is, what does this mean for September, the Bank raised interest rates by
interest rates? The Bank of Botswana released a further 0.25%. This was a small increase,
its mid-year review of the Monetary Policy intended mainly to influence inflation
E
Statement in early August, preceded by a expectations. Given the likelihood of inflation
small increase (0.25%) in interest rates. The rising further, another increase in interest rates
review made some changes to the Bank’s before the end of the year cannot be ruled
conomic developments in the third targets for inflation and credit growth, raising out.
quarter of 2005 have been dominated by both by 1%, so that the inflation objective
Economic Growth
continued concerns about the slow growth range for the rest of the year is 4%-7%, with
of the economy and controversy over the costs a credit growth rate of 11%-14% considered There is no new national accounts data
and benefits of the 12% devaluation of the to be compatible with the inflation objective. available (since mid 2004) and so there is no
pula in May. With regard to the devaluation, accurate data on recent economic growth.
The increase reflected that some additional
the main short-term impact has been on Nevertheless there is a general perception of
inflation as a result of the devaluation would
inflation, which rose to 10.0% in September, an economic downturn and weak business
have to be accommodated, but that
the highest level since mid-2003, compared conditions, with many businesses reportedly
monetary policy would nonetheless aim at
to 6.2% (and falling) in April (the last monthly struggling to achieve acceptable profitability.
preventing any generalised increase in
figure prior to the devaluation). In the absence of official GDP data, proxy
inflation through higher inflation
While an upward movement in inflation as a expectations and second round effects. continue...
result of the devaluation was expected, the
Figure 1: Inflation - Actual and Forecast
extent of the increase has perhaps been below
14
expectations, especially given that part of
Actual Forecast
the increase has been due to rising fuel prices
12
unrelated to the devaluation. After four
months, the main direct impact of the 10
devaluation on prices has now been felt, and
it appears that it will add around 4.5% to 8
prices.
6
Considering that the devaluation was 12%, BoB inflation objective range
and that imports account for nearly 50% of 4
the Consumer Price Index (CPI) basket, this
impact is relatively small, and suggests that 2
Source: Central Statistics Office and own calculations
generally weak economic conditions and high
0
levels of competition in the wholesale and
2002 Q2 Q3 Q4 2003 Q2 Q3 Q4 2004 Q2 Q3 Q4 2005 Q2 Q3 Q4 2006 Q2 Q3
retail sectors are constraining the ability of

2. 2 Economic Review
economy – mining – has been doing well
Figure 2: Index of Economic Conditions
recently, with a number of new or prospective
60
mining ventures in the pipeline. The broad
coverage of this new mining activity was
40 highlighted at a resources conference held in
strong Gaborone in August. Key ongoing
developments include:
% deviation from mean
20
• the Mupane gold mine near Francistown,
neutral
0 operated by Gallery Gold, which has reached
full production capacity (100,000 ounces a
-20 year) following its opening late last year, and
which is evaluating additional gold deposits
-40 weak in north-west Botswana to boost output
further;
Source: own calculations
-60 • the expansion of copper and nickel
2000 2001 2002 2003 2004 2005
production from Lion Ore’s Phoenix mine, also
near Francistown; the company is also
evaluating the possibility of producing refined
indicators of economic conditions suggest 4.9% in 2004, and forecasts 3.8% growth in
metals on site using its proprietary Activox
a mixed story (see Figure 2). Our index of 2005 and 3.5% in 2006.
technology, rather than the current process
economic conditions suggests that the
While no commentary is yet available as to of shipping concentrated ore for smelting at
economic environment remains weak by
the reasoning behind the IMF’s lower growth BCL’s Selebi Phikwe plant to produce copper-
historical standards and trends. However, there
forecasts (this will have to await the release nickel matte which is refined outside of the
have been recent improvements, in that the
of the annual IMF Article IV assessment of the country;
weakest period was in the second half of 2004
and early 2005, since when conditions have Botswana economy), it is likely that the IMF • the preparation of a bankable feasibility
improved somewhat. Nevertheless, the has a more negative assessment of the study by African Copper for proposed Dukwe
recovery appears to be fragile with low levels economic impact of HIV/AIDS and the slow copper mine, anticipated to produce 12,000-
of confidence, and could easily be disrupted pace of the structural reforms (such as 25,000 tonnes of copper a year by 2008; the
by adverse economic developments. privatisation and public-private partnerships) company is also re-evaluating other known
and economic liberalisation (such as the freeing copper deposits in the Matsitama area of
Along with relatively sluggish recent growth up of heavily regulated sectors such as north-west Botswana;
performance, medium term growth forecasts telecommunications and air passenger
have been revised downwards. The • encouraging results from feasibility studies
transport) that are necessary for Botswana to
Government is in the process of finalising the being carried out by African Diamonds and
move on to a higher growth path.
Mid-Term Review (MTR) of NDP 9, in which Diamonex for the possible mining of known
economic growth forecasts have been revised Both Moody’s and Standard and Poors have diamond deposits (kimberlites) in the Orapa
downwards. been in Botswana recently for their respective and Martins Drift areas respectively, which are
2005 credit rating assessments. It is likely that looking increasingly likely to result in one or
The MTR envisages average annual economic
both agencies will highlight concerns about two new diamond mines;
growth of 4.3% for the remainder of NDP 9
sluggish economic growth, the inadequate
(through to 2008/09), compared to an original • detailed consideration of the expansion
pace of economic diversification and the failure
growth rate of 5.5% projected for the whole of coal mining to produce coal for direct
to back up good policy intentions with the
of NDP 9. The reduction is due to slower than export and/or to supply a new power station
implementation of growth-supporting which would generate power to feed into the
anticipated growth in the non-mining sector,
structural reforms. Hopefully this will not lead Southern African Power Pool regional grid;
now seen averaging 5.7% a year, compared
to any change in the country’s credit rating, this would require a new mine(s) in the
to an initial target of 7.7% a year.
but it would not be surprising if the ratings Mmamabula coalfield south of Mahalapye;
The IMF envisages an even lower medium outlook (currently “stable”) were downgraded in addition the existing Morupule coal mine
term growth rate for Botswana. In the data to “negative” in view of these concerns. is likely to be developed further to supply the
supporting its recently-released World projected expansion of the Morupule power
Mining Sector
Economic Outlook (WEO), the IMF estimates
Botswana’s overall economic growth rate at On a more positive note, one sector of the continue...

3. 3 Economic Review
real exchange rate stable, thereby contributing
Figure 3: Minerals Prospecting Licences
to Botswana’s international competitiveness.
900
The devaluation and the new exchange rate
800
system has generated much discussion and
700 critical comment, largely focusing on the
negative aspects (mostly short-term, such as
600
higher inflation and reduced real incomes),
500 with little understanding or recognition of the
400
benefits (improved potential for economic
growth and diversification), which will tend
300
to occur in the medium to long term. Nor
200 indeed has there been much recognition of
the very serious dangers of sustained real
100
exchange rate overvaluation. This is surprising,
0 as avoidance of “Dutch Disease” – whereby
1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005
earnings from mineral exports lead to
Source: Ministry of Mineral Resources and Water Affairs Diamonds Other
exchange rate appreciation and deindustrial-
isation (or delayed industrialisation) – has been
station to meet Botswana’s own energy needs. the economy would do well to draw lessons a key element of Botswana’s exchange rate
from the successes of the mining sector. policy over the past three decades. Similarly,
The level of interest in and potential of the
sustained real exchange rate overvaluation
mining sector can be seen from data on Exchange rates
was a key element of the economic policy
prospecting licences (Figure 3), which
The crawling peg announced as part of the mistakes that impoverished many African
continues to grow steadily for both diamonds
new exchange rate policy at the end of May countries over the same period – Zambia,
and other minerals.
2005 has now been implemented. As noted Tanzania and Ghana being prime examples.
There are a number of reasons why the mining at that time, the rate of crawl is determined While avoiding an overvalued exchange rate
sector has done well while other sectors of with reference to the differential between and keeping the real exchange rate stable are
the economy have shown less dynamism: Botswana inflation and the average of trading essential components of Botswana’s growth
partner inflation; this differential is currently strategy, this does not, however, remove the
• there has been reassessment of Botswana’s
mineral potential using new exploration around 5-6%. Implementation of the crawl need to address the wide ranging constraints
techniques to go over ground that may has led to a further devaluation of to growth that devaluation cannot in itself
previously have been explored; approximately 1.5% against the pula basket address.
between the end of June and the end of
• the changed economics of mineral Taking account of the new exchange rate
September, and the new system has broadly
production, given the sharp rise in the prices achieved its objective, so far, of keeping the continue...
of several minerals in the past two years
(especially copper and nickel), driven by Figure 4: Bank Credit Growth
demand from China, which is expected to 30%
continue into the medium term; the rise in
oil prices has also made the economics of 25%
other energy sources (such as coal and gas)
more attractive; 20%
• an investor-friendly environment laid down
in new legislation (the Mines and Minerals 15%
Act 1999) which has clear and transparent BoB target range
procedures, is supportive of both domestic 10%
and foreign investment, facilitates the
necessary access to land, and which, in general, 5%
is efficiently administered. Source: Bank of Botswana
Initiatives aimed at boosting growth and 0%
2000 M S 2001 M S 2002 M S 2003 M S 2004 M S 2005 M
attracting investment into other sectors of

4. 4 Economic Review
source at least, inflationary pressures are
Figure 5: Ratio of Bank Credit to Non-mineral GDP
18%
minimal (see Figure 4).
16%
The growth of credit to the business sector
has picked up significantly over past few
14%
months, providing some signs of economic
12% recovery. By contrast, the growth of household
credit remains subdued, at least by past
10%
standards of very high household credit
8%
growth. The reasons for sluggish household
6% credit growth are not hard to ascertain: slow
growth of incomes, especially for government
4%
employees who received no salary increase in
2% 2005, has meant that rising household debt
Source: BoB, CSO and own calculations
0%
levels are harder and harder to sustain. As
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Figure 5 shows, the ratio of household credit
Households Businesses to a simple measure of income – non-mineral
GDP – has been rising steadily in recent years,
and has in fact doubled between 1997 and
system and forecast movements of exchange Credit Growth
2004. With no evidence to suggest that wages
rates between Botswana’s major trading
The rate of growth of bank credit is one of have been rising as a share of non-mineral
partners, we obtain the following forecasts
the most important economic variables on GDP, while at the same time interest rates
for pula exchange rates over the next 12
which accurate and up-to-date data is readily have been rising, this clearly indicates that
months:
available. Credit growth is important because the proportion of household income devoted
Actual Forecast of its role in influencing inflation through its to servicing bank borrowing has been rising.
End of Sep-05 End of Sep-06 Change contribution to aggregate demand, and also
At the same time, borrowing from non-bank
Cross rates because the behaviour of different
lenders – who charge much higher rates of
USD/EUR 1.2071 1.3000 8% components of overall credit can reveal
interest than the banks – has also been
information about what is happening to
ZAR/USD 6.3719 6.6000 4% increasing.
different parts of the economy.
Pula exchange rates
Not surprisingly, the result has been increasing
ZAR/BWP 1.1737 1.1544 -2% Overall credit growth has remained relatively
arrears (see Figure 6). Arrears on household
low, dropping to 9.5% in August, well below
USD/BWP 0.1842 0.1749 -5% borrowing have been rising steadily and are
lower end of the Bank of Botswana’s target
EUR/BWP 0.1526 0.1345 -12% much higher than arrears on business
range of 11-14%, suggesting that from this
borrowing. Although the level of household
Figure 6: Arrears on Bank Credit arrears – around 4% - is not particularly high,
5% the steady upward trend indicates a problem.
All this suggests that households as a whole
4% are over-borrowed, and the necessary
% of credit outstanding in category
adjustment – essentially bringing consumption
3% levels into line with income – compounds the
problems being experienced as a result of
sluggish economic growth.
2%
1%
Bifm Botswana Limited
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