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compiled by KEITH JEFFERIS SETHUNYA SEJOE KITSO MOKHURUTSHE ECONOMIC REVIEW third quarter july-sept 2019

in this issue ...

THE MICRO- KEY NEWS MACRO- ECONOMIC COMMENTARY ECONOMIC HIGHLIGHTS ECONOMIC POLICY 1 VARIABLES 6 9 DATA 12 ENVIRON- 13 MENT

COMMENTARY

Economic uncertainties from the diamond market and national elections

Introduction The third quarter of 2019 has been a strange one for the econ- omy, in part because national developments were dominated by the general elections scheduled for October 23rd. Because the election outcome was more uncertain than perhaps any previous election, there was a pervasive feeling that many key decisions were being put on hold until the outcome of the election was clear. This applied to both the private sector and the public sec- tor. In the private sector, firms seemed to be adopting a “wait and see” attitude, pending the election outcome that could usher in a significant change in the economic policy environment. Simi- larly, in the public sector, the knowledge that there would a new Cabinet and widespread changes in ministerial appointments, whoever won the election, added to the air of uncertainty.

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BDP scores another victory, despite a stiff opposition challenge

The 12th Botswana general election held on October 23rd was won by the ruling Botswana Democratic Party (BDP). While this was, in our view, always the most likely outcome, the election was perhaps the most closely fought in recent decades, and it seemed that there was a reasonable possibility that the main opposition grouping, the Umbrella for Democratic Change (UDC) might have won, or indeed that there could have been no overall majority, leading to a hung Parliament.

In the event, the BDP increased its share of the popular vote significantly, from 47% to 53%, which can be taken as a vote of confidence in the BDP and a personal victory for its leader, President Mogkweetsi Masisi. At the Parliamentary level, however, the result was similar to that of 2014 in terms of overall numbers; the BDP’s representation increased from 37 MPs in 2014 to 38 in 2019. With 57 elected seats in total, this is a comfortable victory that secures President Masisi a 5-year term in office and marks his first victory in his own right.

The new government entails a mixture of continuity and change. While there is continuity in the form of ongoing BDP rule, President Masisi has made it clear that he intends to implement a transformational agenda that will enable Botswa- na to address current challenges. In doing so he will need to use his victory and the vote of confidence that it represents to introduce some dramatic changes, some of which might be politically unpopular, in the expectation that these will bring about dividends in the second half of his term.

Economic transformation is complex and difficult, and has to result in Botswana becoming more competitive and productive than it is at present. This may involve making the most of “4th Industrial Revolution” technologies such as artificial intelligence, but first of all it has to focus on getting the basics right and delivering public services efficiently – filling in potholes, getting streetlights to work, making sure there are medicines in clinics and textbooks in schools, and ensuring that the government data network is functional.

President Masisi’s Cabinet will have many new faces, in part because there are so many new BDP MPs. They will have many urgent challenges, including dealing firmly with corruption; rational prioritisation of competing spending demands; improving implementation of projects; and having the courage to terminate or significantly change ineffective pro- grammes. These are all pre-requisites for increasing the rate of economic growth and significantly improving job creation.

Economic Growth Both the pre-election economic doldrums and diamond On the economic front, the third quarter was a tricky one weakness will eventually show in economic growth num- for the global diamond market. Market weakness contin- bers for the third and fourth quarters this year (the latter ued, with overstocking and a lack of profitability in the mid- compounded by a lengthy 3-day public holiday for the stream (diamond trading, cutting & polishing), a shortage elections, leading to lower output and hence GDP). The of bank liquidity for financing diamond stocks, and market most recent GDP numbers are for the second quarter to uncertainty in the US and China due to macroeconomic June 2019. These show a decline in annual GDP growth, developments and their continuing trade dispute, now com- to 3.9% over the year to June, down from 4.4% in the pounded by unrest in Hong Kong. As a result, sales of dia- year to March 2019. The decline is mainly due to a slow- monds through De Beers have been very weak, with sales down in the growth of diamond mining, as Debswana took in the third quarter down by almost 50% on the same pe- advantage of the weak market to bring forward planned riod last year. De Beers’ strategy is to maintain prices, but maintenance, resulting lower output in the second quar- take some of the pressure off sightholders by reducing the ter. Growth of the non-mining private sector was higher, amounts they are required to buy, hence, easing financing at 4.4%, although this was still below the annual growth pressures. De Beers is also buying back some diamonds, in rate in March. Our forecast for GDP growth for the year as a manner that indirectly reduces the prices that sighthold- a whole remains at 3.5%-4%. ers have to pay, thereby responding to market pressures for price reductions to restore margins in the mid-stream.

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Certainly, the level of confidence shown by the private sec- procity in trade with countries in the region by allowing tor seems to have dropped, in contrast to the upbeat situa- them to export products to South Africa … [and] needs to tion a year ago following the accession of President Masisi. prioritize strategic regional value chains that facilitate mu- This may partly reflect election-related uncertainty and a tually beneficial trade” (p52-3). Such counter-productive postponement of investment decisions. Bank lending to the non-tariff barriers to trade need to be raised and dealt with private sector has been subdued, with negative year-on- at the highest political levels, if they cannot be resolved in year growth, hence a decline in absolute terms from the other fora. peak of just over P22 billion in October 2018 to P21.2 bil- lion in July 2019. The Bank of Botswana’s new quarterly Inflation and Credit Business Expectations Survey also shows a decline, with Inflation has remained low, despite a small increase to a net balance of 39% of firms having positive perceptions 3.0% over the quarter. With inflation expected to remain about business conditions in Q3 2019, down from 52% around the lower end of the Bank of Botswana’s inflation in June. On a more positive note, a net balance of 68% of objective range for the foreseeable future, the Bank Rate firms have positive perceptions of conditions over the next (the main policy interest rate) was cut by 25 basis points to 12 months (to Q3 2020). 4.75%, its lowest ever level. This may encourage borrow- ing and investment, but the sluggish pace of credit growth Exports to the private sector, with interest rates already low, sug- The weakness in exports that we highlighted in the last gests that other factors are important in influencing eco- quarter has been ameliorated to some extent in the second nomic activity. As interest rates are reduced, savings are quarter. Relative to the poor first quarter, there have been discouraged; most deposit interest rates are already nega- some improvements. However, compared to 2018, export tive in real terms. performance was weak in the first half of 2019; this applies across almost all categories of exports, both mineral and Coal, Energy & Climate Change non-mineral (manufactured goods), with only the miscella- A highlight of the quarter globally was the meeting of the neous “other goods” export category showing an increase United Nations General Assembly and its particular focus between the first half of 2018 and the first half of 2019. on climate change, as well as growing international con- Given the importance of export-led growth to Botswana’s cerns about the impact of global warming and the lack future economic sustainability, this is of great concern. of progress in mitigation measures. As with most other countries, Botswana is experiencing the impact of global There are presumably many factors behind this decline, warming, with rising temperatures and more erratic rain- including slower global and regional economic growth re- fall. This also raises important questions for Botswana’s ducing export market opportunities. However, Botswana energy strategy, in terms of choices regarding future energy also seems to be falling victim to protectionist measures supply, and more generally the utilisation (or not) of Bo- in South Africa, with government procurement contracts tswana’s large coal reserves. While there is some support specifying 100 percent local content for certain inputs. domestically for various coal-related projects, the reality is This has affected one major Botswana exporter of manu- that such projects are now almost impossible to finance factured goods particularly badly. Not only does this con- commercially, with banks declining to get involved. The ap- tradict the spirit of regional trade agreements (such as the parent withdrawal of Marubeni and Japanese export credit SADC Free Trade Area), it also conflicts with the South Af- and insurance entities from the proposed Morupule B 5/6 rican National Treasury’s own “Economic Transformation” coal-fired power station project is an illustration of this. At document released in August this year, which “identifies the same time interest in solar power projects is rising, as regional integration through contributing towards industrial costs fall, although the high cost of electricity storage is development in Africa, as a component of South Africa’s still a barrier. We will cover these developments in more industrial policy…. this entails ensuring that there is reci- depth in a future issue of the Review.

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The 2020/21 Budget Strategy Paper The BSP contains the first round of projections for the One of the most significant developments of the quarter coming year’s budget, i.e. for the 2020/21 fiscal year. This was the release of the 2020 Budget Strategy Paper (BSP) entails a modest increase in projected revenues in nomi- by the Ministry of Finance and Economic Development. nal terms (+1.5%), but, as this is slower than the rate of This included updated fiscal figures for the 2018/19 finan- growth of GDP, the projections imply that revenues will fall cial year, based on actual revenue and expenditure data, from 28% to 26% of GDP. In order to keep the budget defi- which can be compared with the revised budget figures cit in check, no increase in spending is budgeted. And this presented at the time of the Budget in February this year. means that, due to the second increment to public sector The BSP showed that 2018/19 revenue came in well below salaries, the development budget has to be cut substan- budget, mainly due to the under-performance of mineral tially, from P17 billion in 2019/20 to P12 billion in 2020/21. revenues, reflecting diamond market weaknesses. At the This illustrates the stark choice facing the country, given same time, Government expenditure also came in below structural fiscal constraints: higher public sector salaries budget, with underspending on both the recurrent and de- have to be paid for by lower development spending. velopment budgets. While underspending on the develop- Figure 1: ment budget is a regular occurrence, due to a variety of Government Budget, 2017/18 – 2020/21 project and programme implementation constraints, it is Figure 1: Government Budget, 2017/18 – 2020/21 unusual for there to be such a large underspend on the 2017/18 2018/19 2019/20 2020/21 recurrent budget. As the underspend was larger than the 35% reduction in revenues, the resulting budget deficit, at P6.4 30% billion, or 3.3% of GDP, was marginally smaller than that 25% projected in the 2019 Budget. 20%

15%

Revised data for the current (2019/20) fiscal year show a 10% percent percent of GDP downward revision of both revenues and expenditures as 5% compared to the February 2019 Budge, with an increased 0% deficit of P7.8 billion (3.8% of GDP) projected. The biggest -5% Revenue Spending Balance change is the large downward revision of mineral revenues, Source: MFED, Draft 2020/21 Budget Strategy Paper from P21.1 billion to P16.7 billion, reflecting both market Source: MFED, Draft 2020/21 Budget Strategy Paper weakness and the impact of capital expenditure required AlthoughAlthough the theBSP doesBSP not does present not an explicitpresent financing an explicit plan for budgetfinanc deficits,- , it notes for life-of-mine extensions at Jwaneng and Orapa. This thating aplan combination for budget of drawdowns deficits, from it thenotes Government that a Invest combinationment Account (GIA) at the BoB and borrowing – mainly domestic – will be used. The scope for further drawdowns from is fortunately offset, to some extent, by windfall revenue theof GIAdrawdowns is limited, at from least ifthe the Governmentgovernment wishes Investment to maintain Account a financial buffer that can from the Bank of Botswana (BoB), which has made an ex- be(GIA) utilised at inthe the BoBevent and of future borrowing economic – sho mainlycks. Hence domestic the expectation – will is that deficits will ceptionally large distribution of P5.0 billion to government, bebe mainly used. financed The scope by an expanded for further domestic drawdowns bond issuance from progr theamme. GIA based on BoB’s 2018 profits. On the spending side, overall Newis limited, Business at-Related least Legislationif the government wishes to maintain a expenditure has been revised slightly downwards, despite Thereasonable ending of thefinancial 11th Parliament buffer thatin August can 2019be utilised also led toin a the flurry event of legislative activity to a significant projected increase in spending on personal completeof future various economic pieces ofshocks. legislation, Hence some ofthe which expectation had been in isprocess that for a long period of time. Amongst the key pieces of legislation concluded were the Trade Act, Industrial emoluments following the public sector pay rise this year. Developmentdeficits will Act, be Transfer mainly Duty financed Act, Income by anTax Amendmentexpanded Act,domestic Companies Re- Registratbond issuanceion Act, BMC programme. Transition Act, Financial Intelligence Act, and the Declaration of Assets & Liabilities Act. Some of these laws are aimed at addressing weaknesses in Botswana’s frameworks regarding anti-money laundering (AML) and international tax co-operation (notably the European Union’s blacklist and greylist, respectively). The Trade and Industrial Development Acts reduce the scope of licensing requirements to businesses where there are public health and safety concerns, and introduce much simpler registration requirements for most other businesses. Other objectives include strengthening the ability of tax authorities to deal with transfer pricing; providing the legal basis for company re-registration under the new Online Business Registration System (OBRS); enabling the corporatisation of the Botswana Meat Commission (converting from a statutory entity to a company limited by shares); requiring the declaration of assets and liabilities by those in public and political office; and reforming the scope of transfer duty on transactions involving immovable property. Some of these changes are driven by the ongoing Doing Business Reform Roadmap, and many have laudable objectives. The OBRS is a major step forward and will make it much easier to establish a business. Similarly with business licencing requirements, which have

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New Business-Related Legislation

The ending of the 11th Parliament in August 2019 also led to a flurry of legislative activity to complete various pieces of legislation, some of which had been in process for a long period of time. Amongst the key pieces of legislation concluded were the Trade Act, Industrial Development Act, Transfer Duty Act, Income Tax Amendment Act, Companies Re-Registration Act, BMC Transition Act, Financial Intelligence Act, and the Declaration of Assets & Liabilities Act.

Some of these laws are aimed at addressing weaknesses in Botswana’s frameworks regarding anti-money laundering (AML) and international tax co-operation (notably the European Union’s blacklist and greylist, respectively). The Trade and Industrial Development Acts reduce the scope of licensing requirements to businesses to where there are public health and safety concerns, and introduce much simpler registration requirements for most other businesses. Other objectives include strengthening the ability of tax authori- ties to deal with transfer pricing; providing the legal basis for company re-registration under the new Online Business Registration System (OBRS); enabling the corporatisation of the Botswana Meat Commission (converting from a statutory entity to a company limited by shares); requiring the declaration of assets and liabilities by those in public and political office; and reforming the scope of transfer duty on transactions involving immovable property. Some of these changes are driven by the ongoing Doing Business Reform Roadmap, and many have laud- able objectives. The OBRS is a major step forward and will make it much easier to establish a business. Similarly with business licencing requirements, which have been reduced and streamlined. BMC reform enables its long-outdated monopoly on beef exports to be removed, and its eventual (part-) privatisation. Declaration of assets and liabilities can play a potentially important role in addressing corruption. The transfer duty amendment aims to close loopholes and extend the scope to include more types of property transactions, as well as provide relief for citizens buying houses.

But, along with the good, comes the bad and the ugly. Many businesses are concerned that the new transfer pricing rules will pose a heavy compliance burden. The OBRS removes all of a company’s previous history from the record on re-registration. The declaration of assets and liabilities obligation is extremely far-reaching and appears to apply to any person or entity receiving public funds, including, potentially, all government employees, those supplying goods and services to government, as well as entities receiving any kind of subvention from government. And the rate of transfer duty on property purchases by foreign individuals and companies has been increased from 5% to 30%, which directly contradicts other efforts to make Botswana more attractive to foreign investors.

After years of concerns about the slow pace of getting new legislation passed, these reforms mark a wel- come change. However, the downside is that some of the legislations have been rushed and the implica- tions have not been thought through. Expect many amendments in the months and years to come.

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KEY ECONOMIC VARIABLES

Annual GDP Growth Sectoral GDP Growth Annual GDP Growth Sectoral GDP Growth 30% Annual GDP Growth Sectoral GDP Growth 30% Water & Electricity 20% Water & Electricity 20% Trans. & Comm. Trans. & Comm. 10% Fin. & Bus. Service 10% Annual GDP Growth Fin. & Bus. Service Sectoral GDP Growth Trade 0% 30% 0% Trade Water & Electricity Total VA 20% Total VA -10% -10% Trans. & Comm. Annual GDP Growth GovernmentGovernmentSectoral GDP Growth 30% -20% 10%-20% Fin. & Bus. Service Soc.Soc. & &Pers. Water Pers. Services &Services Electricity 0%-30%20% Trade -30% ManufacturingManufacturingTrans. & Comm. -40%10% Fin.Construction & Bus. ServiceTotal VA -40% -10% Construction 0% AgricultureGovernmentTrade -20%-50% Agriculture -50% Soc. & Pers.MiningTotal Services VA -10%2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Mining -30% GovernmentManufacturing0% 2% 4% 6% 8% -20% NMPS Mining GDP Soc. & Pers. Services0% 2% 4% 6% 8% -40% NMPS Mining GDP Construction The Botswana-30% economy slowed during the second quarter Economic performance was generally slower during Q2 Manufacturing Agriculture The Botswanaof-50% 2019, economy as a result slowed of the during weaken theing second global marketquarter for Economic2019, with performance most sectors was experiencinggenerally slow lowerer during y-o-y Q2 -40% Construction 2007The 2008Botswana2009 2010 economy2011 2012 slowed2013 2014during2015 the2016 second2017 2018quarter2019 Economic performanceMining was generally slower during Q2 2019, with of 2019,rough as adiamonds. result of Real the GDPweaken growthing wasglobal 3.9% market year-on for-year 2019growth, with rates most compared Agriculture sectors to the experiencing previous quarter. lower These y- o-y in Q2of-50% 20192019,, asdown a result from of 4.4%the weakening y-o-y growth global recordedmarket for inrough Q1 . includemost sectors Mining, experiencing 0% Agriculture, lower y-on-y2% growth4% Construction, rates compared6% 8% rough diamonds. Real GDPNMPS growth wasMining 3.9% yearGDP-on-year growth rates comparedMining to the previous quarter. These Realdiamonds. growth2007 2008 Real in2009 GDP the2010 growthmining2011 2012was sector 20133.9%2014 year-on-year experienced2015 2016 2017in Q2 a2018 2019, sharp2019 Manufacturing, to the previous Social quarter. & Personal These includeServices, Mining, Trade Agriculture, and in Q2 2019, down from 4.4% y-o-y growth recorded in Q1. include Mining, 0% Agriculture,2% 4% Construction,6% 8% Real The growthdecrease Botswanadown in from from the 4.4%economy mining5.3% y-on-y y- NMPSo growth sector-slowedy in Q1recorded experienced during2019Mining in toQ1. the 1.4% Real secondGDP growth ay- o sharp-y inquarter the Q2 Manufacturing, TransportEconomicConstruction, &performance Social Manufacturing, Communications. & Personal was Social generally & Services, PersonalBy slow Services, contrast,Tradeer during Trade and Q2 2019.mining Annual sector nexperiencedon-mining a privatesharp decrease sector from (NMPS) 5.3% y-on-y growth in Government, and Transport Finance & Communications. & Business ServicesBy contrast, and Government, Water decreaseof 2019, Thefrom Botswana as5.3% a resulty- oeconomy-y ofin Q1the slowed 2019weaken toduring ing1.4% theglobal y -secondo-y marketin Q2quarter forTransport Economic2019, with performance & most Communications. sectors was generally experiencing slowByer during lowercontrast, Q2 y-o -y also fell during the period from 4.7% in Q1 to 4.4% in Q2. & Electricity are the only three sectors which recorded roughof Q1diamonds. 2019, 2019 asto 1.4% a Real result y-on-y GDP of in the Q2growth 2019.weaken wasAnnualing 3.9 non-miningglobal% year market -privateon-year for 2019growthFinance, with rates& Business most compared Servicessectors and to experiencing theWater previous & Electricity lower quarter. are the y-o only -Thesey 2019. AnnualHowever, non when-mining excluding private the wholesale sector (NMPS) sub-sector growth, which Government,higher y-o-y growthFinance in Q2.& Business As is generally Services the case, and theWater in Q2rough 2019sector diamonds. ,(NMPS) down growth from Real also4.4% GDP fell yduringgrowth-o-y thegrowth was same 3.9 periodrecorded% year from- on4.7% in- yearQ1 . growthincludethree sectorsrates compared Mining,which recorded to the Agriculture,higher previous y-on-y growth quarter. in Construction, Q2.These As is also fell includesduring thediamond period trade, from NMPS 4.7% growthin Q1 toincreased 4.4% in to Q2 5.2%. & fastestElectricity-growing are sectorsthe only are three mostly sectors service which sectors. recorded Realin growthinQ2 Q1 2019 to 4.4% in, down thein Q2. miningfrom However, 4.4% sectorwhen y-o excluding-y experiencedgrowth the recorded wholesale a sub-in sharp Q1. includeManufacturing,generally the Mining, case, Social the fastest-growing Agriculture,& Personal sectors Services, are Construction, mostly Trade service and However,y- owhen-y in Q2 excluding 2019. the wholesale sub-sector, which higher y-o-y growth in Q2. As is generally the case, the decreaseRealsector, growthfrom which 5.3% includes in the y- odiamondmining-y in Q1 trade,sector 2019 NMPS experiencedto growth 1.4% increased y-o - ay in sharp to Q2 Manufacturing,Transportsectors. &Social Communications. & Personal Services, ByTrade contrast,and includes diamond trade, NMPS growth increased to 5.2% fastest-growing sectors are mostly service sectors. 2019.decrease 5.2%Annual y-on-y from n Inflationinon Q2 5.3%-mining 2019. y and-o - privatey Forecastin Q1 2019 sector to 1.4%(NMPS) y-o -y growth in Q2 TransportGovernment, & FinanceAnnual Communications. Credit & Business Growth ServicesBy contrast, and Water y-o-y in Q2 2019. 45% also16% 2019.fell during Annual the n onperiod-mining from private 4.7% sectorin Q1 (NMPS)to 4.4% growthin Q2. Government,& Electricity Financeare the &only Business three sectorsServices which and Water recorded 40% However,14%also fellInflation when during excluding theand period Forecast the from wholesale 4.7% in subQ1 -tosector 4.4%, inwhich Q2. &higher Electricity y-o- yare growthAnnual the only in Credit Q2.three As sectors Growthis generally which recordedthe case, the 45% 16% 35% includes12%However, diamond when trade, excluding NMPS the wholesalegrowth increased sub-sector to, which5.2% higherfastest y--growingo-y growth sectors in Q2. areAs ismostly generally service the case, sectors. the includes diamondInflation trade, NMPS and Forecast growth increased to 5.2% 40%fastest30% -growing sectorsAnnual are Credit mostly Growth service sectors. 14% y-o-10%y in Q2 2019. y-o-y in Q2 2019. 35%25% 12% 8% Inflation and Forecast 20% Annual Credit Growth Inflation and Forecast 30% 45% Annual Credit Growth 16% 45% 10% 6%16% 15% 25% 40% 14% %ofcredit tosector 40% 8% 4%14% 10% 20% 35%35% 12% 2%12% 5% 6% 15% 30%30% 10% 0% 0%10% %ofcredit tosector 4% 10% 25%25% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 -5% 8% 8% 20%20%2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2% 5% 6% 6% Upper Lower Actual Forecast 15% Total Firms Households 0% 15%

0% %ofcredit tosector %ofcredit tosector 4%Annual4% inflation was 3.0% in September 2019, 0.2% higher Annual10%10% bank credit growth rose marginally to 6.8% y-o- 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 -5% 2% 5%2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2%than the inflation rate recorded in June 2019. Group indices y in July5% 2019, up from 6.7% y-o-y in April. The increase wereUpper0% generally Lower steady duringActual the quarter Forecast, recording in credit0% growth is Total attributable Firms to creditHouseholds to households, 0% 0% changes2008 2009 less2010 than2011 2012 1.0%.2013 2014 In the2015 2016 medium2017 2018-term,2019 2020 annual with growth-5% up from 7.0% y-o-y in April 2019 to 9.9% y- Annual 2008inflation2009 rate2010was 2011is 3.0% forecast2012 in2013 September to2014 go below2015 2016 2019,the2017 lower 20180.2% bound2019 higher2020 of the Annualo-y in b-5% Julyank2010. Motorcredit2011 2012 vehiclegrowth2013 purchasesrose2014 2015 marginally2016 and2017 credit to2018 6.8% cards2019 y -o- 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 than theBank inflation of Botswana rateUpper recorded’s mediumLower in June-term 2019.objectiveActual Group range indices Forecast of 3-6% y inwhere July 2019 the main, up from drivers Total 6.7% of Firmsyhousehold-o-y in April.Households credit The growth increase before graduallyUpper increasingLower in the secondActual half of Forecast2020. recording a combined Total 8.7% y -Firmso-y growthHouseholds during the were generallyAnnual inflation steady was during 3.0% in the September quarter 2019,, recording 0.2% higher in creditAnnual growth bank credit is attributable growth rose to marginally credit to tohouseholds 6.8% y-o- , period. On the other hand, growth of credit to firms changesAnnual than less inflation the than inflation was 1.0%. rate 3.0% Inrecorded in the September medium in June 2019.-2019,term, Group 0.2% annual indiceshigher with y Annualgrowth in July 2019 bupank from, upcredit from7.0% growth 6.7% y-o -y y-rose oin-y Aprilin marginally April. 2019 The to increaseto 9.9% 6.8% y -y-o- decreased significantly to minus 1.8% y-o-y in July inflationthan ratewere theAnnual is inflation forecastgenerally inflation rate to wassteady recordedgo 3.0% below in duringSeptember in the June lower the 2019,2019. quarterbound 0.2% Group ,higher ofrecording theindices than o- y ininy in creditAnnual July July. bankgrowth Motor2019 credit, upis vehicle growthattributable from rose6.7% purchases marginally toy- ocredit-y intoand April.to6.8% householdscredit y-on-y The in cardsincrease July, Bank wereof Botswanachanges thegenerally inflation ’s less medium steadyrate than recorded- 1.0%. term during objective in In theJune the medium 2019. quarterrange -Group term,of, 3 recording - indices6% annual were where within 2019, credit thegrowth up main growthfrom up 6.7%from drivers is y-on-y 7.0%attributable ofin y - April.ohousehold-y inThe Aprilto increase credit 2019 credit in to tocredit households9.9% growth growth y- , beforechanges graduallyinflationgenerally less increasingrate steady than is forecast during 1.0%. in the the toquarter, Ingosecond below the recording medium halfthe changes lowerof 2020.-term, boundof less annualthan of the recording owith-yis inattributable growth July a com. Motor up tobined creditfrom vehicle to 8.7%7.0% households, purchases y y--oo--y ywith in growth April andgrowth credit2019 up during from to cards 7.0%9.9% the y- inflationBank1.0%. rate of In Botswana isthe forecast medium-term,’s mediumto gothe belowannual-term inflation theobjective lower rate range isbound forecast of of3 to- 6%the period. whereo-y-on-yy Onin the July in the April main. Motor other2019 drivers to hand,vehicle 9.9% of y-on-y growth household purchases in July. of Motor credit creditand vehicle credit togrowth firmsloans cards Bankbefore ofgo Botswanabelow gradually the lower’s increasing medium bound of- termthein theBank objective second of Botswana’s half range of 2020.medium- of 3 -6%decreased recordingwhereand unsecured the significantly a com main personalbined drivers loans to 8.7% minuswere of y -theohousehold- y 1.8%main growth drivers y - o during credit-ofy household in the Julygrowth beforeterm gradually objective increasing range of 3-6% in beforethe second gradually half increasing of 2020. in the period.recordingcredit On growth. athe com On other thebined hand,other 8.7% hand, growth y growth-o - ofy growthcredit of credit to during to firms firms the second half of 2020. decreasedperiod.decreased On significantly significantly the other to to hand,minus minus 1.8% growth 1.8%y-on-y in of y - oJuly credit-y 2019, in July to from firms decreased5.5% in April significantly2019. This is of great to minus concern, 1.8% as it is the y-o first-y intime July that annual credit growth to the private sector has been negative since the depths of the global financial crisis in September 2009. This subdued growth is as a result of businesses not fully utilising existing credit facilities as well as loan repayments by some companies.

page 6 www.econsult.co.bw2019, from 5.5% in April 2019. This is of great concern, 2019as it, from is the 5.5% first in timeApril 2019 that . annual This is of credit great growth concern, to the KEY ECONOMIC VARIABLES aspr ivate it is the sector first has time been that negative annual credit since growth the depths to the of the prglobalivate sector financial has crisisbeen negativein September since the2009. depths This of subdued the globalgrowth financial is as crisis a result in September of businesses 2009. This not subdued fully utilising Interest Rates growthexisting2019 , isfrom credit as 5.5% a resultfacilities in April ofExchange businessesas 2019 well Rates. asThis notloan is fully ofrepayments great utilising concern, by existingsomeas it iscompaniescredit the firstfacilities time as that well annualas loan creditrepayments growth by to the 2019, from 5.5% in April 2019. This is of great concern, somepr2019ivate companies, sectorfrom 5.5% has inbeen April negative 2019. This since is of the great depths concern, of the Interest Rates as it is the first timeExchange that annual Rates credit growth to the 14 Interest Rates globalas it isfinancial the first crisis Exchange time in that September annualRates credit 2009. growth This subdued to the 14 private 2009sector2010 has2011 2012been2013 negative2014 2015 since2016 2017 the2018 depths2019 of the growthprivate issector as a has result been of negative businesses since the not depths fully utilising of the 12 global6.02009 financial2010 2011 crisis2012 2013 in2014 September2015 2016 2017 2009.2018 2019 This subdued1.45 12 existingglobal6.0 financial credit facilities crisis in asSeptember well as loan2009. repayments This1.45 subdued by growth is as a result of businesses not fully utilising1.40 10 somegrowth companies is as a result of businesses not fully1.40 utilising 10 existing7.0 credit facilities as well as loan repayments by existing7.0 credit facilities as well as loan repayments1.35 by 8 Interest Rates some companies Exchange Rates 1.35 14 8 % some8.0 companies 1.30

% 8.0 1.30 6 Interest Rates 2009 2010 2011 2012Exchange2013 2014 2015 Rates2016 2017 2018 2019 6 1.25 12 14 Interest Rates 6.0 Exchange Rates 1.25 1.45 14 9.0 4 9.0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 4 1.20 Pula per Rand 6.0 2009 2010 2011 2012 2013 2014 2015 2016 2017 20181.202019 1.45Pula per Rand 1.40 12 USD per Pula

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% 0 0 8.0 1.351.30 8 11.011.0 1.35 6 8 1.05 1.05

% 8.0 1.30 2010 2010 2011 2011 20122012 20132013 20142014 20152015 20162016 20172017 2018 20192019 1.25

% 8.0 1.30 6 9.0 4 BankBank Rate Rate PrimePrime Rate 12.012.0 1.00 1.00 6 1.251.20 Randper Pula

Pula per USD per Pula 1.25 91-day91-day BoBC BoBC 14-day14-day BoBC 9.0 BWPBWP per USDper USD ZAR perZAR BWP per BWP 4 9.0 2 4 10.0 1.201.15 Pula per Rand Pula per USD per Pula 1.20 Pula per Rand

The Bank of Botswana’s Monetary Policy Committee (MPC) ForeignUSD per Pula exchange rate trends were reversed during the The Bank2 of Botswana’s Monetary Policy Committee (MPC) Foreign10.0 exchange rate trends were reversed during1.15 the reduced0 2 the Bank Rate by 25 basis points to 4.75% at the third quarter10.0 of 2019, with the Pula weakening against1.151.10 11.0 reduced the Bank Rate by 25 basis points to 4.75% at the third quarter of 2019, with the Pula weakening against1.10 meetingThe0 Bank held of Botswana’s in August Monetary2019. This Policy was Committee the first (MPC) policy the USForeign dollar exchange and gaining rate trends ground were reversedagainst during the Rand. the third The quarter1.101.05 meeting2010 0 2011held 2012 in August2013 201420192015. This2016 was2017 the2018 first2019 policy the US11.0 dollar and gaining ground against the Rand. The changereduced since the BankOctober Rate 2017. by 25 The basis BoB points noted to that4.75% there at werethe Pulaof depreciated 2019,11.0 with the by Pula 3.8% weakening against against the US the dollarUS dollar, ending and gaining1.05 change 2010since2011 OctoberBank2012 Rate 2017.2013 2014The BoB2015 noted2016Prime 2017Ratethat there2018 2019 were Pula12.0 depreciated by 3.8% against the US dollar, ending1.051.00 some2010 upside2011 risks2012 to inflation2013 2014 from2015 changes2016 2017in administered2018 2019 Q3 2019 at 11.04 BWP per USD, from 10.62 in Q2. The meeting held in91-day AugustBank BoBC Rate 2019. This was the14-day firstPrime BoBC Ratepolicy change ground12.0 against the Rand.BWP perThe USD Pula depreciatedZAR per by BWP 3.8% against1.00 the someprices, upside but risksthat withtoBank inflation weakeningRate from global changes growthPrime in Rateadministered and limited PulaQ3 2019strengthened12.0 at 11.04 BWPby 2.6% per USD, against from the 10.62 rand in, Q2.to1.00 The since October 2017.91-day The BoBC BoB noted that there 14-daywere BoBCsome upside US dollar, ending Q3 2019BWP perat 11.04USD BWP ZARper USD,per BWP from 10.62 in Q2. prices, but that with weakening global growth and limited Pula strengthenedBWP by per USD 2.6% againstZAR per BWP the rand, to The domesticBankrisks of to Botswana’s inflationdemand 91-day frompressures, MonetaryBoBC changes the in Policy outlook administered Committee14-day for inflationBoBC prices, (MPC) wasbut that ZAR1.366 ForeignThe Pula exchangeper strengthened BWP at rate theby 2.6% endtrends againstof Q3 were, thefrom rand,reversed ZAR1.331 to ZAR1.366 during in per the domesticbenign.The Bank demand This of Botswana’sprovided pressures, scope Monetary thefor monetaryoutlook Policy forCommitteepolicy inflation easing (MPC)was to Q2. ZAR1.366Foreign These exchange per developments BWP rateat the trends end are ofwere mainly Q3 ,reversed from driven ZAR1.331 during by the in reducedThewith Bankthe weakening Bank of Botswana’s Rateglobal by growth 25Monetary basis and limited pointsPolicy domestic Committeeto 4.75 demand% at (MPC) the thirdForeignBWP quarter at theexchange end of of 2019 Q3, rate from, with trends ZAR1.331 the were Pula in Q2. reversed weakening These developments during against the benign.supportreduced This economicthe provided Bank Rate activity scope by. for25The monetarybasis commercial points policy to bank 4.75 easing % Prime at tothe movements Q2.third These quarter of the developmentsof SA 2019 rand, with against the are thePula USD mainly weakening dollar driven in the against by meetingreducedpressures, held the the in Bank Augustoutlook Rate for 2019 by inflation 25. Thisbasis was waspoints benign. the to 4.75 firstThis % policyprovided at the thethirdare US mainly quarter dollar driven andof by2019 gaining movements, with ground the of thePula againstSA weakeningrand against the Rand. the against USD The supportLemeetingnding economic Rateheld also in activity Augustchanged. 2019The from . commercial 6.5%This to was 6.25% the bank . firstThe Prime policy14- context movementsthe US of thedollar ofPula theand basket SA gaining rand exchange groundagainst rateagainst the mechanism. USD the dollar Rand. in Thethe changemeetingscope since for held Octobermonetary in August policy2017. easing The2019 toBoB. supportThis noted waseconomic that the there activity. first were policy Pulathedollar USdepreciated in dollarthe context and byof gaining the 3.8% Pula groundbasketagainst exchange against the US rate the dollar mechanism. Rand., ending The Lendingdaychange BoBC Rate since and also October 91 changed-day BoBC 2017. from rates The 6.5% BoBremained notedto 6.25% soft that during. thereThe the 14were - contextPula depreciated of the Pula by basket 3.8% exchangeagainst the rate US mechanism.dollar, ending somechange Theupside commercial since risks October bankto inflation Prime 2017. Lending from The Rate changes BoB also noted changed in administeredthat from there 6.5% were Q3Pula 2019 depreciated at 11.04 BWPby 3.8% per against USD, fromthe US 10.62 dollar in, Q2.ending The dayquartersome BoBC upside withand marginal9 risks1-day to BoBC changes.inflation rates f rom remained changes soft in administered during the Q3 2019 at 11.04 BWP per USD, from 10.62 in Q2. The prices,someto but6.25%. upside that The with risks14-day weakening to BoBC inflation and 91-day fromglobal BoBCchanges growth rates remainedin andadministered limited soft PulaQ3 2019strengthened at 11.04 BWP by per 2.6% USD, against from 10.62 the in Q2. rand T, heto quarterprices, with but marginal that with changes. weakeningStock Markets global growth and limited Pula strengthenedDe Beers Diamond by 2.6% Sales against the rand, to domesticprices,150 demand but that pressures,with weakening the outlook global growthfor inflation and limitedwas ZAR1.366Pula strengthened per BWP atby the 2.6% end ofagainst Q3, from the ZAR1.331 rand, to in domesticduring the demandquarter with pressures, marginal changes. the outlook for inflation was ZAR1.366900 per BWP at the end of Q3, from ZAR1.331 in benign.domestic This provideddemand pressures,scopeStock for Markets monetarythe outlook policy for inflation easing wasto Q2.ZAR1.366 These per De developments BWPBeers at Diamond the end areof Sales Q3 mainly, from ZAR1.331 driven in by benign.150 140 This provided scope for monetary policy easing to Q2.800900 These developments are mainly driven by supportbenign. economic This provided activity scope. The for commercial monetary policy bank easing Prime to movementsQ2. These of the developments SA rand against are the mainly USD dollar driven in bythe support140 130 economic activity. The commercial bank Prime movements of the SA rand against the USD dollar in the Lendingsupport Rate economic also changed activity from. The 6.5% commercial to 6.25% bank. The Prime14- contextmovements700800 of the of Pula the SAbasket rand exchangeagainst the rate USD mechanism. dollar in the Lending120 Rate also changedStock Markets from 6.5% to 6.25%. The 14- context of the PulaDe Beers basket Diamond exchange Sales rate mechanism. Le130nding Rate also changed from 6.5% to 6.25%. The 14- context600700 of the Pula basket exchange rate mechanism. day dayBoBC BoBC and and 91- day91-day BoBC BoBC rates rates remained remained soft soft during during the the day 110BoBC and 91-day BoBC rates remained soft during the 500 quarterquarter120 with with marginal marginal changes. changes. 600 quarter100 with marginal changes. USDmillion 400 110 StockStock Markets Markets 500 DeDe BeersBeers DiamondDiamond Sales 150 15090 Stock Markets De Beers Diamond Sales USDmillion 300900 100 900 150 400900 140 14080 200 Index, Jan 2010 = 100 = 2010 Jan Index, 800800 90 140 300800 70 130 130 100700700 80 130 200700 Index, Jan 2010 = 100 = 2010 Jan Index, 60 0 120 120 600600 70 120 2012 2013 2014 2015 2016 2017 2018 2019 100600 110 2013 2014 2015 2016 2017 2018 2019 110 BSE DCI (BWP) BSE DCI (USD) MSCI EM 500500 60 110 5000 USDmillion

1002012 2013 2014 2015 2016 2017 2018 2019 USDmillion 100 USDmillion 400400 100 400 BSE DCI (BWP) BSE DCI (USD) MSCI EM 2013 2014 2015 2016 2017 2018 2019 90 90 300 90 300300 80 200 80100 = 2010 Jan Index, 80 200 Index, Jan 2010 = 100 = 2010 Jan Index, 200 Index, Jan 2010 = 100 = 2010 Jan Index, 70 70 100 70 100100 60 0 60 60 2012 2013 2014 2015 2016 2017 2018 2019 0 0 2012 20122013 20132014 201420152015 20162016 20172017 20182018 20192019 BSE DCI (BWP) BSE DCI (USD) MSCI EM 2013 2014 2015 2016 2017 2018 2019 BSE DCIBSE (BWP) DCI (BWP) BSEBSE DCI DCI(USD) (USD) MSCIMSCI EM EM 20132013 20142014 20152015 2016 20172017 20182018 20192019

The Botswana Stock Exchange (BSE)’s Domestic Companies Index The global market for rough diamonds showed signs of severe (DCI) fell in Q3 2019 in both Pula and US dollar terms, by 2.1% and weakness in Q3 2019, with the lowest Q3 sales since 2015. 5.9% respectively. At the end of the quarter, the DCI was 101.76 The global market is confronted with weak retail demand for in Pula terms and 63.02 in US dollar terms, at January 2010 prices. diamond jewellery as well as an oversupply of rough diamonds The MSCI World and MSCI Emerging Markets indices also declined in and low margins in the midstream. De Beers Global Sightholder Q3 2019, to 0.1% and negative 5.1% down from 3.3% and negative Sales (DBGSS) recorded sales of USD530 million in Q3, down from 0.3% respectively during the same period. USD1,388 million in Q2, and approximately half of the value of sales in Q3 2018. Sightholders were also given supply flexibility options to either reject part of their allocations or exercise De Beers’ buyback option to ease pressure without reducing rough prices.

page 7 The Botswana Stock Exchange (BSE)’s Domestic The global market for rough diamonds showed signs of CompaniesThe Botswana Index (DCI) Stock fell in Exchange Q3 2019 in (BSE)’s both Pula Domestic and US Thesevere global weakness market forin Q3rough 2019, diamonds with the showed lowest signs Q3 sales of dollarCompanies terms, by Index 2.1 %(DCI) and fell 5.9 in% Q3 respectively. 2019 in both At Pula the and end US of severesince 2015. weakness The globalin Q3 2019,market with is theconfronted lowest Q3 with sales weak dollar terms, by 2.1% and 5.9% respectively. At the end of since 2015. The global market is confronted with weak thedollar quarter, terms the, by DCI 2.1 was% and 101.76 5.9% in respectively. Pula terms Atandwww.econsult.co.bw the 63.02 end ofin sinceretail demand2015. The for global diamond market jewelry is confronted as well as with oversupply weak USthe dollar quarter, terms the, atDCI January was 101.76 2010 inprices Pula .terms The MSCIand 63.02 World in retailof rough demand diamonds for diamond and low jewelry margins as well in asthe oversupply midstream. andUS MSCI dollar Emerging terms, at JanuaryMarkets 2010indices prices also. T declinhe MSCIed inWorld Q3 ofDe rough Beers diamonds Global Sightholder and low margins Sales in(DBGSS) the midstream. recorded 2019andKEY, toMSCI 0.1% ECONOMIC Emerging and megative Markets VARIABLES5.1 indices% down also from declin 3.3%ed in andQ3 Desales Beers of USD Global530 Sightholder million in SalesQ3, down (DBGSS) from recordedUSD1,388 negative2019, to0.3% 0.1% respectively and megative during 5.1 the% downsame fromperiod. 3.3% and salesmillion of in USD Q2, 530approximate million inly Q half3, down of the from value USD1,388 of sales in negative 0.3% respectively during the same period. millionQ3 2018 in .Q2, Sightholder approximates werely half also of giventhe value supply of sales flexibility in Q3 2018. Sightholders were also given supply flexibility International Trade Q3options 2018 to. Sightholder eitherForeign rejects wereExchange or exercise also given Reserves De supply Beers’ flexibility buyback options to either reject or exercise De Beers’ buyback optionsoption to to ease either pressure reject or without exercise reducing De Beers’ rough buyback prices. option to ease pressure without reducing rough prices. International Trade 30,000 International Trade Foreign Exchange Reserves 30,000 International Trade 13 Foreign Exchange Reserves 30,000 13 Foreign Exchange Reserves 13 90 25,000 90 25,000 90 25,000 1212 12 20,000 20,000 80 80 20,000 80 1111 11 15,00015,000 15,000 70 70 1010 70 10,00010,000 10 10,000 60 60 99 60

Trade Pula million 5,000 9 Trade Pula million 5,000

Trade Pula million 5,000 Pula billion Pula billion

50 50Pula billion Trade (Pula million) Trade USDbillion USDbillion 88 50

0 0 USDbillion 0 8

-5,000-5,000 7 40 40 -5,000 77 40

-10,000-10,000 6 30 -10,000 66 30 30 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2007200720082008200920092010201020112011201220122013201320142014201520152016201620172017 20182018 20192019 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 JanJan 20082008 20092009 201020102011201120122012201320132014201420152015201620162017201720182018Jan Trade Balance Imports Exports TradeTrade Balance Balance ImportsImports ExportsExports US dollar Pula USUS dollar dollar PulaPula

TotalTotal foreign foreign trade trade picked picked up up in in the the quarter quarter toto JuneJune 2019,2019, The foreign foreign exchangeexchange reserves reserves decreased decreased acro across ss all all withwith both both imports imports and and exports exports increasing increasing during during thethe period.period. measurement -- Pula,Pula, US US dollar dollar and and SDR SDR - in- inthe the first first TotalTotal Total imports imports foreign grew trade grew bypicked by 4.2% 4.2% up in fromthe from quarter P16.7 P16.7 to June billion billion 2019, in in with Q1 Q1 to halfThe ofof foreign 2019.2019. exchange ForeignForeign reserves exchange exchange decreased reserves reserves across decreased all decreased measurement by by P17.4P17.4both billion billion imports in inQ2 andQ2 2019 2019exports. E. Exports increasingxports rose rose during by by 19.3% 19.3%the period. fromfrom Total P14.7P14.7 2.3%currencies in in Pula Pula - Pula, terms terms US dollar to to andP74.58P74.58 SDR - billionin billionthe first in in H1half H1 of 2019. 2019. billion to P17.4 billion. This resulted in a small trade surplus Similarly, foreign exchange reserves fell by 1.1% in US billionbillionimports to toP17.4 P17.4 grew billion. bybillion. 4.2% This Thisfrom resulted P16.7resulted billion in in a ina small smallQ1 to t P17.4traderade billionsurpsurplus lus Similarly,Foreign exchange foreignforeign exchange reservesexchange decreased reserves reserves by 2.3%fell fell by inby 1.1%Pula 1.1% terms in inUS toUS of P58.4 million in Q2 from a trade deficit of P2.1 billion in dollar terms and 1.4% in SDR terms to amount to of ofP58.4 P58.4in Q2 million 2019. million Exportsin inQ2 Q2 rosefrom from by a19.3% atrade trade from deficit deficit P14.7 of of billion P2.1P2.1 to billion billionP17.4 in dollarP74.58 terms terms billion and andin H1 1.4% 1.4%2019. inSimilarly, in SDR SDR foreign terms terms exchange to to amount amount reserves to to Q1. Most categories of exports grew in Q2, but only relative USD6.77 billion and SDR4.86 billion respectively. The Q1.to Most abillion. very categories Thisweak resulted Q1. of Overin e axport small thes trade firstgrew surplushalf in Q2of of ,2019 butP58.4 only as million a relative whole, in decreaseUSDfell6.77 by 1.1% inbillion reserves in USand dollar mainlySDR4.86 terms reflects and billion 1.4% revaluation respectively. in SDR terms, losses Theto to toa veryaQ2, very from weak weak a trade Q1. Q1. deficit Over Over ofthe theP2.1 first firstbillion half half in of Q1.of 20192019Most categories asas aa whole,whole, of decreaseUSD6.77 in inbillion reservesreserves and SDR4.86 mainly mainly billion reflects reflects respectively. revaluation revaluation The decrease losses losses in most categories of non-diamond exports declined relative from movement in exchange rates and were equivalent mostto 2018.exportscategories grew inof Q2, non but- onlydiamond relative exportsto a very weakdeclined Q1. Over relative the tofrom 14reserves movementmonths reflects of im inrevaluationport exchange cover losses of rates goods from and movementand were services. inequivalent exchange to 2018.to 2018.first half of 2019 as a whole, most categories of non-diamond to 14rates monthsmonths as well of asof balanceim importport ofcover cover payments of of goods goodsdeficits. and and The services. reservesservices. were exports declined relative to 2018. equivalent to 14 months of import cover of goods and services.

Fuel prices Quarterly Fiscal Data

Fuel prices 1,200 Fuel prices Quarterly Fiscal Data 1,200 Quarterly Fiscal Data 20 1,000 20 1,000 15 15

800 billion 10

800 billion 10

Pula 5

Pula 5 600 600 Pula billion 0 0 (pula/barrel) 400 (pula/barrel) 400 -5 -5 VAT VAT Total Total Total Total NMIT NMIT Other Other SACU 200 200 SACU Balance Balance Minerals Minerals Recurrent Recurrent Pump Retail (thebe/litre) and Brent Crude Crude Brent and (thebe/litre) Retail Pump Development Pump Retail (thebe/litre) and Brent Crude Crude Brent and (thebe/litre) Retail Pump 0 0 Development RevenueRevenue SpendingSpending 2009 20102009 20112010 20122011 20132012 20132014 20142015 20152016 20162017 20172018 20182019 2019 2018/192018/19 2019/20 Petrol/DieselPetrol/Diesel CrudeCrude Oil Oil

Local Local retail retail prices prices for petrol for petrol and and diesel diesel have have been been held held FiscalFiscal data data for for the the first first quarterquarter of the 2019/202019/20 financial financial constanconstant sincet since they they were were increased increased in November in November 2018. 2018. yearyear indicates indicates a a budget budget surplussurplus of P2.1P2.1 billionbillion for for the the Local retail prices for petrol and diesel have been held constant Fiscal data for the first quarter of the 2019/20 financial year HoweverHowever, international, international prices prices for fuelfor fuel continued continued to to move move period.period. This This is is a a significant significant reversal fromfrom thethe deficit deficit of of downwardsince theys inwere Q3 increased 2019, droppingin November by 2018.6.1% , However, following a P3.0indicates billion a budget experienced surplus of P2.1 in the billion same for the period period. inThis the is downwards in Q3 2019, dropping by 6.1%, following a P3.0 billion experienced in the same period in the declineinternational of 2.2% prices in Q2.for fuelThe continued decline into internationalmove downwards oil pricesin previousa significant year. reversal The from surplus the deficit is mainly of P3.0 duebillion toexperienced “other declineseems Q3of 2.2%2019, to have droppingin Q2. been Theby largely6.1%, decline following influenced in international a decline by tensions of 2.2% oil inpricesbetween Q2. previousincome”in the same year. of P4.7period The billion,in the surplus previous mainly is year. mainly comprising The surplus due a tois one mainly “other-off seemsthe toThe USAhave decline and been in Chinainternational largely over influenced oil trade prices, whichseems by tensionstohas have led been to between largelyconcerns income”paymentdue to of“other from P4.7 income” BoB billion, based of P4.7 mainly on billion, its 2018 comprisingmainly profits. comprising Because a onea one--off the USAoverinfluenced and global China by growth tensions over and tradebetween the, which demandthe USA has and for led China oil. to Despiteoverconcerns trade, this paymentofoff this payment “windfall” from fromBoB income, BoBbased based the on outturn onits its 2018 2018should profits. profits. not beBecause takenBecause over globaldecline,which growthhas local led retailto andconcerns prices the over demandhave global not growth been for and oil. reduced theDespite demand, because for this of asthisof rep this“windfall”resentative “windfall” income, income, of the thethe year outturn as ashould shouldwhole, not notforbe takenwhichbe taken as a decline,of oil. localthe Despite need retail this toprices decline, replenish havelocal retail not the prices been National have reduced not Petroleum been, becausereduced, Fund assubstantial reprepresentativeresentative deficit of the of yearthe is asyear projected. a whole, as a for whole, Withwhich afor regard substantial which to a of the(NPF), because need which toof the replenish need has to been replenish the depleted National the National byPetroleum Petroleumunplanned Fund Fund fuel substantialexpenditure,deficit is deficit projected. development is With projected. spendingregard to With was expenditure, 20% regard lower development to (NPF),subsidies (NPF), which which and has has illicit been use depleted of depleted accumulated by unplanned by funds.unplannedfuel subsidies and fuel expenditure,whenspending compared was development 20% to lower Q1 when FY2018/19, compared spending toand Q1 was onlyFY2018/19, 20% 14.5% lowerand of subsidiesillicit and use illicitof accumulated use of accumulated funds. funds. whentheonly compared development14.5% of the to development Q1 budget FY2018/19, forbudget the for and the year. onlyyear. Recurrent Recurrent14.5% of thespending spending development waswas largely largely budgetin linein linewith with forthe budget. the the budget. year. Recurrent spending was largely in line with the budget.

page 8

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NEWS HIGHLIGHTS

05/07/2019 Debswana’s economic Debswana’s contribution to the economy of Botswana reached impact reached P18bn P18.4 billion in 2018, a seven percent increase when compared to in 2018 (Mmegi) 2017. According to a report published by Anglo American, this was achieved by an increase in corporate taxes, royalties to government, capital expenditure and wages paid by Debswana during the year.

09/07/2019 Firms optimistic in Q2 – Results from the Bank of Botswana’s Business Expectations Survey Survey (Weekend Post) indicate that firms were optimistic about economic activity during the second quarter of 2019. Despite anticipating limited access to credit in the domestic market, firms intended to increase their investment in buildings, plant & machinery, vehicles & equipment and other goods.

15/07/2019 ABN Amro restricts Dutch bank ABN Amro has scaled back its financing of rough-diamond rough-sector lending purchases. The bank will not be reducing their overall credit limit but (Rapaport) restricting drawings under the rough-purchase sublimit. A letter from ABN Amro cites a “continued lack of profitability across a wide range of goods in the midstream pipeline.” as the reason behind restrictions.

22/07/2019 Orapa mine scapegoated De Beers’ rough diamond production decreased by 14 percent to as Debswana production 7.7 million carats during Q2 2019. Debswana production declined by slumps (Weekend Post) 9 percent during Q2, driven by a 23 percent decline in production at the Orapa mine. This was due to a planned plant shut down, which was moved forward from the second half of the year.

24/07/2019 Jwaneng: USD2 billion Debswana has announced the Cut-9 expansion project for their Jwaneng investment for mine. The Cut-9 project is expected to cost USD2 billion and will extend Botswana’s brightest the life of mine by at least another five years. star (Mining Review)

26/07/2019 Govt shaves P2.3bn Government has cut P2.25 billion from the Botswana Power Corporation’s from BPC subsidy fund (BPC) NDP 11 allocation for subsidies. The funds will be used for the (Mmegi) Tshele Hills project, which is aimed at boosting national strategic oil storage capacity.

29/07/2019 Low equity turnover Botswana Stock Exchange (BSE) Limited published their Market during 2019 H1 – BSE Performance Report for H1 2019 (1st January - 30th June). The report (Weekend Post) indicates that turnover was relatively low compared to the same period in the previous year. For the year to date, BSE recorded turnover of P866.9 million from a volume of 257.4 million shares traded. Over the same period last year, the BSE had a turnover of P1.1 billion and a total volume of 411.6 million shares traded. The top three traded companies were Wilderness Holdings, Botswana Insurance Holdings Limited and Sechaba Holdings.

31/07/2019 Cupric Canyon The engineering, procurement and construction management (EPCM) Capital awards Fluor contract for the Khoemacau copper and silver project has been awarded Khoemacau contract to Fluor Corporation. The scope of Fluor’s work includes upgrading (Mining Weekly) the existing copper concentrator plant and providing new mine surface infrastructure.

11/08/2019 Lucara profit drops Lucara Diamond Corp. profits declined to USD700,000 during Q2 2019, amid lower-value down from USD19.7 million in Q1 2019. This was due to an increase output in production of smaller stones from its Karowe mine, which yielded a (Rapaport News) lower average price. Revenue from the Botswana deposit experienced a year-on-year drop of 34 percent, recording a value of USD42.5 million.

12/08/2019 Barclays opens Barclays Bank of Botswana has opened an enterprise development Enterprise Development centre. The centre will act as an all-services incubation base for local Centre entrepreneurs. According to the bank’s Head of Enterprise and Supply (Weekend Post) Chain Development, Ms Kushatha Chilisa, the centre is aimed at resolving numerous issues faced by SMMEs such as access to finance and a lack of office space amongst others.

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NEWS HIGHLIGHTS

18/08/2019 Emerging manganese Giyani Metals Corp. have reported positive results following a preliminary project in Botswana economic assessment (PEA) of their K. Hill manganese project. delivers hot economics The PEA derived a pre-tax NPV of US369 million and an after-tax NPV of (Mining Review) USD285 million for the project. The project carries a potential operating life span of nine years and is expected to produce 245,000t of high- purity electrolytic manganese metal (HPEMM).

18/08/2019 De Beers lets clients De Beers will grant sightholders the ability to refuse more diamonds reject 50% of goods (50 percent) at their next sightholder sale in an attempt to ease (Rapaport News) pressure on the diamond market. De Beers have also increased their buy back commitment for customers’ purchases to 20 percent, up from 10 percent.

19/08/2019 BPC goes for solar Botswana Power Corporation has announced another round of invitation- parks again to-tender for two solar PV plants with a total capacity of 100MW. (Sunday Standard) The solar power parks are intended to reduce the country’s dependence on power imports from Eskom in South Africa.

19/08/2019 UK firm revises Fitch Solutions have revised their current account surplus projections botswana’s economic for Botswana. They now forecast the current account surplus to be prospects forecasts 1 percent of GDP in 2019 and 0.7 percent of GDP in 2020, down from (Sunday Standard) initial projections of 8.2 percent and 7.8 percent of GDP respectively. The downward revision is due to the decline in diamond production, a sustained demand for imports and muted SACU income flows, all adding pressure on the current account surplus.

19/08/2019 Maatla Energy acquires Maatla Energy has finalized a deal that has seen it acquire a majority P1.6 billion Mmamabula shareholding stake in Jindal BVI Ltd from Jindal Steel & Power Limited. Energy & Coal mining Jindal owns the Mmamabula coal deposit in eastern Botswana. (Weekend Post)

26/08/2019 Moody’s cautions Moody’s have maintained Letshego’s Ba2 Corporate Family Ratings Letshego over credit (CFR) and Ba3/Not Prime issuer ratings. Moody’s went on to explain, risk from Pan African “The stable outlook reflects our expectation that the company's financial expansion fundamentals will remain robust over the next 12 to 18 months, despite (Weekend Post) elevated credit risks from its regional expansion”.

28/08/2019 De Beers gem sales De Beers recorded sales valued at USD280 million during their August keep falling as buyers sight sale, 44 percent lower than same period last year. This is attributed allowed to say no to midstream participants continuing to work down their polished (Bloomberg) diamonds stock and a reduction in manufacturing levels in key diamond cutting centres.

02/09/2019 BPC’S P2.3 billion The BPC North West Transmission Grid (NWTG) project registered a transmission grid completion progress of 73 percent as at July 2019, against its target expansion on track of 86 percent. According to project manager, George Moeti, a request (Sunday Standard) for extension of time by the contractors is still under review. The NWTG project is aimed at providing the Northwest region of Botswana, along with the Chobe and Ghanzi districts, access to the national power grid. The cost of the project is P2.36 billion.

03/09/2019 BSE to collaborate The Botswana Stock Exchange (BSE) and Zimbabwe Stock Exchange with Zimbabwe Stock (ZSE) announced that they will be signing a Memorandum of Exchange Understanding (MOU). The MOU will serve as a basis for co-operation (Weekend Post) between the two markets and is aimed at promoting cross-border investments and cross-border listings.

04/09/2019 Namibia and Botswana The World Economic Forum’s Global Future Council on Energy has mull 20-year, 4.5 GW announced plans between Botswana and Namibia to develop 5 GW solar push of solar capacity over the next twenty years. The project is expected (PV Magazine) to have three phases. The first phase could see a solar tender of 300-500 MW to meet domestic demand, the second phase is planned to allocate 0.5-1 GW more solar for exports and the third and final phase would generate 1-3 GW of solar to be traded across Africa.

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NEWS HIGHLIGHTS

05/09/2019 WEF Africa: Botswana President H.E Mokgweetsi Masisi has reiterated Botswana’s desire to tells the world it wants reduce its dependence on diamonds. Speaking at the World Economic to reduce dependence Forum (WEF) President Masisi told an audience that Botswana would on diamonds embrace the 4th Industrial Revolution and would focus on producing (IOL Business Report) high quality products as the country’s small population mean it cannot compete with other countries in terms of quantity, citing the beef market as an example.

06/09/2019 Botswana leader sees President H.E Mokgweetsi Masisi has stated that negotiations between new diamond pact with Botswana and De Beers over a new diamond sales pact are “cordial” De Beers after vote and “going as planned”. The current 10-year deal expires in 2020 and (Mining Weekly) negotiations over a new deal are aimed at improving profitability for both parties. The new deal is expected to be concluded after the general elections to be held in October 2019.

10/09/2019 Masama Coal Mine A market update statement by Minergy has stated that the Masama records first commercial Coal project will record its first commercial sales during the month sale (Weekend Post) of September 2019. According to Minergy’s CEO, Morné du Plessis, the company is completing the process of signing its first long-term customer and is in discussions with other regional industrial customers.

12/09/2019 Botswana, SACU seal The SACU-plus-Mozambique trading block has finalised a deal with the post-Brexit deal United Kingdom to allow trade to continue seamlessly between the (Mmegi) two when the UK leaves the European Union. The formal signing of the agreement is expected to take place mid-October.

16/09/2019 Barclays 2019 H1 Barclays Bank published strong financial results for the half-year to skyrocket to 49 30 June 2019. Before-tax profits rose by 49 percent to P387 million in percent growth H1 2019, up from P260 million in H1 2018. The bank has attributed (Weekend Post) the strong performance to a growth in income, constrained costs and reduced credit losses.

19/09/2019 Karowe yields two Lucara Diamond Corp. has recovered a 123-carat type II rough diamond massive stones and a 375-carat gem-quality stone from its Karowe mine in Botswana. (Rapaport News) Along with these two diamonds, the company has recovered 27 other diamonds over 100 carats.

23/09/2019 Strata-X seeks P110 Strata-X Energy and Botswana Development Corporation (BDC) have million from BDC for signed a non-disclosure agreement for a financing strategy for the Serowe coal funding Serowe Coal-Bed Methane (CBM) project valued at P110 million. The (Weekend Post) agreement gives BDC a 60 to 90 day period to evaluate and conduct due diligence of the project with the aim of providing a financial package to develop the Serowe CBM project in the next three years.

26/09/2019 Better mining of energy The U.S., Botswana, Australia and Peru have announced The Energy minerals sought in Resource Governance Initiative, a partnership aimed at encouraging U.S.-backed effort responsible mining of rare earths and other minerals which are used in (Bloomberg) car batteries, wind turbines and solar panels.

26/09/2019 Lucara recovers gem- Lucara Diamond Corp. announced the recovery of a 9.74-carat gem- quality blue, pink quality blue diamond and a 4.13-carat gem-quality pink diamond from diamonds at Karowe the direct milling of the South Lobe ore at its Karowe mine. The diamonds (Engineeringnews.co.za) will be sold at the company’s fourth quarter tender which will be held in December.

27/09/2019 Shumba’s P20bn plant Shumba Energy has announced that its planned Coal-to-Liquids (CTL) targets 25,000 barrels plant is expected to produce 20,000 barrels of diesel and 5,000 barrels of fuel per day (Mmegi) of petrol per day once fully functional. The CTL plant is currently undergoing a bankable feasibility study and is estimated to cost between USD1.5 billion and USD2 billion.

page 11 www.econsult.co.bw MACRO-ECONOMIC DATA

Key Economic Data unit 2014 2015 2016 2017 2018 2019Q1 2019Q2 2019Q3

Annual Economic Growth GDP % 4.1 -1.7 4.3 2.9 4.5 4.4 3.9 .. Mining % 0.5 -19.6 -3.7 -11.1 5.3 5.3 1.4 .. Non-mining private sector % 4.9 1.4 7.1 5.6 4.7 4.7 4.4 .. GDP current prices P mn 145,868 146,066 170,564 180,102 189,869 48,850 49,242 .. GDP 2006 prices P mn 87,569 86,083 89,787 92,398 96,513 24,485 24,814 ..

Money & Prices Inflation % 3.8 3.1 3.0 3.2 3.5 3.3 2.8 3.0 Prime lending rate % 9.0 7.5 7.0 6.5 6.5 6.5 6.5 6.25 BoBC 14-day % 3.07 0.97 0.84 1.45 1.52 1.60 1.60 1.40

Trade & Balance of Payments Exports - total goods P mn 76,261 63,484 80,336 61,672 67,162 14,662 17,494 .. Exports - diamonds P mn 65,328 52,730 70,781 54,384 60,411 13,519 16,088 .. Balance of payments P mn 11,404 - 57 2 843 61 -4 204 - 907 .. ..

Foreign Exchange Exchange rate BWP per USD end 9.515 11.236 10.650 9.872 10.730 10.787 10.616 11.038 Exchange rate ZAR per BWP end 1.217 1.383 1.279 1.256 1.344 1.353 1.331 1.366 FX reserves $ mn 8,323 7,546 7,189 7,502 6,657 6,843 6,765 .. FX reserves P mn 79,111 84,881 76,804 73,693 71,427 73,505 71,814 ..

Financial Sector Deposits in banks P mn 51,492 59,961 62,438 63,581 69,271 71,640 71,484 .. Bank credit P mn 45,116 48,307 51,316 54,181 58,332 58,362 60,177 .. BSE index 9,501.6 10,602.3 9,727.7 8,860.1 7,853.5 7,885.6 7,622.5 7,461.0

Business Indicators Diamond production (a) '000 cts 24,658 20,732 20,880 22,961 24,377 6,081 5,828 .. Copper production (b) tonnes 46,721 23,050 16,878 1,239 1,462 ...... Nickel production tonnes 14,958 16,789 13,120 0 0 0 0 .. Business confidence index 52% 44% 43% 46% ...... No. of companies formed 16,300 19,134 17,133 20,707 ...... Electricity consumption GWh 3,990 3,974 3,929 3,772 3,919 966 926 .. Crude oil (Brent) $/bar 55.27 36.61 54.96 66.73 50.57 67.93 67.52 60.99

Employment (formal) Government 129,918 130,220 129,216 129,009 133,238 Parastatals 18,790 19,411 19,008 19,444 19,830 Private sector 191,399 191,484 194,202 193,745 195,681 Total 340,107 341,115 342,426 342,198 348,749 Sources: Bank of Botswana; 2018/19 2019/20 2020/21 Govt Budget 2016/17 2017/18 MFED; Statistics Botswana; Preliminary Revised Projections Department of Mines; Registrar (d) (d) (d) (e) (e) of Companies; BSE; Econsult Revenues P mn 57,398 56,411 54,513 58,238 59,125 Notes: Spending P mn 56,275 58,393 60,858 66,025 66,067 (a) From 2013, figures include production from Lucara Balance P mn 1,123 -1,982 -6,345 -7,787 -6,941 Diamonds (Karowe mine) and Public debt & guarantees P mn 36,864 45,542 46,012 52,980 Debswana. From 2016, figures also include production from Govt deposits at BoB P mn 29,819 30,094 21,559 Gem Diamonds (Ghagoo) and GDP P mn 174,630 182,195 194,901 207,568 224,607 Lerala mines, which ceased in February 2017 and April 2017 Revenues %GDP 32.9% 31.0% 28.0% 28.1% 26.3% respectively (b) Copper production starting Spending %GDP 32.2% 32.0% 31.2% 31.8% 29.4% Q2 2017 for Mowana Balance %GDP 0.6% -1.1% -3.3% -3.8% -3.1% mine Public debt & guarantees %GDP 21.1% 25.0% 23.6% 25.5% 0.0% (c) Numbers in Italics reflect revisions from the previous Govt deposits at BoB %GDP 17.1% 16.5% 11.1% 0.0% 0.0% review (d) Actual Sources: Bank of Botswana; MFED; Statistics Botswana; Department of Mines; Registrar of Companies; BSE; Econsult (e) Budget Notes:

(a) From 2013, figures include production from Lucara Diamonds (Karowepage mine) 12 and Debswana. From 2016, figures also include production from Gem Diamonds (Ghagoo) and Lerala mines, which ceased in February 2017 and April 2017 respectively (b) Copper production starting Q2 2017 for Mowana mine (c) Numbers in Italics reflect revisions from the previous review (d) Actual (e) Budget www.econsult.co.bw

SPECIAL FEATURE

The Microeconomic Policy Environment

Botswana has traditionally paid a lot of attention to the • Business environment (investment climate); management of macro-economic policy – including mon- • Public enterprises (parastatals and state-owned enter- etary policy, exchange rate and fiscal. The balance of prises); macro-economic policy is generally seen as having been • Financial markets; favourable and supportive of growth and stability. Currently, • Labour markets; fiscal policy is playing a stabilising role, with a modest fiscal • Market-facing / regulatory institutions; deficit within the context of a medium-term balanced bud- • Subsidies policy and price controls; get objective. Interest rates are at their lowest ever level, • International trade policy. in nominal terms. The nominal effective exchange rate is stable, although, as we have argued previously, the Pula is Investment Climate – the “Doing Business” Environment probably overvalued in real terms, which does not support The investment climate in a country covers a wide range export-led growth. The category of macro-economic sta- of factors that influence the attractiveness of an environ- bility is by far Botswana’s best performance in the World ment to private sector investors. Several aspects of the in- Economic Forum’s Global Competitiveness Index, where vestment climate are assessed by the World Bank’s annual the country is ranked in first place globally. Doing Business reports, which examine a range of factors relevant to the business life-cycle: starting a business, deal- So why is economic growth and employment creation not ing with construction permits, getting electricity, register- stronger? From an economic policy perspective, macro- ing property, getting credit, protecting minority investors, economic policy is only part of the story; it is important paying taxes, trading across borders, enforcing contracts, to also consider the micro-economic policy environment. resolving insolvency and labour market regulation. Coun- Micro-economics focuses on how individual markets op- tries are given scores on all of these indicators, and are erate, and the micro-economic environment is the set of also ranked. prices, regulations, institutions, taxes and subsidies that govern the operation of markets. All of these character- For Botswana, the absolute measure of the quality of the istics create a set of prices and incentives that economic business environment (the DB score) has remained more or agents respond to – in terms of decisions regarding pur- less unchanged in recent years. Nevertheless, Botswana’s chases, investment, production, employment, trade, etc. Doing Business ranking has declined, from 19 in 2005 Micro-economic policy includes actions to change the way to 86 in 2019 (Figure 1). This illustrates that other coun- in which markets operate, such as to make them more ef- tries improved their business environment while Botswana ficient, remove distortions, correct market failures, and in- stood still (leading to the lower ranking), and confirms the crease competition, and more generally to guide and influ- need to take action to improve the absolute Doing Business ence the micro-economic decisions of economic agents. It score through enhancements of the business environment. has links to macro-economic policies, especially those that affect prices and the returns to different types of invest- A related assessment is conducted by the World Economic ment, such as exchange rates, tax and subsidy policy etc. Forum (WEF), which rates each country under the Global Competitiveness Index (GCI) annually. The GCI covers a The markets in question include those for different types of somewhat different set of indicators to the Doing Business goods and services, but also financial markets, labour mar- assessment, specifically: macroeconomic stability, finan- kets, etc. Below we consider policies and outcomes in dif- cial system, ICT adoption, infrastructure, health, business ferent markets and segments of the economy, as follows: dynamism, skills, product markets, market size, innovation capability, labour market and institutions. Botswana’s rank- ings on the GCI have also followed a downward trend over the years, albeit with a period of improvement between 2012 and 2016.

page 13 insolvency and labour market regulation. Countries are given scores on all of these indicators, and are also ranked. For Botswana, the absolute measure of the quality of the business environment (the DB score) has remained more or less unchanged in recent years. Nevertheless, Botswana’s Doing Business ranking has declined, fromwww.econsult.co.bw 19 in 2005 to 86 in 2019 (Figure 1). This illustrates that other countries improved their business environment while Botswana stood still (leading to the lower ranking), and confirms the need to take action to improve the absolute Doing Business SPECIAL FEATUREscore through enhancements of the business environment. A related assessment is conducted by the World Economic Forum (WEF), which rates each country under the Global Competitiveness Index (GCI) each year. The GCI covers a somewhat different set of indicators to the Doing Business assessment, specifically: macroeconomic stability, financial system, ICT adoption, infrastructure, health, business dynamism, skills, product markets, market size, innovation capability, labour market and institutions. Botswana’s rankings on the GCI have also followed aFigure downward 1: trend over the years, albeit with a period of improvement between 2012Business and 2016. Environment Rankings Figure 1: Business environment rankings

DoingDoing Busine Businessss Ranking Ranking GlobalGlobal Competitiveness Competitiveness Index RankingRanking 2005 2007 2009 2011 2013 2015 2017 2019

0 2008 2010 2012 2014 2016 2018 0 10 20 20 30 40 40 50 60 60 70 80 80 90 100 100

Source: www.doingbusiness.org; www.weforum.org/reports/the-global-competitveness-report-2019 Source: www.doingbusiness.org; www.weforum.org/reports/the-global-competitveness-report-2019 Considerable attention has been paid to improving the business climate in recent years. Initiatives include the establishment of the National Doing Business Committee; the adoption by Cabinet of the Doing Business Roadmap, with a range of action items, and the establishment Considerable attentionof the has Botswana been paid One to-Stop improving Service theCentre busi (BOSSC)- • byInvestment the Botswana in ICTInvestment to improve and Tradeconnectivity and reduce ness climate in recentCentre years. (BITC Initiatives). Some imp includerovements the haveestab been- made, includingcosts; the new Trade and Industrial lishment of the NationalDevelopment Doing Acts, Business and the Committee; introduction ofthe online business• Improving registration the byquality the Companies of public and service delivery, shift- adoption by Cabinet of the Doing Business Roadmap, with ing government services online (eGov), while ensuring Intellectual Property Authority (CIPA). However, a number of further reforms are needed: a range of action items, and the establishment of the Bo- reliability of the Government Data Network; and tswana One-Stop Service• CentreSpeeding (BOSSC) up the by thelegislative Botswana process, so• Implementing that improvements the “one-government”in the business principle (where- Investment and Trade Centreenvironment (BITC). Some that require improvements changes in the law areby implementedthe public would faster; have a single point of contact and have been made, including the new Trade and Industrial would not have to deal separately with government Development Acts, and the introduction of online business departments and agencies even for a single process). registration by the Companies and Intellectual Property Au- thority (CIPA). However, a number of further reforms are Public Enterprises – Privatisation and Reform needed: The number of parastatals (statutory entities) and state- owned enterprises (SOEs) has been increasing over the • Speeding up of the legislative process, so that im- years, to around 60. These can be classified into different provements in the business environment that require types, as follows: changes in the law are implemented faster; • Continued progress in government in the transition • Commercial (18) from a “controlling” approach towards the economy • Commercial financial (6) and the private sector to a “supportive/facilitative” • Regulatory (16) one; • Developmental (11) • Reducing excessive regulation, and introducing Regu- • Education (5) latory Impact Assessments, so that regulations are • Other (4) only introduced when the anticipated benefits exceed the costs; The Privatisation Policy (2000) proposed reducing the num- • Further liberalisation of restrictive immigration require- ber of public enterprises through privatisation and rationali- ments, through, e.g. online visa processing and im- sation of those with overlapping mandates. Implementation proved availability of work permits for skilled workers of this policy has been slow, with one partial privatisation and investors; (Botswana Telecommunications Corporation, although this • Improving statistical capacity, to support evidence- is still a SOE as majority share ownership remains with based policymaking, and monitoring and evaluation; government), and two mergers1. Furthermore, some public • Improved screening of policies across government to enterprises are monopolies, which has an adverse impact ensure that they are consistent with the agreed Doing on competition and efficiency in their respective markets. Business Road Map;

1The International Financial Services Centre (IFSC) and Botswana Export Development and Investment Agency (BEDIA) were merged to form the Botswana Investment and Trade Centre (BITC), while the Rural Industries Innovation Centre (RIIC) and Botswana Technology Centre (BoTEC) were merged to form the Botswana Institute for Technology Research and Innovation (BITRI).

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SPECIAL FEATURE

Many public enterprises require subventions (subsidies) of “tiered” bank licensing, to enable new types of financial from government, which adds to public spending, and may institutions to enter the market. It is also important to en- reflect inefficiency. Policy priorities should include identify- sure that Know-Your-Customer (KYC) regulations do not ing further parastatals for privatisation and rationalisation; act as a barrier to the provision of financial services to the removing monopolies and facilitating competition; improv- unbanked and underserved. ing parastatal governance and transparency; de-politicisa- tion of appointments to parastatal boards and manage- Botswana has relatively low access to finance for a country ment; and assessment of whether subsidies to parastatals of upper-middle income status, with limited use of banks are achieving identifiable benefits and value for money. by those outside of formal employment. To improve access Fortunately, Government has committed to removing one to finance, a Financial Inclusion Roadmap and Strategy cov- of the most destructive monopolies in place, the BMC mo- ering the period 2015 – 2021 has been agreed, with five nopoly of beef exports. Public accountability and transpar- priority areas: development of the payments ecosystem; ency requirements should be applied to SOEs (companies facilitation of accessible, low cost, savings products; de- owned by government), as well as statutory parastatals. velopment of accessible risk mitigation products; improve- ment of the working of the credit market; and consumer Financial Markets empowerment and protection. The financial sector has become more competitive and ef- ficient over the past decade. Competition has been helped Data on financial inclusion in Botswana lags and needs to by the entry of new banks through the Bank of Botswana’s be updated. The most recent FinScope survey, which pro- licensing policy, such that in 2019 there are 12 deposit- vides comprehensive information on access to finance by taking institutions, including 10 licensed commercial banks, households and on which the Financial Inclusion Roadmap one statutory bank (Botswana Savings Bank) and one was based, was carried out in 2014. A new FinScope sur- building society (Botswana Building Society, in the process vey is urgently required (one is planned for late 2019), and of converting to a bank). For lending, in addition, there are should be complemented by a FinScope SMME survey, to three development finance institutions (National Develop- gather information on the financial situation of SMMEs and ment Bank, Botswana Development Corporation and the the constraints they face. Citizen Entrepreneurial Development Authority (CEDA), various government funds (such as the Youth Development Labour Markets Fund (YDF), and a number of private sector non-bank lend- Several microeconomic interventions have taken place in ers. In banking, interest rate spreads and profits have fallen labour markets. These include the activities of parastatals as competition has increased. However, there are questions such as the Botswana National Productivity Centre (BNPC) around the impact and cost-effectiveness of CEDA and and the Human Resources Development Council (HRDC), YDF, neither of which operate on a commercial basis and focused on developing skills, increasing productivity, and require considerable subsidies. improving the availability of labour market information (e.g., through HRDC’s Labour Market Observatory). Other impor- Around the world, the financial sector environment is tant labour market interventions include immigration pol- changing rapidly, largely driven by financial technology icy and minimum wage policy. Immigration policy affects (“fintech”), the growth of payments instruments (notably the ability of investors to enter the country and of firms mobile money, payment cards and phone-based apps). to employ skilled foreign workers, and a liberal policy can Much of the innovation is coming from outside of the tradi- enhance the international competitiveness of producers of tional banking sector. Further regulatory reform will help to tradeable goods and services. However, over the past de- support similar developments to improve financial inclusion cade immigration policy has been tightened and the num- in Botswana, including allowing “regulatory sandboxes” to ber of work permits drastically reduced, and many firms support innovation2. Fintech will help support the provi- have noted that this has had a negative impact on invest- sion of “branchless” banking and financial services more ment and growth, as well as on the creation of employment generally through electronic, web and app-based channels opportunities for citizens. rather than through physical channels, and thereby help reach those who are currently under-served or un-served Minimum wage policy is aimed at providing some protec- financially. The high rate of mobile phone penetration in Bo- tion for workers in less skilled occupations and preventing tswana supports the potential of these methods of financial employers from driving down wages to very low levels. The service delivery. This will require regulatory reform, for in- level of the minimum wage has important labour market stance changes to banking regulations and the introduction implications, as it has an impact on the demand for labour

2BoB Annual Report, 2017. A regulatory sandbox allows firms to test innovations in financial products and services, in the market, in a controlled and usually time-limited environment, under the supervision of the financial sector regulator. It allows innovation where the existing regulatory framework may be unclear or unduly restrictive.

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SPECIAL FEATURE

and the level of employment; setting it too high may lead quiring number portability – so that subscribers can change to lower formal employment growth. However, it also has service provider while keep the same cellphone number – important social and distributional implications, as the ben- would be a big step forward; something that BOCRA can eficiaries of higher minimum wages are likely to be lower require of licensed telecommunications operators. Similarly, paid workers; in a society with high income inequality, this BoB could introduce regulations to make it easier to switch may be an important outcome. Hence, there are important banks, as some other bank regulators have done. trade-offs in setting an appropriate level of the minimum wage. In recent years, the minimum wage has risen in real The need for competition in a small economy is also a good terms, but this marked a reversal of a longer-term trend of reason to avoid protectionism, as imports provide a cru- declining real minimum wages3. cial source of competition, keep prices down, and benefit consumers. In Botswana, the impact of protectionism can The overall impact of labour market policies has not been as be seen in the poultry sector, where imports are heavily intended. Although the overall unemployment rate has not restricted, the domestic industry is dominated a small num- changed much – the 17.6 percent unemployment rate re- ber of firms, and prices are higher than in South Africa, at corded in the 2015/16 BMTHS was similar to the 17.8 per- the expense of consumers. cent recorded in the previous household survey in 2009/10 – it does seem that a smaller share of the employed popula- Price Controls and Subsidies tion is working in the formal sector – i.e., informal employ- Price controls and subsidies can be powerful tools to influ- ment has grown faster than formal employment. ence market prices and outcomes. However, they have to be used extremely cautiously, as they can equally create Competition and Market Regulation distortions and groups with interests in maintaining price A small economy such as that of Botswana is always vul- controls and subsidies, even when they may not be eco- nerable to monopolies, given that in many modern indus- nomically beneficial; as a result, they can be extremely dif- tries firms have to be large in order to achieve economies ficult to remove. of scale. For instance, if there are too many banks, the re- sult will be inefficiency as the banks are too small and the Price Controls consumer is burdened by excessive costs. However, small Botswana has not traditionally made extensive use of price numbers of firms in an industry need not be anti-competi- controls, preferring to allow markets forces to operate. tive – the key issue is whether a market is “contestable”. However, price controls are used in some important areas, The global motor industry, for instance, is dominated by a including fuel (petrol, diesel), electricity and water. All three small number of large firms, but the industry is contestable sets of prices are ultimately determined at Cabinet level, as all of those large firms are challenged by others, and no and hence have become politicised. The result is that they firm’s position is secure. Similarly, in Botswana there is ag- have been set at sub-economic levels in recent years, lead- gressive competition between the banks, even though the ing to losses at the producer level, which have to be made market is dominated by a few players. up through subsidies. There are also risks that economic decisions become distorted, for instance encouraging the There is, however, always a risk of collusion or market dom- over-use of scarce water supplies and discouraging water ination that acts against the interests of consumers and conservation and recycling efforts, and discouraging invest- reduces the beneficial impact of competition – especially ment in renewable energy supplies. by blunting the incentive for innovation. Hence the role of market regulators is important – primarily the Competition Price controls can also prevent competition. For instance, Authority, but also industry-specific regulators such as the the fixed retail fuel price means there is no price compe- Bank of Botswana (BoB), Non-Bank Financial Institutions tition between suppliers, unlike in deregulated markets Regulatory Authority (NBFIRA), and the Botswana Com- where fuel price competition is extensive. In Botswana, a munications and Regulatory Authority (BOCRA). Their role simple change would maintain the objective of protecting is not just about preventing monopoly pricing or the ac- consumers from exploitation where there is little compe- cumulation of undue market power through mergers and tition (e.g. in rural areas) while encouraging competition. takeovers. It is also about setting rules that make markets This would be to make the regulated price a maximum more competitive. A particularly relevant area is making it price, not a fixed price, which would allow fuel retailers to easier for consumers to switch service providers. This is offer discounted prices as a competitive strategy, yielding easy in the case of supermarkets, but not so easy in the benefits for consumers. case of banks or cellphone providers. In the latter case, re-

3Between 2011 and 2017, the minimum wage in retail rose by 23% in real terms, but between 1990 and 2017 it fell by 24%.

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SPECIAL FEATURE

Subsidies The need for cost-effectiveness evaluation applies both to A variety of explicit or implicit subsidy programmes are in subsidies for parastatals and direct subsidies to producers, place in Botswana. Many of these take place through para- such as the Integrated Support Programme for Arable Agri- statals, and are the counterpart of the price controls men- culture Development (ISPAAD) and the Livestock Manage- tioned above. The Botswana Power Corporation (BPC), for ment and Infrastructure Development (LIMID) programme; instance, has received extensive subsidies over the years these receive subsidies of around P550m and P100m a (subsidies to BPC are the second largest item in the origi- year, respectively. The agricultural sector is probably the nal NDP 11 development expenditure programme). Other largest recipient of subsidies in Botswana (including those parastatals receive subsidies, but this may reflect inefficient paid through BAMB and the Agricultural Credit Guarantee operations rather than sub-economic pricing – examples Scheme), but has not achieved sustained growth or signifi- include the BMC and Air Botswana. Other subsidies are cantly improved incomes for those engaged in agriculture. deliberate and aimed at achieving specific objectives, such This suggests that a thorough evaluation of the effective- as the subventions to CEDA that enable it to charge low ness of agricultural subsidy schemes is called for. Indeed, interest rates on its loans, take on a higher level of risk, the cost of ISPAAD subsidies appears to be greater than absorb the cost of loan defaults, and maintain an extensive value added in crop production, which suggests that the outreach programme. Amongst the commercial and devel- subsidy is encouraging Batswana to undertake activities opmental parastatals, the largest subsidies over the period that destroy, rather than create, economic value. 2013/14 to 2017/18 are the following: Not all subsidies appear directly as a charge on the budget. The Economic Diversification Drive (EDD) provides price in- Table 1: Largest direct public enterprise subventions centives for accredited local firms in the provision of goods from Government, 2013/14 – 2017/18, P mn and services to government and parastatals; hence leading to higher expenditure by government than would otherwise Public Enterprise [1] Total be achieved. The value of EDD price preferences is inte- Subventions, grated into procurement budgets and has not been sepa- P million rately costed. A cost-benefit evaluation of the impact of the Botswana Power Corporation (BPC) 9,260 EDD would show what has been achieved through such ex- penditure. Similarly with projects implemented through the Citizen Entrepreneurial Development 1,568 Economic Stimulus Programme (ESP), where normal public Agency (CEDA) procurement rules that emphasised cost-minimisation were Botswana Agricultural Marketing Board 1,440 relaxed. EDD subsidies may also have provided firms with (BAMB) an incentive to concentrate on public procurement rather Local Enterprise Authority (LEA) 736 than exports. Botswana Meat Commission (BMC) [2] 693 In some cases, subsidies are combined with regulatory Water Utilities Corporation (WUC) [2] 613 privileges that protected public enterprises from competi- Source: Annual Reports; Estimates of Expenditure tion, such as with BMC and its beef export monopoly. This

Note: [1] Excludes Air Botswana, BCL Ltd and Botswana Railways, where information is not available. Smaller has introduced extreme distortions in the beef and cattle subventions were received by many other parastatals. The table includes direct budgetary subventions only, and sector, which has contributed to the decline of beef exports does not include the value of equity injections, debt-to-equity conversions and debt guarantees, all of which represent additional subsidies. [2] Subsidies over the 5 years to 2015/16 – more recent accounts not available. and the gradual depletion of the national cattle herd as cattle rearing has become uneconomic. This has to be ad- Some of these subsidies may be justified and delivering dressed through the removal of the beef export monopoly, useful socio-economic outcomes. However, it is important and potentially the privatisation of BMC, to enable private to subject such subsidies to proper evaluation and assess- sector investment in productive capacity and remove price ment of their impact, in order to ensure that the scarce distortions. public financial resources that are being used achieve the desired objectives in a way that represents the best value Trade Policy for money. For instance, the cost to government of employ- Trade policy is included under microeconomic policy as ment creation in LEA-supported enterprises appears to be it affects prices, competition and market access across in the region of P200,000 per job. It would be important to different goods and services. Botswana’s trade policy is compare this with the cost of other interventions to sup- influenced by participation in several regional and interna- port employment creation. tional trade agreements, including the SACU, the Southern

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SPECIAL FEATURE

African Development Community (SADC) Free Trade Area Overall Impact (FTA), the SADC-EAC-COMESA Tripartite FTA, the African The impact of micro-economic policies can be related to Continental Free Trade Area (AfCFTA), and the SADC-EU macro-economic outcomes, under which the overall rate of Economic Partnership Agreement (EPA). In addition, Bo- economic growth has been reasonable. However, growth tswana imposes some of its own policies outside of these has not been labour-intensive, nor has it been export-led. agreements, such as infant industry protection, along with This suggests that micro-economic policies and interven- other import levies, and import restrictions. Protection- tions have had a bias against exports and have not sup- ist trade policy offers apparent short-term benefits, but is ported labour-intensive economic activities. The pattern of largely inconsistent with an export-led growth strategy, as growth in Botswana – led by services and non-tradeables it raises costs and prices and does not provide incentives as mining growth has slowed – shows that the impact of for firms to become more competitive, and should therefore Dutch Disease has not been avoided. Future micro-eco- be used very cautiously. Protectionism is also inconsistent nomic interventions should therefore be focused on coun- with the principles of the various trade agreements that tering Dutch Disease effects, and shifting the incentives for Botswana has signed, most recently the AfCFTA, which investment and employment away from non-tradeables and are all premised on reducing trade barriers and increasing the domestic market and towards exports. trade integration. This, in turn, means focusing on competitiveness and ef- Also included under trade policy are broader issues of trade ficiency: government, and businesses providing non-trade- facilitation, including non-tariff barriers (NTBs), regulatory ables (mostly domestic services), do not have to be inter- issues, border infrastructure, etc. These are usually issues nationally competitive, but businesses producing tradeables that have to be negotiated bilaterally with neighbouring (exports and import substitutes) do. Policies, interventions states. A focus on export-led growth requires that these and regulations that raise domestic costs and undermine issues are addressed, so that costs are not increased by competitiveness should be avoided at all costs. a “thickening” of borders due to delays and bureaucracy. This includes issues such as 24-hour opening of key border crossings, one-stop border posts, electronic customs docu- mentation, mutual recognition of standards, etc.

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