Botswana at a Glance: 2007-08

Country Report

Botswana Botswana at a glance: 2007-08

OVERVIEW The government, under the presidency of Festus Mogae, will remain firmly in power, with the ruling Botswana Democratic Party (BDP) clearly the dominant political party. Expanded diamond production will drive real GDP growth of 4.7% in 2007 and 6% in 2008. Diversification of the economy away from diamond mining will remain a key goal of economic policy. Inflation is expected to remain on a downward trend, at an average rate of 6.5% in 2007 and 4.7% in 2008, as monetary policy remains tight and South African inflation declines in 2008. Import growth will be driven by higher capital spending by the government and mining companies. Additional mining capacity will drive up exports. The surplus on the services account will increase during 2007-08, owing to increased capacity to provide services, particularly in the tourism, finance and diamond-related sectors. The deficit on the income account is expected to narrow because of higher returns on portfolio investments abroad. The surplus on the current transfers account will remain firm in the forecast period, reflecting large payments from the Southern African Customs Union. The current-account surplus is forecast to increase from 15.2% of GDP in 2006 to 16.1% of GDP in 2007 and 17% of GDP in 2008. The pula is expected to depreciate slightly over the forecast period, in line with downward trends in the rand, to average P6.29:US$1 in 2007 and P6.60:US$1 in 2008.

Key changes from last month Political outlook • A cabinet reshuffle has brought in two prominent leaders of an under- represented faction of the BDP, thus setting the stage for greater unity in the party over the forecast period. Economic policy outlook • New data from the Bank of Botswana show that significant under-spending, particular on development expenditure, took place in the first half of fiscal year 2006/07 (April-March). The Economist Intelligence Unit now estimates the government surplus for 2006/07 at 5% of GDP, up from 2.6% of GDP previously. Economic forecast • There have been no significant changes to our economic forecast in the past month.

February 2007

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Botswana 1

Contents

Botswana

3 Summary

4 Political structure

5 Economic structure 5 Annual indicators 6 Quarterly indicators

7 Outlook for 2007-08 7 Political outlook 8 Economic policy outlook 9 Economic forecast

12 The political scene

17 Economic policy

20 The domestic economy 20 Economic trends 21 Agriculture 21 Mining 22 Manufacturing 22 Infrastructure 23 Financial and other services

24 Foreign trade and payments

List of tables 9 International assumptions summary 12 Forecast summary 15 Local council by-election results 17 Government finances 19 Human Development Index, 2006 20 Labour force and unemployment

List of figures

12 Gross domestic product 12 Consumer price inflation

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Botswana 3

Botswana February 2007 Summary

Outlook for 2007-08 The government, under the presidency of Festus Mogae, will remain securely in power throughout the forecast period, with the ruling Botswana Democratic Party (BDP) continuing to dominate the political scene and opposition parties struggling to forge greater unity. Diversification of the economy away from diamond mining and job creation will remain the chief policy goals. Real GDP growth will rise from 4.7% in national accounts year 2007/08 (July-June) to 6% in 2008/09 as mining production increases. Inflation is expected to subside to 6.5% in 2007 and 4.7% in 2008, although the rate of decline will be curtailed by the gradual depreciation of the pula, imported inflation from South Africa and high international oil prices. Strong diamond exports will drive a current- account forecast at 16.1% of GDP in 2007 and 17% of GDP in 2008.

The political scene A cabinet reshuffle has brought in Daniel Kwelagobe and Ponatshego Kedikilwe, the leaders of an under-represented faction within the BDP. Negotiations to create an electoral alliance between the main opposition party, the Botswana National Front (BNF), and three smaller opposition parties have failed. The leader of the BNF, Otsweletse Moupo, has resumed his duties after a leave of absence. Botswana!s High Court has ruled that the relocation of the Basarwa from the Central Kalahari Game Reserve (CKGR) was unconstitutional.

Economic policy According to the Bank of Botswana, development spending in the first half of fiscal year 2006/07 (April"September) is well below budgeted levels. A leaked report by the Business and Economic Advisory Council has criticised the government!s empowerment policy. The development of a number of new industries has been proposed, including a high-technology innovation centre.

The domestic economy The official 2005/06 Labour Force Survey has put the unemployment rate at 17.3%. A new consumer price index basket has been introduced by the Central Statistics Office, and suggests that year-on-year inflation reached 8.5% in December 2006. The government has announced plans to promote ostrich farming by supplying young birds. The construction of a new nickel refinery has begun. A UK-based company, African Copper, has been granted a licence for the Dukwe copper mine. A South African airline, SA Airlink, has been chosen as the preferred bidder for Air Botswana.

Foreign trade and payments Botswana has chaired the plenary meeting of the Kimberley Process, at which the control of "conflict diamonds" was discussed.

Editors: Nicola Prins (editor); Roger Boulanger (consulting editor) Editorial closing date: January 25th 2007 All queries: Tel: (44.20) 7576 8000 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule

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Political structure

Official name Republic of Botswana

Form of state Unitary republic

Legal system Roman-Dutch law; cases in rural areas are heard by customary courts

National legislature National Assembly consisting of 57 members elected by universal suffrage, the president, the attorney-general and four members appointed by the president; a 15-member House of Chiefs advises on tribal matters

National elections October 2004 (legislative); next legislative election due in October 2009

Head of state President, chosen by the National Assembly

National government The president, his appointed vice-president and cabinet (reshuffled in January 2007)

Main political parties Botswana Democratic Party (BDP; the ruling party); Botswana National Front (BNF); Botswana Congress Party (BCP); Botswana People!s Party (BPP); New Democratic Front (NDF); Botswana Alliance Movement (BAM)

President Festus Mogae Vice-president Ian Khama

Key ministers Agriculture Johnnie Swartz Communications, science & technology Pelonomi Venson-Motoi Education Jacob Nkate Environment, wildlife & tourism Kitso Mokaila Finance & development planning Baledzi Gaolathe Foreign affairs & international co-operation Mompati Merafhe Health Sheila Tlou Labour & home affairs Charles Tibone Lands & housing Ramadeluka Seretse Local government Margaret Nasha Minerals, energy & water affairs Ponatshego Kedikilwe State president (public service & parliament) Daniel Kwelagobe State president (justice, police & defence) Phandu Skelemani Trade & industry Neo Moroka Works & transport Lesego Motsumi Youth, sports & culture Moeng Pheto

Central bank governor Linah Mohohlo

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Economic structure

Annual indicators 2002a 2003a 2004 a 2005 b 2006b GDP at market prices (P bn) 39.8 42.6 48.8 56.7 65.0 GDP (US$ bn) 6.3 8.6 10.4 11.1 11.2 Real GDP growth (%)c 9.5 3.4 8.4 5.5 4.7 Consumer price inflation (av; %) 8.0 9.2 7.0 8.6 a 11.5a Population (m) 1.8 1.8 1.8 1.8 1.8 Exports of goods fob (US$ m) 2,319 3,024 3,696 4,619 4,807 Imports of goods fob (US$ m) -1,642 -2,127 -2,864 -2,824 -3,034 Current-account balance (US$ m) 143 462 287 1,661 1,700 Foreign-exchange reserves excl gold (US$ bn) 5.5 5.3 5.7 6.3 a 7.6 Total external debt (US$ m) 488.4 513.6 524.0 512.5 517.5 Debt-service ratio, paid (%) 2.0 1.2 1.0 1.1 1.1 Exchange rate (av) P:US$ 6.33 4.95 4.69 5.11 a 5.82a a Actual. b Economist Intelligence Unit estimates. c National accounts years July-June.

Origin of gross domestic product 2004/05a % of total Components of gross domestic product 2004/05a % of total Agriculture 2.1 Private consumption 27.8 Industry 48.6 Public consumption 22.8 Services (incl government) 40.2 Gross fixed capital formation 20.4 Change in stocks 14.4 Exports of goods & services 49.8 Imports of goods & services -35.1

Main exports fob 2005 % of total Main imports cif 2005 % of total Diamonds 70.1 Machinery & electrical equipment 16.3 Copper-nickel 9.8 Food 13.7 Textiles 4.7 Fuel 13.3 Vehicles & parts 2.4 Vehicles & transport equipment 12.5 Meat & meat products 1.3 Chemical & rubber products 11.9

Destination of exports 2005 % of total Origin of imports 2005 % of total UK 75.7 SACUb 85.1 SACUb 9.0 Zimbabwe 1.5 Zimbabwe 4.1 UK 1.3 US 2.2 US 1.2 a National accounts year July-June. b Southern African Customs Union.

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Quarterly indicators 2004 2005 2006 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr Central government finance (P m) Revenue & grants 4,186.8 5,901.3 4,882.4 4,821.5 5,640.5 n/a 5,521.6 5,650.9 Expenditure & net lending 4,329.4 4,371.9 4,778.3 3,675.8 4,018.3 n/a 4,706.7 4,367.5 Balance -142.6 1,529.4 104.1 1,145.7 1,622.2 n/a 814.9 1,283.4 Prices Consumer prices (Sep 2006=100) 83.0 84.0 86.1 89.5 92.4 95.0 97.7 99.3 Consumer prices (% change, year on year) 7.7 7.3 6.6 9.3 11.3 13.1 13.5 10.9 Financial indicators Exchange rate P:US$ (av) 4.51 4.47 4.94 5.46 5.58 5.42 5.65 6.06 Exchange rate P:US$ (end-period) 4.28 4.61 5.50 5.43 5.51 5.48 5.90 6.39 Bank rate (end-period; %) 14.25 14.25 14.00 14.25 14.50 15.00 15.00 15.00 Lending rate (av; %) 15.75 15.75 15.53 15.67 16.00 16.33 16.50 16.50 M1 (end-period; P m) 4,225 4,019 3,903 4,629 3,998 4,009 4,078 4,358 M1 (% change, year on year) 46.6 27.3 7.9 30.1 -5.4 -0.2 4.5 -5.9 M2 (end-period; P m) 13,262 13,834 13,794 15,195 14,674 19,448 23,541 24,219 M2 (% change, year on year) 13.9 12.7 4.8 16.5 10.6 40.6 70.7 59.4 Stockmarket index (end-period; 1989=100)a 2,888.7 3,021.4 3,275.6 3,468.7 3,559.1 3,946.5 4,411.1 5,310.5 Foreign trade (P m) Exports fobb 16,894 ( 21,923 ) n/a n/a n/a Diamonds 3,240 4,204 3,402 5,438 3,938 4,784 4,766 4,545 Imports cifb -16,237 ( -20,441 ) n/a n/a n/a Trade balance 657 ( 1,482 ) n/a n/a n/a Foreign reserves (US$ m) Reserves excl gold (end-period) 5,661 5,955 5,846 6,207 6,309 6,704 7,188 7,437 a Domestic Company Index. b Annual data. Sources: IMF, International Financial Statistics; Bank of Botswana, Botswana Financial Statistics, Annual Report.

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Outlook for 2007-08

Political outlook

Domestic politics The government of the ruling Botswana Democratic Party (BDP), led by the president, Festus Mogae, is expected to remain firmly in power throughout the forecast period. Although the BDP has been dogged by in-fighting since the last election in 2004, this is unlikely to threaten its dominant position. An extensive cabinet reshuffle in mid-January saw the re-inclusion of the two main leaders of the faction that had previously been largely excluded from government, creating greater unity during the final year of Mr Mogae!s presidency before he hands over to his deputy, Ian Khama, early in 2008. However, divisions could still creep back into the BDP!s ranks in the run-up to the 2007 party congress as rivalries intensify to succeed Mr Khama as party chairman and state vice- president. In addition, primary elections to select parliamentary candidates are scheduled for late 2008, and there is always a risk of the indiscipline that marked the chaotic 2003 primaries and damaged the BDP!s performance at the 2004 legislative election. However, tense rivalry is expected, and senior party officials already appear to be manoeuvring to win candidacies for seats in BDP strongholds. The main opposition party, the Botswana National Front (BNF), has formally withdrawn from negotiations to forge an alliance with three smaller parties for the 2009 election. The traditional hostility between the BNF and the Botswana Congress Party (BCP) is still a major underlying factor that is hindering the BNF from forming an electoral alliance with the BCP and the other two parties, the Botswana Alliance Movement (BAM) and the Botswana People!s Party (BPP). The other three parties are continuing to seek an alliance of their own, but the talks, which are scheduled to be complete by March, are making little headway. Without the BNF, an opposition pact has little prospect of challenging the BDP at elections#the three smaller parties won a combined total of only 21% of the vote in 2004, of which almost 17% was for the BCP. Instead, its focus would have to be on unseating the BNF as the main opposition in parliament, a far less compelling reason for forging an alliance. By 2008 there may still be some scope to try to lure back the BNF (which won 26% of the vote in 2004) as the reality sets in that the four parties can mount a serious challenge to the BDP only by standing together. However, there are hardliners within the BNF who may see the principal objective as seeing off the other opposition parties before mounting a serious challenge to the BDP at the next election in 2014. Meanwhile, in-fighting in the BNF appears to have intensified, with some in the leadership intent on removing Otsweletse Moupo, the BNF president, whose personal problems embarrassed the party in 2006. Mr Moupo is increasingly appealing to his grass-roots support, after some of his close advisers and fellow BNF parliamentarians appear to have distanced themselves from him. The BNF party conference in July 2007 may prove to be a critical turning-point for the party if calls for it to be upgraded to a full congress are heeded and the leadership issue is addressed. Although the extent to which the party has become factionalised will become apparent, it will provide an opportunity to

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either unify the party or enter into a period of in-fighting that could critically weaken the party.

International relations Botswana will maintain good relations with its major trading partners over the forecast period, continuing to benefit from its reputation for political and economic stability, its successful use of diamonds to finance development, and its efforts to tackle HIV/AIDS. The government has accepted a High Court ruling that a group of Basarwa (Bushmen, also known as San) have the right to live in the Central Kalahari Game Reserve (CKGR). However, the government is not required to provide services to the Basarwa in the reserve and is offering incentives to those who continue to live outside the reserve. Moreover, it is allowing only the applicants in the court case to return to the CKGR, rather than all Basarwa, and there may now be further legal action. The greatest regional diplomatic challenge is how best to take relations forward with Zimbabwe. The neighbouring country!s disastrous economic situation is having an impact on Botswana in terms of inflows of illegal immigrants, causing domestic tensions. Nevertheless, despite domestic criticism, the government is likely to continue its policy of quiet diplomacy, in line with the policies of other countries in the region.

Economic policy outlook

Policy trends The government will continue to pursue largely prudent policies in 2007-08 that will support macroeconomic stability and financial discipline. Reflecting the objectives of the Ninth National Development Plan (NDP 9, April 2003- March 2009), policy will focus on economic diversification, employment creation and poverty alleviation, with the focus on developing the downstream diamond industry, particularly diamond sorting, valuing, cutting and polishing, as well as encouraging investment in tourism and the International Financial Services Centre. Another key objective under NDP 9 is the development of the country!s human resources (including the fight against HIV/AIDS). A recent report from the Business and Economic Advisory Council that has criticised populist polices may provide the impetus to press on with the long-delayed privatisation programme (where there is now some sign of movement) and labour market reforms. However, there will be resistance to proposed reforms to the local empowerment policy from populist politicians.

Fiscal policy The budget for fiscal year 2006/07 (April-March) is based on the mid-term review of NDP 9 and includes a new fiscal rule, which sets an upper limit of 40% of GDP on government spending and rebalances the budget in favour of development spending. However, the outturn of the first half of the 2006/07 budget shows that under-spending is the actual concern, as only one-quarter of the development budget was spent, reflecting the over-ambitious nature of the budget given limited administration capacity to absorb a large increase in spending. Strong diamond revenue and increased receipts from the Southern African Customs Union (SACU) will keep revenue inflows high in 2006/07, with the budget remaining firmly in surplus. Over the forecast period receipts from SACU are expected to experience slow growth, reflecting adjustments to

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the customs union!s revenue-sharing formula, but diamond revenue could pick up strongly in 2008 if a major new mine opens as planned. Despite plans to boost development expenditure, limited administrative capacity is expected to continue to lead to under-spending. The Economist Intelligence Unit estimates a surplus of 5% of GDP in 2006/07, falling to 4.2% of GDP in 2007/08 as SACU revenue declines, but rising again to 4.5% of GDP in 2008/09 as diamond revenue picks up strongly.

Monetary policy The key aim of the Bank of Botswana (BoB, the central bank) is to bring annual inflation into single digits, and it has set a medium-term target (covering the period to end-2008) to bring inflation within a 3-6% range. The central bank made no changes to its targets in the mid-year review of the 2006 monetary policy statement (MPS), and these look likely to be retained in the 2007 MPS. Monetary policy looks set to remain tight over the forecast period; however, the BoB will not follow the South African Reserve Bank!s recent rises in interest rates, despite Botswana!s strong monetary connections with South Africa, as its decisions are influenced more by inflationary trends at home, which are on a downward trend. Although the BoB faces pressure to cut rates in order to ease access to capital for business, it is likely to resist for the time being, using falling inflation to raise real rates further in a bid to align expectations of future inflation with its targets. However, with inflation forecast to come within the BoB!s target over the forecast period, there is some prospect for interest-rate reductions over 2007-08.

Economic forecast

International assumptions International assumptions summary (% unless otherwise indicated) 2005 2006 2007 2008 Real GDP growth World 5.0 5.4 4.8 4.8 US 3.2 3.3 2.3 2.6 South Africa 5.1 4.9 4.5 5.1 Exchange rates ¥:US$ 110.1 116.2 114.3 99.8 US$:€ 1.246 1.256 1.342 1.363 Rand:US$ 6.36 6.76 7.40 7.85 Financial indicators US$ 3-month commercial paper rate 3.38 5.04 4.99 4.85 € 3-month interbank rate 2.18 3.08 4.00 4.10 Commodity prices Oil (Brent; US$/b) 54.7 65.3 58.8 57.4 Nickel (US$/lb) 6.7 10.8 12.1 8.1 Copper (US cents/lb) 166.8 307.7 273.8 235.0 Industrial raw materials (% change in US$ terms) 10.2 50.1 -0.5 -13.2 Note. Regional GDP growth rates weighted using purchasing power parity exchange rates.

World GDP growth (on a purchasing power parity basis) is forecast to slow to an average of 4.8% over 2007-08. Growth in the key market for Botswana!s diamonds, the US, is expected to fall sharply, to 2.3% in 2007, before rising to 2.6% in 2008. Increased interest rates and high prices for precious metals have

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slowed growth in the jewellery industry, but demand will remain strong, driven by China!s burgeoning domestic market. In South Africa, the main market for Botswana!s non-traditional exports, real GDP growth will remain strong, at 4.5% in 2007 and 5.1% in 2008. International oil prices are forecast to remain high over the forecast period, at US$58.8/barrel in 2007 and US$57.4/b in 2008.

Economic growth Real GDP growth in Botswana during the forecast period will be heavily influenced by expansion in the mining sector. Diamond production will rise moderately in 2007, but there could be a sizeable increase in 2008 if a major new mine begins production as planned. Despite lower global prices for copper and nickel, output will continue to expand. Agriculture, which has stagnated as the economy has developed, will continue to make only a marginal contrib- ution to national output. Construction activity is currently depressed by slow government spending on development projects. This will pick up over the forecast period, boosted by major mining developments, although construction activity in South Africa ahead of the 2010 football World Cup may cause capacity constraints, as Botswana relies heavily on imports of key construction materials. Growth in manufacturing in Botswana has been sluggish but will gain impetus mainly from the development of the downstream diamond- related activities, particularly the creation of a large "diamond park" for cutting and polishing diamonds in the capital, Gaborone, although the impact on GDP in the forecast period is expected to be limited. Growth in the services sector is likely to remain robust. The commercial banks have continued to perform strongly, despite adverse trading conditions stemming from high interest rates. Efforts to develop Botswana!s International Financial Services Centre will be helped by plans to establish a Pan-African commodities and derivatives exchange in Gaborone. The transfer of some of De Beers! diamond marketing and sales activities to Botswana will boost the services sector further. We forecast real GDP growth at 4.7% in national accounts year 2007/08 (July-June), rising to 6% in 2008/09, driven by the expansion in mining and increased public spending.

Inflation Year-on-year inflation declined to 8.5% in December 2006 as the inflationary pressures caused by the devaluation of the pula in May 2005 continued to abate. Since October changes in the consumer price index have been based on an updated basket, which will make estimates of inflation in Botswana more reliable. Inflation is forecast to continue to subside in 2007 as the central bank maintains a tight monetary policy, although there will be inflationary pressure from the gradual depreciation of the pula and imported inflation from South Africa. However, international oil prices are expected to ease, and the budgeted increases in the government!s development spending have failed to materialise, easing inflationary pressures. In 2008 inflation should ease further, as international oil prices are expected to moderate and South African inflation is forecast to fall slightly. We expect average inflation rates of 6.5% in 2007 and 4.7% in 2008.

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Exchange rates The pula!s value is determined by a basket of currencies, in which the South African rand is heavily weighted. Given that the rand depreciated modestly in 2006, this has pushed the pula from P5.40:US$1 on the first day of trading in 2006 to P6.03:US$1 in December. Overall, the pula is expected to average P5.82:US$1 for the year. The rand is forecast to depreciate gradually against the US dollar over the rest of the forecast period, averaging R7.75:US$1 in 2007 and R8.10:US$1 in 2008, although a sharper fall is possible. The main risk factors for the rand are continuing high world oil prices, US interest-rate movements, a widening current-account deficit for South Africa and the role of short-term speculative inflows in the capital account. Assuming that the rand does not succumb to these risk factors, the pula is forecast to average P6.29:US$1 in 2007 and P6.60:US$1 in 2008. The central bank will use a crawling-peg mechanism to continue to depreciate the pula through small adjustments, taking account of expected inflation differentials and the need to maintain export competitiveness. This should reduce the likelihood of a devaluation such as the one that occurred in May 2005.

External sector Botswana!s mineral exports are estimated to have grown strongly in 2006, driven by high world commodity prices and increased production of diamonds, copper-nickel and gold. Exports are expected to rise further over the forecast period as new mining capacity comes on stream. Beef exports have been restricted by an outbreak of foot-and-mouth disease in April 2006, but the chances of a recovery to 2005 levels will be limited by the dwindling size of the national cattle herd. Import demand will be driven largely by higher capital spending by the government and mining firms; the value of fuel imports should decline as world oil prices continue to fall. The capacity to provide services domestically continues to improve, particularly in the financial, tourism and mining sectors; services credits will drive an increase in the surplus on the services account. Movements on the income account will depend on the international financial markets, where Botswana!s foreign-exchange reserves and most of its pension funds are invested, and on profit transfers from De Beers (during the forecast period these will be limited by the company!s investment in new plant and facilities). Botswana!s large share of SACU imports will ensure a steady inflow of payments into the current transfers account from SACU!s pool of customs revenue. These, and rising donor assistance for HIV/AIDS programmes, will help to boost the current transfers surplus in 2007-08. As a result, we forecast that the current- account surplus will rise to 16.1% of GDP in 2007 and 17% of GDP in 2008.

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Forecast summary (% unless otherwise indicated) 2005 a 2006 a 2007b 2008b Real GDP growthc 5.5 4.7 4.7 6.0 Industrial production growthc 9.4 6.3 6.1 8.4 Gross fixed investment growthc 9.0 9.5 9.5 8.5 Consumer price inflation (av) 8.6 d 11.5 d 6.5 4.7 Consumer price inflation (year-end) 11.4 d 8.5 d 5.0 4.5 Commercial bank prime rate (av) 15.7 d 16.3 15.8 14.8 Government balance (% of GDP) 2.8 5.0 4.2 4.5 Exports of goods fob (US$ m) 4,619 4,807 4,977 5,310 Imports of goods fob (US$ m) -2,824 -3,034 -3,178 -3,348 Current-account balance (US$ m) 1,661 1,700 1,824 2,046 Current-account balance (% of GDP) 15.0 15.2 16.1 17.0 External debt (year-end; US$ m) 512 518 556 571 Exchange rate P:US$ (av) 5.11 d 5.82 d 6.29 6.60 Exchange rate P:¥100 (av) 4.64 d 5.00 d 5.51 6.62 Exchange rate P:€ (year-end) 6.50 d 7.99 d 8.99 8.88 a Economist Intelligence Unit estimates. b Economist Intelligence Unit forecasts. c National accounts years July-June. d Actual.

Gross domestic product Consumer price inflation (% change, year on year) (av; %)

Botswana Sub-Saharan Africa Botswana Sub-Saharan Africa 10.0 12.0 9.0 11.0 8.0 10.0 7.0 6.0 9.0 5.0 8.0 4.0 7.0 3.0 6.0 2.0 1.0 5.0 0.0 4.0 03 04 05 06 07 08 03 04 05 06 07 08 2002 2002

The political scene

Cabinet reshuffle brings in On January 19th a cabinet reshuffle was announced, which included the facti on lead ers creation of new posts at the level of both minister and assistant minister. Although rumours of an impending reshuffle had been circulating since early in the New Year, analysts were divided as to their credibility#just days earlier one prominent commentator had completely ruled out such a move. The cabinet had remained unchanged since the 2004 general election, despite mounting dissatisfaction with the performance of several ministers. Criticism had increased in the latter half of 2006, driven by increasing concerns over the slow pace of implementing the government!s development programme (see The domestic economy: Economic trends). With Ian Khama due to take over from Festus Mogae as president in early 2008, Mr Mogae may aim to use his

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final year in the presidency to boost his legacy by addressing the need for greater efficiency in the government. Equally importantly, however, there has been restlessness within the ruling Botswana Democratic Party (BDP) amongst backbenchers who complain of lack of opportunities for promotion, with the cabinet made up almost entirely of supporters of Mr Khama, thus sidelining the faction led by Daniel Kwelagobe and Ponatshego Kedikilwe. However, the BDP has been actively addressing factionalism within the party over the last year, and the cabinet reshuffle forms yet another initiative to create greater unity (August 2006, The political scene). The creation of additional posts in the new cabinet has allowed Mr Kwelagobe and Mr Kedikilwe to be brought in, as well as a number of other backbenchers, while no loyal Khama supporters have been dropped. The following are the most important changes in the new cabinet. • A division of responsibilities has been created at ministerial level in the Ministry of State President. Daniel Kwelagobe, who was controversially dropped from the cabinet following the 2004 general election, returns as the minister in charge of the administration of the public service and parliament. The incumbent minister, Phandu Skelemani, will focus on the administration of justice, police and order, and defence. • The Ministry of Youth, Sports and Culture has been created, and is headed by Moeng Pheto, who had been criticised for his performance as minister of labour and home affairs. • The Ministry of Labour and Home Affairs is to be headed by Charles Tibone, who was previously minister of minerals, energy and water resources. A successful businessman, Mr Tibone should provide a more business-friendly image to the ministry. The controversial former assistant minister for labour and home affairs, Olifant Mfa, who had been pursuing a populist drive to reduce the numbers of foreign workers in Botswana, has been moved to the position of assistant minister for agriculture, where he can do less harm to the efforts to attract foreign investment. Mr Tibone!s new assistant is Gaotlhaetse Matlhabaphiri, a key member of the Kedikilwe/Kwelagobe faction. • Mr Kedikilwe, at one time Mr Khama!s arch rival to succeed Mr Mogae, returns to the cabinet as Mr Tibone!s replacement as minister of minerals, energy and water affairs. As well as bringing vast experience, he will no longer be a focal point for backbench attacks on the government; his recall is said to have rekindled his ambition to succeed Mr Khama as vice-president.

Collapse of opposition unity In mid-November the leaders of four opposition parties, the Botswana National

talks is confirmed Front (BNF, the largest opposition party), the Botswana Alliance Movement (BAM), the Botswana Congress Party (BCP) and the Botswana People!s Party (BPP) met and agreed formally that negotiations to establish an electoral alliance had failed and were definitely over. The process had, in effect, come to an end in late September after the insistence of the BNF that all participants should form an alliance under the BNF banner, which the other parties rejected as a plan to absorb them (November 2006, The political scene). Tensions continued to mount after the BCP decided to support the New Democratic

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Front (NDF, a small party in a separate alliance with the BCP), rather than the BNF, in a by-election in the Naledi North ward of the Gaborone city council that took place in October 2006#thus breaking the by-election pact that had been in place since the end of 2005 (October 2005, The political scene). With the three smaller opposition parties no longer willing to co-operate with the BNF over by-elections or the next general election, there was little surprise in early January 2007 when the BCP broke its agreement with the BNF to work together on the Kgatleng district council, where together they held more seats than the BDP (January 2005, The political scene). Interestingly, the BCP decided to side instead with the BDP in Kgatleng, with local officials sparking a renewed war of words, declaring that the BNF needed to understand that the BCP was a force to be reckoned with.

Remaining parties struggle to The BNF appears to have resolved to stand alone, and decided that its strategy continue unity talks for increasing its strength will have to rely on defections from other parties. For the three remaining parties, however, the situation is more complex. They were united in opposition to the "big brother" approach of the BNF, and when talks with the BNF failed they still appeared to be committed in principle to reaching agreement for an electoral alliance among themselves at least (November 2006, The political scene). Hence, talks among the three parties have continued formally, but little practical progress has been made, with scheduled meetings regularly postponed. A deadline for reaching agreement that was originally set for November 2006 has been extended to March 2007. By mid-January the talks appeared to be on the brink of collapse when the BPP!s suggestion that the three parties should merge was swiftly rejected by the BCP. This was partly because the BPP had suggested merging under the BPP party banner. Ultimately, however, the three parties face the uncomfortable reality that to a large extent the original reason for seeking an electoral alliance was the prospect of including the BNF, the largest opposition party. Without the BNF an opposition pact has little prospect of challenging the BDP at elections; instead, its focus will have to be on unseating the BNF as the main opposition in parliament, a far less compelling reason for forging an alliance.

BNF has one victory and one As expected, the BNF easily won the local council by-election in Naledi North, a

loss in October by-elections district of Gaborone that is by some margin the most deprived area in the city and that has long been a BNF stronghold. The BDP came second but did not appear to feel threatened by this outcome, given that it was expected. The NDF was in third place, taking nearly one-quarter of the vote, an improved performance compared with the 2004 general election. Elsewhere, the BNF suffered a major setback in another council by-election held on the same day. Although a rural ward well outside the party!s traditional power base, the village of Mabutsane in the Ngwaketse West constituency was home to the local BNF member of parliament (MP), and therefore the BNF had expected to win the contest. However, the by-election was won by the BDP, which claimed that it had lost the parliamentary seat in the 2004 legislative election due only to a protest vote by its supporters over factionalism in the party; and that the BDP!s support in the area had returned now that this issue had been addressed.

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Local council by-election results (% share of vote in brackets) Naledi North Mabutsane 2004 2006 2004 2006 BDP 398 (36.3) 279 (32.9) 532 (38.2) 696 (53.7) BNF 495 (45.2) 371 (43.8) 862 (61.8) 600 (46.3) BCP/NDF 202 (18.5)a 198 (23.3) No candidate a Combined total of BCP and NDF, which fielded separate candidates in 2004. Source: Local press.

Leader's return fails to restore The BNF president, Otsweletse Moupo, resumed his duties in October after

peace to the BNF taking a six-week leave of absence (November 2006, The political scene). During his leave period Mr Moupo was able to attend to the affairs of his law firm, whose suspension due to financial irregularities was lifted. However, Mr Moupo!s return did little to quash rumours that some members of the party leadership wanted him to go. Speaking at party rallies and branch meetings he appeared to be distancing himself from previously close advisers who were suspected of trying to remove him; instead, he praised his grass-roots support, which had remained loyal to him during the earlier calls for his resignation. Then, in November, his fellow BNF MPs remained silent when he was savagely criticised by the BDP and the media for failing to deliver an official response, in his capacity as leader of the opposition, to the State of the Nation address by the president. Mr Moupo argued that he had been caught by surprise by the sudden end of the parliamentary debate that followed the address, an excuse that once again cast doubt on his suitability as a prospective national leader and allowed the BDP to reiterate its claim that the BNF was bereft of ideas. Mr Moupo!s supporters are now reportedly pushing for the party conference scheduled for July to be upgraded to a full congress, presumably to allow him the opportunity to properly address the issue of challenges to his leadership by his opponents within the party.

Concerns arise over new In early November the government published details of a proposed new

security legislation intelligence and security service bill that would establish a directorate of intelligence and security (divided into internal and external divisions), to be overseen by an intelligence and security council. The directorate would also provide personal protection to the president, the vice-president and former presidents, and the bill would make it a criminal office to issue threats to such persons or their families. The bill cites a growing range of security threats as justification, and there was general support from across the political spectrum for the principle behind the legislation. However, some MPs did question the necessity of the bill, and it was inevitably linked to the supposed increasing militarisation of the government in the run-up to Mr Khama (a former army commander) succeeding Mr Mogae. There was also some concern that the bill would legitimise activities that are already taking place, although the government has consistently denied that it has used internal security to spy on political opponents, including opposition leaders and trade union leaders. Once such case came to prominence in November when, in the face of mass protests, the government was forced to back down on the enforced early retirement of Japhta Maribe, the leader of the

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Botswana Teachers! Union (BTU), who is also the headmaster of a secondary school. The move had been almost universally interpreted as a dismissal following Mr Radibe!s apparent advice to parents not to pay school fees that were controversially reintroduced in 2006, and there were reports of a government "hit list" of leaders of public-sector workers who oppose government policy.

High Court ruling allows In a landmark ruling, on December 13th the High Court ruled that the

Bushmen to return to CKGR relocation of the Basarwa (Bushmen, also known as San) from the Central Kalahari Game Reserve (CKGR) was unconstitutional. The government announced shortly afterwards that it did not intend to appeal against the court!s decision, raising the prospect of a quick return for the 189 surviving applicants to the reserve, who had undertaken a long-running campaign in which a UK- based non-governmental organisation, Survival International (SI), had effectively co-ordinated international support for them. In the build-up to the judgment the government had come under increased pressure from SI!s campaign, which attempted to link the removals to supposed plans for diamond mining in the CKGR (October 2006, The political scene). In contrast, the government had portrayed the relocations as necessary both to enhance conservation in the CKGR and to integrate the Bushmen into modern society. The government remained steadfast in their view throughout the trial, but efforts to enlist the active support of other political parties mainly backfired. The sudden conversion of the BNF to the cause of the Bushmen, which included organising demonstrations (which were not well attended), was widely seen as opportunistic, and drew charges from the government that the party had received funding from SI. The government had also been prominent in the successful campaign by African countries to seek further review of the draft UN Declaration of Rights of Indigenous Peoples, which would have singled out groups such as the Basarwa for special treatment in terms of traditional land ownership. In contrast, African governments argued that all native Africans were equally indigenous. However, the judgment was not entirely favourable to the Basarwa. Crucially, the court ruled that there was no obligation to provide services to the Basarwa in the reserve. The government also chose to use a strict interpretation of the ruling: only the applicants and their dependants would be entitled to return to the reserve, and without any livestock or automatic right to special hunting licences. The government appealed for no-one to return until Mr Mogae had come to speak at New Xade, the main new settlement for the Basarwa outside the reserve. Addressing residents in mid-January, he promised accelerated development for the village, including electrification and telephone services, while making it clear that those choosing to live in the CKGR would receive no assistance. However, by then some 30 families had gone back into the reserve, and the Basarwa pressure group, the First People of the Kalahari (FPK), began talking of further court action if the government did not allow all former residents to return.

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Economic policy

Development spending is well According to the Bank of Botswana (B0B, the central bank), total government

below budgeted levels spending in the first half of fiscal year 2006/07 (April"September) was P9.1bn (US$1.4bn), representing only 39% of the total budget for the year. Development spending was only P1.5bn (26% of the development budget for the year), indicating that significant under-spending has taken place. This is particularly disappointing given that the 2006/07 budget had proposed boosting development spending by 36% on 2005/06, and the apparent intention to use public spending to boost the flagging domestic economy had been warmly welcomed when the budget was delivered (May 2006, Economic policy). The extent of under-spending was greeted with concern by many politicians, and may have strengthened the resolve of the president, Festus Mogae, to reshuffle the cabinet in January 2007 (see The political scene). Meanwhile, revenue grew more or less in line with the budget forecast, to P11.2bn for the half year (46% of the budget). However, the simultaneous under-spending means that the budget surplus for the half year is now already at P2.1bn, which is 227% of the budget and equivalent to 3.2% of GDP. With a further surplus likely to accumulate during the second half of the fiscal year, the budget surplus is now estimated by the Economist Intelligence Unit to reach 5% of GDP for 2006/07.

Government finances (P m; fiscal years Apr-Mar) Mar-Sep 2005/06a 2006/07 b 2006/07 c % of total Revenue & grants 21,697 24,144 11,172 46 Expenditure & net lending 20,122 23,221 9,074 39 Recurrent 15,796 17,234 7,711 45 Development 4,450 6,035 1,548 26 Balance 1,575 923 2,098 227 a Revised estimates. b Budget forecast. c Estimates. Source: Bank of Botswana, Botswana Financial Statistics, November 2006.

Leaked BEAC report calls for In early November 2006 a local newspaper, Mmegi, began to publish extracts

radical change of mindset from the report of the Business and Economic Advisory Council (BEAC). The council had been established in mid-2006 with the task of drawing up a programme of policy reforms that would improve the business environment and thereby inject life into the sluggish domestic economy (October 2006, Economic policy). The report was scheduled for delivery by the end of October 2006, but it has still not been published. Yet, it is clear that the government has received the BEAC!s recommendations, as in his State of the Nation address in November Mr Mogae acknowledged that the government was studying them. However, the government was clearly not prepared for such early public release and insisted that the newspaper reports were based on an early draft. Such defensiveness was not surprising given the hard-hitting tone of the parts of the report that were quoted in the press. It called for a dramatic change of mindset to encourage productivity and welcome investors, saying that Botswana had become a low-income country with a high-income lifestyle. It was highly critical of the citizen empowerment programmes, which have put redistribution

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before wealth creation and encouraged anti-foreign sentiment. Instead, the BEAC called for programmes of empowerment through excellence, based on skills creation to match world-class standards. The government was urged to act decisively in amending, or even abandoning, unsuccessful policies and to provide stronger leadership.

The development of new The BEAC report also included recommendations for developing new industries

sectors is proposed that would help with the critical task of diversifying the economy away from its current strong reliance on diamond mining. Significantly, the proposals were focused on the services industry, thus singling out opportunities in higher value-added activities. The recommendations included: • creating an international media centre, which would include film production and be supported by tax breaks; • developing the Sir Seretse Khama airport in the capital, Gaborone, as a regional transport hub (with an open-skies policy to attract airlines away from South Africa); and • using experience in combating HIV/AIDS to generate revenue (for example, through a specialist teaching hospital). At the same time as the BEAC report was leaked, another important policy proposal was spearheaded by the Ministry of Communications, Science and Technology. In November the ministry hosted a national workshop to discuss the development of a Botswana Innovation Hub (BIH). The focus of the BIH would be on establishing a centre for research and innovation in technology- intensive activities, which would ultimately aim to spin off new high- technology businesses in Botswana. The initial technology areas that would be targeted are diamond and mineral technology#a logical first choice given that Botswana is a major diamond and metal producer. Other proposed areas of focus include information and communication technology, biotechnology, and HIV/AIDS treatment and research. The resultant businesses would aim to export goods and services, which could include software development, high-tech manufacturing and other services such as call centres. The communications ministry hopes to attract substantial foreign direct investment from international businesses in technology-intensive industries, offering incentives such as state-of-the-art telecommunications services, a liberalised economy and financial incentives similar to those of the International Financial Services Centre (IFSC) as well as trade-related incentives. Initially, the BIH will have to draw on highly skilled foreign workers, with the ultimate objective of transferring these skills to local workers. The BIH will also benefit from a partnership with the Botswana campus of a Malaysian technological university, which has been licensed to start operations in 2007. Fifty-seven hectares of land have been reserved for the development of the BIH in an area of Gaborone that is close to the sites for the construction of the new downstream diamond industry businesses.

Policy reforms are likely, but Despite the earlier defensiveness of the government, there are indications that

resistance is expected the BEAC!s recommendations are being considered seriously and will contribute to economic policy reforms. The inclusion of many senior represent-

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atives from both the public and the private sector on the council, and the close involvement of the vice-president, Ian Khama, are indications of the importance with which the BEAC!s work is viewed and the strong support of the government. Although the development of new industries is unlikely to be controversial, the reform of empowerment policy would be anathema to the powerful populist faction that supports the empowerment of local businesses. However, on the issue of empowerment, Mr Mogae has already argued in his State of the Nation address that a more liberal approach must be taken. He warned of great opportunities being missed if participation by foreigners in the economy were restricted. To help to prepare for the way for the implementation of the BEAC proposals may also have been part of the reason for the cabinet reshuffle that took place in January (see The political scene), in which a more business-friendly minister and assistant minister were put in place at the Ministry of Labour and Home Affairs.

Low HDI ranking raises The 2006 Human Development Index (HDI) prepared by the UN Development questions over UN data Programme (UNDP) ranks Botswana 131st out of 171 countries#only just out of the lower development category. The HDI score of 0.570 (the highest is Norway with 0.965) shows a precipitate decline from 0.660 in 1995. However, this raises as many questions about the HDI itself and, in particular, the quality of UN data, as it does about development in Botswana. The falling index is driven by the estimate of life expectancy, which the UN puts at only 34.9 years for Botswana. Although no-one disputes that the HIV/AIDS epidemic has had a severe impact on mortality rates in Botswana, the extent of this is hotly disputed, and the government!s own figures, based on the 2001 population census and comprehensive survey data, suggest that life expectancy remains well above 50 years. The HIV infection rate in Botswana is commonly cited as more than 30% of the adult population, but figures sourced from the National AIDS Co-ordinating Agency (NACA) put it at closer to 20%. In January Batho Molomo, the chief executive of NACA, suggested that some organisations preferred to use exaggerated statistics in order to improve their chances of donor funding, and insisted that NACA was the only authoritative source of data on HIV/AIDS in Botswana.

Human Development Index, 2006a Life HDI rank HDI score expectancy b Adult literacyc GDP per headd South Africa 121 0.653 47.0 82.4 11,192 Namibia 125 0.626 47.2 85.0 7,418 Botswana 131 0.570 34.9 81.2 9,945 Lesotho 149 0.494 35.2 82.2 2,619 Zimbabwe 151 0.491 36.6 90.0 2,065 Tanzania 162 0.430 45.9 69.4 674 Zambia 165 0.407 37.7 68.0 943 Malawi 166 0.400 39.8 64.1 646 Mozambique 168 0.390 41.6 46.0 1,237 a Human development data are from 2004. b At birth in years. c % of population over the age of 15 who can read. d US$ at purchasing power parity exchange rates. Source: UN Development Programme, Human Development Report, 2006.

The domestic economy

Economic trends

Survey shows fall in According to the preliminary results of the 2005/06 Labour Force Survey (LFS),

unemployment the unemployment rate in Botswana was 17.6%. This is much lower than other recent estimates: the 2002/03 Household Income and Expenditure Survey estimated unemployment at 23.8%, for example, while the 2004 Botswana Aids Impact Survey II estimated unemployment at 24.6%. The LFS data should be treated with caution, however. Most notably, although total employment has increased by 211,532 in the ten years since the previous LFS, more than half (116,000) was the result of increased employment in subsistence agriculture, which may have been due mainly to the good rains in early 2006 and is thus temporary in nature. Addressing the relatively high level of unemployment in Botswana is a priority for the government, and economic policy is increasingly focused on creating new jobs by boosting old industries or developing new ones such as ostrich farming, the downstream diamond industry, and technology-intensive and knowledge-based industries.

Labour force and unemployment Unemployment Labour force Unemployed rate 1993/94 Household Income & Expenditure Survey 499,527 107,723 21.6 1995/96 Labour Force Survey 439,933 94,528 21.5 2000 Multiple Indicator Survey 574,161 90,729 15.8 2001 Census 562,897 109,512 19.5 2002/03 Household Income & Expenditure Survey 606,826 144,460 23.8 2004 Botswana Aids Impact Survey II 756,145 185,816 24.6 2005/06 Labour Force Survey 651,465 114,422 17.6

Source: Central Statistics Office, Preliminary 2005/06 Labour Force Survey Results.

New CPI basket introduced at last

The long-awaited new basket based on the consumer price index (CPI) was finally introduced by the Central Statistics Office in October. The change was long overdue: the old basket had been in use since 1996 and had become increasingly unrepresentative of consumption patterns in Botswana (there was, for example, no inclusion of items such as mobile phones, computers or private-sector housing rentals). The new basket contains 364 items, up from 256, and the geographical coverage has been extended from 21 to 46 sampling areas (although the effort required to collect 26 separate rural samples has been questioned, given that the rural component of the CPI accounts for less than 20% of total expenditure). The index has been brought more into line with international practice in both terms of classification of items (although this will make direct comparisons with the old basket problematic) and of using a geometric rather than an arithmetic mean as the basis for calculation. The introduction of the new basket helped to reinforce the downward trend in inflation evident since May 2006, in particular because of the greater weight given to petrol at a time when fuel prices had started to fall. By

December year-on-year inflation had fallen to 8.5%, down from a peak of 14.2% in April. The fall from 8.8% to 8.5% between November and December came despite an electricity tariff increase by the Botswana Power Corporation.

Agriculture

Government unveils initiative In late 2006 the Ministry of Agriculture unveiled an initiative to revive the

to promote ostrich farming flagging commercial ostrich-farming industry. This involves the three-year development of a "multiplication centre" to provide farmers with birds to either start up or boost their own ostrich-breeding programmes and provide mentoring services to ostrich farmers. Although Botswana has the world!s largest population of wild ostriches, commercial faming has struggled to gain a foothold. The government had earlier supported the development of a specially designed abattoir for ostriches, which led to clearance for export to the lucrative EU market, but it has closed frequently, reopening for limited slaughtering, since it began operating in 2001 owing to lack of business#with only an estimated 4,000 birds currently being farmed, potential output remains far below the 15,000 per year needed for the abattoir to be commercially viable. The new initiative was broadly welcomed, but some farmers were more cautious about it, suggesting that many farmers would abuse the initiative and would just sell the juvenile birds that they received instead of keeping them for breeding.

Mining

Construction of a new nickel In mid-January a groundbreaking ceremony was held to formally launch the

refinery starts construction of a new refinery at Tati Nickel!s Phoenix mine in northern Proposed mining projects Botswana, the largest nickel mine in Africa. The refinery will be the first in the ANGOLA ZAMBIA world to use a new technology, Activox, which has been patented by LionOre, the majority owners of Tati Nickel. Activox uses chemical solutions to extract metal from finely ground ore, and is believed to result in a higher recovery rate ZIMBABWE of metal. The new refinery is expected to both boost output from the mine and NAMIBIA Dukwe copper mine Matsitama concession reduce average production costs by approximately 50%. The plant will cost Phoenix nickel mine US$630m and, on completion in 2009, will treat ore from LionOre!s other BOTSWANA Lerala diamond mine Southern African operations and may also be made available to other nickel producers. As with the rest of Tati Nickel!s operations, the government holds a GABORONE SOUTH AFRICA 15% stake in the refinery. LionOre also reported positive results from initial prospecting around the nearby Selkirk nickel mine, which has been on a care 0 km 250 500 and maintenance programme since the main ore body was mined out in 2002.

African Copper is granted a In December 2006 a UK-based company, African Copper, was granted a licence

mining licence for the proposed Dukwe copper mine on a 10-sq-km site in northern Botswana (May 2006, The domestic economy: Mining). The mine!s environmental impact assessment has been approved and construction of the mine is expected to be completed in 18 months. The current life expectancy of the mine is 12 years, with reserves estimated at between 33m and 41m tonnes of ore, carrying an average 1.5% copper content. Further prospecting for copper in the nearby Matsitama concession (4,000 sq km), which is also licensed to African Copper,

has yielded positive results, with one site showing encouraging results for copper and silver.

New diamond mine in In late December an Australian mining company, DiamonEx, confirmed that

Martin's Drift to go ahead final arrangements were in place for both the funding and the operation of the new Lerala diamond mine near Martin!s Drift. According to DiamonEx, funding has been secured from an Australian company, Babcock & Brown Australian Infrastructure; a mining contractor has been appointed; and the mine design work is being carried out by a South African mining company, MinXcon. Construction of the processing plant is expected to begin in early 2007, and the mine is scheduled to start operations in late 2007, with a production rate of about 300,000 carats per year (November 2006, The domestic economy: Mining). The announcement prompted a surge in the value of DiamonEx shares on the Botswana Stock Exchange (Diamonex shares are also listed in Australia).

Manufacturing

Diamond polishing is to grow Speaking at an industry dinner in Antwerp, Belgium, in January, the president,

rapidly Festus Mogae, revealed his government!s ambition for Botswana!s small-scale diamond-polishing and -cutting activities to be rapidly developed into a major industry within five years. Plans were unveiled in June 2006 for the creation a large "diamond park", which would concentrate all the country!s diamond- processing operations in one place (August 2006, The domestic economy: Mining). According to Mr Mogae, polishing and cutting activities in Botswana are currently worth US$30m a year, but are targeted to reach at least US$500m a year. Located in the diamond park, the industry is to benefit from the new Botswana Diamond Trading Centre (DTC, a subsidiary of the De Beers international diamond company, which will sort and value rough diamonds), as well as Botswana!s large supply of rough diamonds. The new cutting and polishing industry is also expected to boost related services, such as security, engineering and financial services, as well as fulfilling a key objective of creating large-scale employment.

Infrastructure

Bottlenecks in South Africa set Towards the end of 2006 the local press gave considerable coverage to concerns

to raise construction costs that increased infrastructure spending in South Africa would begin to have a negative impact on Botswana. The press reported that labour shortages had begun to emerge in South Africa!s booming construction industry and would lead to Botswana experiencing similar shortages. Not only is Botswana partly reliant on skilled labour from South Africa for construction projects, but high demand in South Africa might also lure some of Botswana!s skilled workers to that country. The local press also raised concerns about shortages developing in the supply of building materials from South Africa, on which Botswana and a number of other countries in Southern Africa are heavily dependent. A newspaper report in Botswana claiming that exports of cement from South Africa had been banned turned out to be false, but the extent of the cement shortage

was evident in the fact that one of South Africa!s major cement producers, PPC, has had to import cement for the first time ever (while the expansion of its existing plants was under way). In the light of high demand for cement in South Africa and possible shortages occurring in Botswana, increased consideration is also being given to establishing limestone mining in Botswana, which would then feed into cement production, either in Botswana or South Africa.

SA Airlink looks set to buy Air In October 2006 the Public Enterprises Evaluation and Privatisation Agency

Botswana (PEEPA) confirmed that a South African airline, SA Airlink, had been chosen as the preferred bidder for Air Botswana, which is to be privatised. This opened the way for negotiations to go ahead between Air Botswana and SA Airlink over the terms of a privatisation agreement, which will then be submitted to the government for approval. The Air Botswana website has indicated that this could be concluded by the end of March 2007, although industry analysts have said that a conclusion by mid-year would be more likely. Although two other bids had been received, including one from a local company, Lobair, these apparently did not meet the requirements of the bid (PEEPA did not give further details on this). SA Airlink, a privately owned company, already operates as part of an alliance with South African Airways, the other carrier on the main Johannesburg-Gaborone route operated by Air Botswana. On taking over Air Botswana, SA Airlink will be faced with turning around the airline!s poor performance of recent years; unable to cope with rising fuel prices and technical problems, Air Botswana has relied heavily on leased aircraft and has run at a loss in recent years.

Export power station plans Plans to develop a coal-fired power station in Mmamabula in eastern Botswana

continue to move forward that would export electricity to South Africa moved a step closer to realisation with the signing in November 2006 of a second Memorandum of Understanding (MoU) between the Botswana Power Corporation (BPC) and South Africa!s Eskom. This followed the earlier signing of a MoU to conduct a feasibility study and prepare investment guidelines for the envisaged 3,600-mw power station (November 2006, The domestic economy: Infrastructure). The latest MoU included a commitment by Eskom to purchase 70% of the proposed output. The balance will be purchased by BPC but may not be required for domestic consumption, given the planned fourfold expansion of its existing Morupule power station (October 2005, The domestic economy: Communications and infrastructure), and may therefore be exported to other members of the Southern African Power Pool (SAPP). The intention is that detailed agreements on sharing Mmamabula!s electricity supply should be in place by the end of 2007. Construction of the power plant is expected to be completed by 2011, costing P34bn (US$5.4bn).

Financial and other services

Non-bank financial regulator is In November 2006 parliament debated draft legislation to establish a non-bank

to be established financial institutions supervisory body. The need to extend supervision beyond the banking sector, which is handled by the Bank of Botswana (BoB, the central bank), is clear: the assets of the largely unregulated pension funds comfortably

exceed those of the commercial banks, and concerns have also been raised about other activities ranging from insurance to small-scale money lenders. Although the principle of creating the new regulatory body was generally supported, some concern was expressed over the demands that this might place on already scarce public resources, particularly skilled workers and senior managers. One member of parliament suggested an alternative whereby the supervisory functions of the BoB would be extended to cover non-bank financial institutions. Although the latter proposal was not adopted, it is possible that the central bank will be called upon to play a major role in setting up the new body once the legislation is passed.

English FA chief visits In late October 2006 Mr Mogae met a senior official of the English Football

Botswana Association (FA), David Davis, to discuss the country!s prospects for attracting some of the top international football teams to use Botswana as a training camp during the 2010 World Cup, which is being held in South Africa (November 2006, The domestic economy). Mr Davis inspected Botswana!s facilities and briefed local officials on what further facilities they would need to put in place, particularly if they wanted to attract a team such as England, which would also mean providing facilities for a large number of travelling fans. The government is hoping that by hosting one or more international football teams this will provide a large boost to Botswana!s tourism industry. Also in October, the tourism industry received a boost when a major industry publication, Condé Nast Traveler, included two Botswana luxury safari camps among their list of the top three in Africa, based on a poll of customer preferences. Botswana!s tourism was developed with a particular focus on catering for the high end of the global tourist market, and its facilities therefore tend be fairly exclusive#upmarket, expensive and with limited accommodation; however, with tourism targeted to be one of the future pillars of growth for Botswana, it may increasingly begin to focus on opportunities to cater for a wider market.

Foreign trade and payments

Botswana hosts Kimberley In early November 2006 Botswana chaired the plenary meeting of the

Process meeting Kimberley Process, which co-ordinates work by countries involved in the international diamond trade to eliminate the trade in "conflict" or "blood" diamonds. The centrepiece of the process is a certification scheme, operational since January 2003, requiring rigorous tracking of trade in rough diamonds. As well as the 45 participating countries (with the EU, due to take over the chair after Botswana, attending as a single entity), the meeting was attended by other interested parties, including non-governmental organisations (NGOs) and the World Diamond Council. A Botswana spokesman highlighted the fact that trade in conflict diamonds had been significantly reduced and made up only about 0.2% of the total, compared with 4% just a few years ago. Despite this, the spokesman argued that it was still problematic and there were countries where controls were too lax. There was special concern about diamond smuggling from Côte d!Ivoire, and the meeting seriously warned both Ghana (which was suspected of helping to channel illegal diamonds from Côte d!Ivoire as part of

its own production) and, more surprisingly, Venezuela, that they risked expulsion if controls did not improve quickly. In early December the president, Festus Mogae, followed up the Kimberley meeting in Gaborone with an address to the UN General Assembly on progress made in implementing the certification scheme.

International shortfall in At a conference in Perth, Australia, in November, a South African analyst

diamonds is forecast predicted that by 2010 there would be a shortfall in the global supply of diamonds of US$4bn-5bn, owing to both the increased demand and falling output in mature mines, such as those in South Africa. Such a shortfall represents more than the entire production by Botswana (the world!s largest diamond producer) in 2005. This prediction of continued high global demand for diamonds was reassuring for Botswana, which is highly dependent on diamond exports. There had initially been some concern over the impact that a new Hollywood movie, Blood Diamond, set in Sierra Leone during the country!s long civil war, would have on the image of the global diamond trade, and ultimately on demand for Botswana!s diamond exports. The government!s anxieties were heightened when a local pressure group, the First People of the Kalahari, wrote an open letter to seek support from the international actor starring in Blood Diamond, Leonardo DiCaprio; they were backed by a UK- based NGO, Survival International, which had accused the Botswana government of wanting to remove the Basarwa from the Central Kalahari Game Reserve in order to pursue diamond mining there. Mr DiCaprio!s response is not publicly known, but it was evidently a relief for Botswana when the film actually emphasised (including through publicity by the cast in advance of the release) the good work done by countries such as Botswana and Namibia in controlling the trade in illicit diamonds.

CITES approves ivory sale The Convention on International Trade in Endangered Species (CITES) has

to Japan confirmed that Japan is compliant with its conditions for receiving a one-off export of ivory from Botswana. This has opened the way for Botswana to sell 20 tonnes of its ivory stockpile, which currently totals 50 tonnes. Botswana last exported ivory in 1999, and had applied to CITES for permission to sell additional stockpiled ivory in 2002. However, the sale could not go ahead at the time, as potential Asian buyers were found not to be compliant with CITES conditions. The sale was approved only on a one-off basis, with a request by Botswana for annual exports of 4 tonnes being turned down.