www.econsult.co.bw compiled by KEITH JEFFERIS Sethunya Sejoe ECONOMIC REVIEW fourth quarter october - december 2017 in this issue ...

COMMENTARY KEY NEWS MACRO- SPECIAL ECONOMIC HIGHLIGHTS ECONOMIC FEATURES 1 VARIABLES 4 7 DATA 10 11

COMMENTARY

Diamonds performing well but the impact of the BCL closure is still being felt – and challenges facing the new President

Economic Summary As we reach the end of 2017 and move into 2018, the economy presents a mixed picture of good, bad and important gaps in the data. Economic growth slowed over the 12 months to the end of September 2017, to an annual rate of only 1.8%, still weighed down by the impact of the closure of the BCL copper-nickel mine in October 2016. We do expect, however, that the final growth figure for the whole of 2017 will be higher than this, in the range of 2-3%. Inflation has picked up slightly, to 3.2% in December 2017, but this is still low by historical standards and within the expected range. As a result, interest rates have been cut again, to their lowest ever level since the Pula was introduced in 1976.

Also on a positive note, government rev- This is mainly due to better than expected enues appear to be coming in ahead of performance of diamond exports and gov- forecast. The final budget data for the ernment revenues. Data for the first half of 2016/17 financial year show a more or less the 2017/18 fiscal year (April – September balanced budget (in fact a small surplus, of 2018) indicates that this trend has contin- 0.6% of GDP), in contrast to earlier expec- ued, with a broadly balanced budget rather tations of a substantial deficit. than the projected deficit. All this is posi- tive and reduces some of the pressure for

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cutbacks in government spending and alleviates some con- Outlook cerns about the depletion of government savings. As we move into 2018, economic prospects for the year remain mixed, reflecting both international economic un- The main data gap relates to international trade, i.e. imports certainty as well as domestic issues. Economic growth for and exports. Due to technical problems concerning the the year should be reasonable given the likelihood of in- collection and analysis of trade data by BURS and Statis- creased diamond production, as long as the international tics Botswana, no accurate trade data has been published market remains stable. However, as is well known in Bo- since the beginning of 2017. This marks a major gap in tswana, diamond mining creates relatively few jobs direct- knowledge regarding economic developments, given the ly, and the challenge remains to support other economic importance of exports and imports to the economy. We un- activities, notably those producing exports of goods and derstand that the problem is close to being resolved, but services, which is the only sustainable source of long-term nevertheless the length of time it has taken should be of job creation. Rising international fuel prices will put upward concern to policymakers and the government principals of pressure on inflation, but we do not expect this to be seri- both parastatals. Nevertheless, the increase in the official ous enough to require an increase in interest rates. Global foreign exchange reserves in the year to October indicates economic growth is picking up, with the IMF forecasting that the balance of payments was in surplus during that growth of 3.9% in 2018 and 2019, the highest for several period, even if we do not know how different components years, which will generally provide a positive environment of the external account performed. for exports.

Statistics Botswana has helpfully improved the frequency Two major developments will take place in the coming and timeliness of publishing data on formal employment, weeks and months. The 2018 Budget Speech will be deliv- which is now being produced quarterly and runs to June ered in the first week of February. The outline of the budget 2017. Sadly, however, the results are discouraging, with message has already been presented in the Budget Strat- a continued decline in formal employment, mainly in the egy Paper in September 2017, so there will be no great sur- mining sector. Of course, this largely reflects the closure of prises. However, the relatively beneficial budget data will BCL, but it is also a reflection that the rest of the economy give the Minister of Finance and Economic Development is failing to pick up the slack even nine months after the some breathing space. closure. The same developments may also lie behind the relatively weak business confidence reading for the second At the end of March, the ten year term of His Excellency half of 2017. President Seretse Khama Ian Khama will come to an end, and the current Vice President, His Honour Mokgweetsi At the beginning of January 2018, the Pula exchange rate Masisi is expected to assume the Presidency under the au- mechanism was adjusted slightly. The basket weights were tomatic succession provision of the Constitution. A smooth unchanged (55% SDR, 45% SA rand), but the rate of transition is expected, with the next national elections due crawl was changed from an upward crawl at an annual rate in late 2019. We do not anticipate any immediate major of 0.26% in 2017 to a downward annual crawl of 0.30% in policy changes, although a Cabinet reshuffle is likely. Nev- 2018. The basic mechanism of the pegged exchange rate ertheless, the incoming President will face some economic remains unchanged, and the rate of crawl remains close to challenges that he will have to get to grips with pretty zero, but the small adjustment is a move in the right direc- quickly, certainly prior to the 2019 election. We identify tion given our concerns about the overvaluation of the Pula three major issues that, in our view, should preoccupy the (see the Economic Review, 2017 Q2) and the negative im- new President and his economic advisors from the begin- pact this may have on the potential for export-led growth. ning.

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First, the need to put the economy back on a path of eco- changed or wound up. Obviously government will always nomic openness, recognising that integration into regional have to take into account both political and economic/tech- and global markets for goods, services, capital and labour nical considerations in making policy choices, but in our is essential for the long-term health and prosperity of the view, the balance needs to shift in the coming years, so as Botswana economy. This recognises that creeping protec- to improve the nature of policies being pursued. tionism against imports of goods and services, barriers to inward foreign investment, and immigration restrictions on Third, it will be essential to re-establish much better public foreign investors and skilled workers are counter-produc- finance discipline. This reflects a general problem in that tive, and indeed have contributed to the lack of dynamism the quality of public financial management has deteriorated and job creation in the domestic economy in recent years. over many years, with poor spending decisions and an in- creasing level of waste and inefficiency. However, the issue Given the magnitude of the unemployment problem, large- was brought home by the scandal over the diversion of scale job creation can only come from the growth of region- monies from the National Petroleum Fund that blew up in ally and globally oriented, competitive producers of goods December 2017. This resulted from a particular weakness and services for export. The alternative of inward looking in Botswana’s public finances, which has been the ten- policies focusing on the small domestic market and import dency for a proliferation of “special funds” (there are now substitution cannot hope to address the unemployment 33 in total). These funds are permitted under the Public problem. And export-led growth obviously requires integra- Finance Management Act, but once the order establish- tion into global markets and economic openness. ing a fund has been approved by Parliament, they are then subject to relatively little scrutiny. Crucially, these funds Second, we hope to see a more rational basis for policy- are “off budget”, in that they do not appear in the normal making, with policies based on evidence and analysis, rath- government budget documents that are presented for Par- er than just being driven by political considerations. Policy liamentary approval and are made available to the public. decisions are often complex, with both predictable and un- Inflows and outflows do not generally form part of recorded predictable consequences. For policies to be effective, they government revenues and spending. And in contrast to the need to carefully considered, subject to analysis based on detailed line-by-line reporting of authorised and actual ex- data, trialled through pilot programmes and refined accord- penditure for the government budget, virtually nothing is ingly. Policies need to be subject to regular evaluation using available regarding these special funds, where the funds evidence to ascertain their impact; such evaluations should come from and how they are used. Cleaning up these spe- be published, and government should be accountable cial funds and bringing them on-budget should form part of enough to accept and act on their results. If policies are not a more general reform and modernisation of public finance having the desired or anticipated impact, they should be policies, laws and practices.

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KEY ECONOMIC VARIABLES Annual GDP Growth Sectoral GDP Growth 30% Annual GDP Growth Water & Elec.Sectoral GDP 14.2%Growth 30% Annual GDP Growth Sectoral GDP Growth 20% Water & Elec.Trade 14.2% 20% Trade 10% AnnualAnnual GDP GDP Growth Growth Trans. & Comm.Sectoral GDP Growth 30%30% 10% Trans.Fin. WaterWater & Bus.& Comm. && ServiceElec.Elec. 14.2% 0% 20% Fin. & Bus. Service 20%0% ConstructionTradeTrade -10% 10% Trans.Trans.Construction && Comm.Comm. -10%10% Soc. & Pers. Services -20% Soc.Fin. & Pers.& Bus. Services Service 0% Fin. & Bus.Government Service -20%0% Government -30% ConstructionConstruction Agriculture -10%-10% -30% Soc. & Pers. Agriculture Services -40% Soc. & Pers. ServicesTotal VA -20% -20% GovernmentTotal VA -40% GovernmentManuf 2007 2008 2009 2010 2012 2013 2014 2015 2016 2017 -50% 2011 -30%-30% AgricultureManuf

2007 2008 2009 2010 2012 2013 2014 2015 2016 2017 Agriculture -50% 2011 Mining -12.3% Mining -12.3% -40%-40% TotalTotal VAVA NMPS Mining GDP -4% -2% 0% 2% 4% 6% 8% Manuf-4% -2% 0% 2% 4% 6% 8%

2007 2008 2009 2010 2012 2013 2014 2015 2016 2017 Manuf -50% NMPS 2011 Mining GDP 2007 2008 2009 2010 2012 2013 2014 2015 2016 2017 -50% 2011 Annual real GDP growth fell further during Overall economicMiningMining -12.3%-12.3%activity was generally slow Annual real GDP growth fell further during Overall economic activity was generally slow the third quarter of 2017, recording year-on- during Q3 -4%2017 -2% with0% 2%several 4% 6%secto 8% rs NMPSNMPS MiningMining GDPGDP -4% -2% 0% 2% 4% 6% 8% theyear third real quarter growth of of 2017, 1.8% ,recording down from year 3.1%-on -in duringrecording Q3 lower2017 growthwith severalrates than secto in rsthe yearAnnual real real growth GDP of 1.8%growth, down fell furtherfrom 3.1% during in recordingOverall economic lower growth activity rateswas generally than in slowthe AnnualQ2Annual 2017. realreal GDP The GDPgrowth slow fellgrowth ingfurther of during felleconomic thefurther third quarter growth during of is OverallpreviousOverall economic economic quarter. activity activitywas generallyThese was slow include duringgenerally Q3 2017 Mining, slowwith Q2the 2017. third quarterThe slow ofing 2017, of economic recording growth year-on is- previousduring Q3quarter. 2017 Thesewith severalinclude Mining,sectors theattributable2017, third recording quarter year-on-yearto the of decline2017, real growth recording in of both 1.8%, mining downyear from-on and - duringTransportseveral sectorsQ3 recording&2017 Communications, lower with growth ratesseveral than inAgriculture thesecto previousrs , attributableyear real growth to the ofdecline 1.8%, indown both from mining 3.1% and in Transportrecording &lower Communications, growth rates thanAgriculture in the, yearn3.1%on real- inmining Q2 growth2017. Theprivate slowingof 1.8% ofsector economic, down growth(NMPS) from is attributable 3.1% growth in recordingTradequarter. ,These Construction, lower include growthMining, andTransport rates Social & Communications,than & Personalin the nQ2onto the -2017.mining decline inThe bothprivate miningslow andingsector non-mining of economic (NMPS) private sector growth (NMPS)growth is TradepreviousAgriculture,, Construction, Trade,quarter. Construction, These and and Social include & Personal & Personal Mining,Services. Q2during 2017. the The period. slowing NMPS of economic growth growth declined is previousServices .quarter. Manufacturing These, Waterinclude & ElectriMining,city duringattributablegrowth duringthe the period.to period.the decline NMPSNMPS growth in growth bothdeclined mining significantlydeclined and ServicesTransportManufacturing,. Manufacturing& Water Communications, & Electricity, Water and Finance &Agriculture Electri & Businesscity , attributablesignificantly to fromthe decline 6.5% yin-o both-y in miningQ2 2017 and to Transportand Finance & Communications,& Business Services Agriculture were the, significantlynfromon- mining6.5% y-o-y frominprivate Q2 2017 6.5% to sector4.5% y- y-o-yo- y (NMPS)inin Q3. Q2 Mining 2017 hasgrowth not to andTradeServices Finance, Construction,were the & onlyBusiness sectors and with ServicesSocial higher growth& werePersonal rates the of non4.5%improved-mining y and-o -continues y privatein Q3. to record sectorMining negative has(NMPS) real growth, not improvedofgrowth minus Tradeonly1.6%, , 14.2%sectorsConstruction, and 4.6%with y-o-y andhigher in Q3 Social2017 growth from & 1.4%, Personal rates 13.9% of 4.5%during y -othe-y inperiod. Q3. M NMPSining has growth not improveddeclined onlyServices sectors. Manufacturing with higher, Water growth & Electrirates cityof duringand12.3% continues y-o-ythe in period.Q3 2017. to recordThis NMPS reflects negative thegrowth continued real declinedimpact growth of , Services1.6%and 4.0%, .14.2% y-o-yManufacturing growth and in Q24.6% 2017, Water respectively.y-o-y & in Trade,Electri Q3 which city2017 andsignificantly continues from to record 6.5% negativey-o-y in realQ2 2017growth to, 1.6%and ,Finance 14.2% &and Business 4.6% yServices-o-y in Q3were 2017 the significantlywiththe closure growth of BCL,from ofwhereby 6.5%minus production y -12.3%o-y of in copper, Q2y- o nickel-2017y inand toQ3 andfromfell Financesignificantly 1.4%, from13.9& Business12.3%% and y-o-y growth 4.0%Services in yQ2-o 2017- ywere growth to 5.7% the in with4.5%cobalt growth ceased.y-o-y Although inof Q3. minus diamond Mining output12.3% has increased, noty-o - yimprovedit hasin notQ3 fromonlyin Q3 1.4% sectors2017, ,was 13.9 largelywith% affected andhigher 4.0% by thegrowth largey-o -fally growthinrates Wholesale inof 4.5%2017. y -oThis-y in reflects Q3. M iningthe continuhas noted improved impact of onlyQ2 sectors2017 respectivelywith higher. Tradegrowth, whichrates offell 2017.andbeen continuessufficient This toreflects offset to therecord impactthe continunegativeof the BCL edclosure real impact on growth mining of, Q21.6%subsector 2017, 14.2% growth, respectively fromand 48.1% 4.6% in .Q2 Tradetoy -1.4%o-y Q3., inwhich Q3 2017fell andthe continues closure ofto recordBCL, whereby negative productionreal growth ,of 1.6%significantly, 14.2% fromand 12.3%4.6% yy-o-o-y-y ingrowth Q3 2017in Q2 thewithgrowth closure growth rates. of of BCL, minus whereby 12.3% productiony-o-y in Q3of significantlyfrom 1.4%, 13.9from% 12.3% and 4.0% y-o- yy -growtho-y growth in Q2 in withcopper, growth nickel of andminus cobalt 12.3% ceased. y-o-y Althoughin Q3 from2017 1.4% to , 5.7%13.9% inand Q3 4.0% 2017 y-o, -ywas growth largely in 2017.copper,2017. ThisThis nickel reflectsreflects and cobaltthethe continucontinu ceased.eded impactimpactAlthough ofof 2017Q2Q2 2017 2017to 5.7% respectivelyrespectively in Q3 . 2017Trade, ,was which largely fellfell thediamond closure output of BCL, increased whereby, it productionhas not been of significantlyaffected by from the 12.3% large y -ofall-y growthin Wholesale in Q2 thediamond closure output of BCL, increased whereby, it hasproduction not been of affectedsignificantly by fromthe 12.3%large yfall-o -yin growth Wholesale in Q2 copper,sufficient nickel to offset and cobaltthe impact ceased. of Althoughthe BCL 2017subsector to 5.7% growth, in fromQ3 201748.1%, wasin Q2 largely to 1.4% copper,sufficient nickel to offsetBusiness and cobaltthe Confidence impact ceased. of theAlthough BCL subsector2017 to growth,5.7%Annual in from CreditQ3 48.1% 2017Growth ,in wasQ2 tolargely 1.4% diamondclosure on output mining increased growth rates., it has not been affectedQ3. by the large fall in Wholesale diamondclosure on output mining increased growth rates., it has not been Q3.affected by the large fall in Wholesale sufficient to offsetBusinessBusiness the impactConfidence Confidence of the BCL subsector growth,Annual from 48.1% Credit in Growth Q2 to 1.4% sufficient100% to offset the impact of the BCL subsector45% growth,Annual from Credit 48.1% Growth in Q2 to 1.4% 100%closure on mining growth rates. Q3.45% closure90% on mining growth rates. Q3. 40% 90% Business Confidence 40% Annual Credit Growth 80% Business Confidence 35% 100%80% 35%45% Annual Credit Growth 100%70% 45% 70%90% 40%30% 60% 30% 90%60% 40% 80% 35%25% 80%50% 25% 50%70% 35%20% 40% 20%30% 70%40% 60% 30%15% 60%30% 15%25% 30%50% 25% % of credit to sector 10%

% of credit to sector 20% 50%20%20% 10% 40% 20% 10% 15%5% 40%10%30% 5% 0% 15%0% 30%20%0% % of credit to sector 10%0%

% of credit to sector 2010 2011 2012 2013 2014 2015 2016 2017 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 10% 2010 2011 2012 2013 2014 2015 2016 2017 20%10%2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 5% 5% 10%0% Exporters Non-Exporters All 0% Exporters Non-Exporters All TotalTotal FirmsFirms HouseholdsHouseholds 2010 2011 2012 2013 2014 2015 2016 2017 0% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 0% 2010 2011 2012 2013 2014 2015 2016 2017 TheThe2008 2009BankBank 2010 2011ofof 2012 Botswana’s 2013Botswana’s 2014 2015 2016 Business 2017Business AnnualAnnual bankbank creditcredit growthgrowth increasedincreased The Bank of ExportersBotswana’s BusinessNon-Exporters Expectations Survey (BES)All Annual bank creditTotal growth increasedFirms marginally fromHouseholds 4.7% in July ExpectationsExpectationsExporters SurveySurvey (BES)Non-Exporters(BES) forfor H2H2 2017All2017 marginallymarginally from from 4.7% 4.7% in inJuly July 2017 2017 to to4.8% 4.8% in in for H2 2017 showed an overall decline in business confidence 2017 to 4.8% inTotal October 2017.Firms The increase isHouseholds attributable to showedTheshowed Bank anan overalloverallof Botswana’s declinedecline in in businessBusinessbusiness OctoberAnnualOctober 2017. bank2017. The Thecredit increase increase growth is isattributable attributableincreased to to Thefrom 48%Bank in H1 2017of to 46%Botswana’s in H2 2017. Business Businessconfidence Annualhigher growth bank in lending creditto households, growth up from 5.1% increased in July 2017 confidenceExpectationsconfidencedecreased among from from domestic-orientedSurvey 48% 48% in (BES)in H1 businessesH1 2017 2017for to to46% H2to 46% in46% 2017H1 in in highermarginallyhigherto 7.1% growth ingrowth October from in 2017.4.7% inlending lendingHowever, in July to the to households2017increase households toin household4.8%, up ,in up Expectations Survey (BES) for H2 2017 marginally from 4.7% in July 2017 to 4.8% in H2showedH2from 2017. 48%2017. in H2,an Business whileBusiness overall remaining confidence theconfidencedecline same for exportersin decreaseddecreasedbusiness at 50%. fromOctoberfromlending 5.1% 5.1%was 2017. partiallyin inJuly The Julyoffset 2017 increase 2017by lower to togrowth7.1% is7.1% attributable in inbank inOctober creditOctober toto October 2017. The increase is attributable to showedamongconfidenceamongThe survey domestic domestic revealedan fromoverall more- oriented48%- orientedoptimism declinein about H1businesses businesses business2017 in conditionstobusiness to46% to 46% in46% in 2017.higher2017.firms, from However, growthHowever, 9.8% to in6.8% the lending theduring increase increasethe period.to households Thein ingrowthhousehold household of bank, up confidenceinH2in theH1 H1first2017. from halffrom of from 48%Business 2018,48% 48%within in H2,expectations H2,inconfidence whileH1 while 2017of remainingimproved remaining todecreased domestic46% the inthe lendinghigherfromlendingcredit 5.1% to growth washouseholds was in partially Julypartiallyin was lending the2017 offsetresult offset toofto theby7.1% households byrise lower in lowerin the Octoberuptakegrowth growth, ofup demand. mortgage lending. H2sameamongsame 2017. for domesticfor Businessexportersexporters-oriented confidence atat 50%.businesses50%. The Thedecreased surveytosurvey 46% infrom2017.in bank bank 5.1% However, credit credit in Julyto tothefirms, 2017firms, increase fromto from 7.1% 9.8% in9.8% inhousehold toOctober to6.8% 6.8% amongrevealedinrevealed H1 domesticfrom more more48% - oriented optimisminoptimism H2, whilebusinesses aboutabout remaining business businessto 46% the during2017.lendingduring However,the wasthe period. period.partially the The The increaseoffset growth growth by of inlower ofbank household bank growth credit credit inconditionssameconditions H1 fromfor in48%exportersin the thein firstH2,first at while halfhalf50%. ofremaining of The 2018,2018, survey withthewith tolendinginto householdsbank households wascredit partially wasto was firms, the offsetthe resultfrom result by 9.8% oflower ofthe theto risegrowth 6.8%rise in in same for exporters at 50%. The survey in bank credit to firms, from 9.8% to 6.8% expectationsrevealedexpectations more of of improved improvedoptimism domestic domestic about demand. demand.businesspage theduring 4the uptake uptake the ofperiod. of mortgage mortgage The growthlending. lending. of bank credit revealedconditions more in theoptimism first half about of 2018,business with duringto households the period. was The the growth result ofof bankthe rise credit in conditionsexpectations in ofthe improved first half domestic of 2018, demand. with tothe households uptake of mortgage was the lending.result of the rise in expectations of improved domestic demand. the uptake of mortgage lending. Inflation and Forecast Fuel Prices 1,200 16% Inflation and Forecast www.econsult.co.bw Fuel Prices 14% 1,200 16% 1,000 12%KEY ECONOMIC VARIABLES 14% Economic Review Q4 20171,000800 10% 12% 600800 8%10% Inflation and ForecastPage Comment/Proposed changesFuel Prices 6%8% Inflation and Forecast5 600 Fuel Prices 1,200400 Fuel Prices 16% (pula/barrel) 1,200 4%6% 400 200 14% (pula/barrel) 1,000 2%4% 1,000 0%12% 200 2% 8000 10% 800 0% Pump Retail (thebe/litre) and Brent Crude 0 8% 600 BoB Upper BoB Lower 600 Pump Retail (thebe/litre) and Brent Crude Petrol/Diesel Crude Oil 6% Actual Forecast BoB Upper BoB Lower 400

(pula/barrel) 400 Petrol/Diesel Crude Oil The4% a nnual Actualinflation rate in DecemberForecast 2017 International(pula/barrel) fuel prices rose steadily during 200 wasThe2% 3.2%, annual the inflation same asrate in in September December 20172017 theInternational second200 half fuel of prices the year. rose The steadily spot priceduring of andwas 0.2% 3.2%, higher the same than asinflation in September in December 2017 Brentthe second crude half increased of the year. by 21.4% The spot and price 12.5% of 0% 0 lastand year.0.2% higherGroup thanindices inflation were in Decembergenerally inBrent USD crude and0 Pulaincreased terms by respectively 21.4% and in 12.5% the 12 Pump Retail (thebe/litre) and Brent Crude monthsin USDPump Retail (thebe/litre) and Brent Crude andto December Pula terms 2017 respectively, with the in increase the 12 stablelast year.during BoBGroup UpperQ4 indices2017 exeptwereBoB Lowergenerallyfor the Petrol/Diesel Crude Oil Transportstable duringindexActual groupQ4 2017 which exept registeredForecast for thean inmonths international to December Petrol/Dieselprices 2017 partially , with theCrudeoffset increase Oil by a Transport index group which registered an in international prices partially offset by a increaseThe annual of 4.1% inflation y-o-y rateas a inresult December of changes 2017 weakeningInternational US fuel dollar prices. L ocalrose retaisteadilyl prices during for increase of 4.1% y-o-y as a result6 of changes weakening USDe dollarBeers. DiamondLocal retai Salesl prices for in wasThethe annual 3.2%, Operation inflation the rate same in Decemberof asPersonal in2017 September was 3.2%,Transport the same2017 petroltheInternational second and fuel halfdiesel prices of rosethewere steadily year. adjusted during The the spot second upwards price half ofof inas inthe September Operation 2017 and 0.2% of higher Personal than inflation inTransport December petrolthe year. 900and The spotdiesel price ofwere Brent crudeadjusted increased byupwards 21.4% and followingand 0.2% increased higher thanfuel pricesinflation. Core in December inflation threeBrent timescrude increasedduring the by 21.4%year, andin March,12.5% (trimmedfollowinglast year. Group mean)increased indices waswere fuel generally2.9% prices stable in. Core duringDecember, Q4inflation 2017 Novemberthree12.5% 800 timesin USD and andduring PulaDecember terms the respectively 2017year, in bythein 12 20 March,months thebe, to lastexept foryear. the Transport Group index groupindices which registeredwere angenerally increase in DecemberUSD and 2017, Pula with the terms increase respectively in international prices in thepartially 12 (trimmed mean) was 2.9% in December, November700 and December 2017 by 20 thebe, whilestableof 4.1% the y-o-y alternativeduring as a result Q4 of measurechanges 2017 in the ofOperationexept core of inflation forPersonal the 20months offsetthebe by toa weakening Decemberand US 30dollar. 2017 Localthebe, retailwith prices respectivelythe for increase petrol and , while the alternative measure of core inflation 20 thebe and 30 thebe respectively, (excludTransportTransporting following administeredindex increased group fuel prices.prices)which Core inflationregisteredwas (trimmed2.3%. an reflectingin dieselinternational 600were adjustedboth upwards higherprices three partiallytimesinternational during theoffset year, in price March,by as (excluding administered prices) was 2.3%. reflecting both higher international prices Inflationincreasemean) was is 2.9%forecastof 4.1% in December, yto-o fall- ywhile as below thea resultalternative the ofthe measure changes lower of andweakeningNovember increased500 and DecemberUS domesticdollar 2017 .by 20Local thebe,fuel 20retai levies thebel pricesand. 30R thebeetail for Inflationcore inflation is (excludingforecast administered to fall belowprices) was the 2.3%. the Inflation lower andrespectively, increased reflecting domestic both higher international fuel levies prices and. increasedRetail limit of the Bank of Botswana’s inflation fuel prices400 are regulated and reviewed every inis forecastthe Operationto fall below the ofthe lowerPersonal limit of theTransport Bank of petroldomestic and fuel levies.diesel Retail fuelwere prices adjustedare regulated andupwards reviewed limit of the Bank of Botswana’s inflation fuel pricesUS $ million are regulated and reviewed every objectivefollowing range increased of 3 -fuel6% pricesin the. Corefirst halfinflation of monththree 300bytimes the Botswanaduring the Energy year, Regulatoryin March, objectiveBotswana’s inflationrange objective of 3 -range6% ofin 3-6% the in thefirst first half half of of monthevery monthby theby the Botswana Energy Energy Regulatory AuthorityRegulatory (BERA). 2018(trimmed2018 with with smallsmall mean) increases increases inwas the second 2.9% in half the ofin thesecond year.December, half AuthorityNovemberDue to under-recovery (BERA). and December relative Due to internationalto 2017 under by prices, -20recovery thebe,further 2018 with small increases in the second half Authority200 (BERA). Due to under-recovery of whilethe year. the alternative measure of core inflation relative20increases thebe into domestic andinternational prices 30are anticipated thebe prices,in therespectively first half furtherof 2018. , of the year. relative100 to international prices, further (excluding administered prices) was 2.3%. increasesreflecting inboth domestic higher prices international are anticipated prices increases0 in domestic prices are anticipated Inflation is forecast to fall below the the lower inand the increasedfirst half of domestic2018. fuel levies. Retail Interest Rates in the first half of Exchange2018. Rates limit of the Bank of Botswana’s inflation fuel prices are regulated and reviewed every Interest Rates Exchange Rates 14objective range Interestof 3-6% Ratesin the first half of month by the BotswanaExchange EnergyRates Regulatory 201814 with small increases in 6the second half Authority2009 (BERA). 2010 2011 2012 Due 2013 2014to 2015 under 2016 2017-recovery 12 6.0 2009Bank 2010 2011 Deposits, 2012 2013 2014 Lending 2015 2016 2017 & 1.45 of12 the year. relative6.0 to international prices, 1.45further 10 Liquidity 1.40 10 increases7.0 in domestic prices are anticipated1.40 7.0 1.35 8 in the60,000 first half of 2018. 1.3530% 8 % 8.0 1.30

% 8.0 1.30 6 6 Interest Rates Exchange Rates 1.25 14 9.040,000 1.2520% 4 9.0 2009 2010 2011 2012 2013 2014 2015 2016 2017 1.20 4 million P 12 6.0 1.201.45 Pula per USD 10.0 1.15 Rand per Pula 2 Pula per USD 2 10.020,000 1.151.4010% Rand per Pula 10 7.0 % of total assets 1.101.10 0 0 11.0 1.35 8 11.0 1.051.05 % 8.0 0 1.300% 6 12.0 1.00 12.0 1.001.25 Bank Prime BoBC91 BoBC14 Bank Prime BoBC91 BoBC14 9.0 BWP perper USDUSD ZARZAR per per BWP BWP 4 1.20 Deposits Lending Excess Liquidity Pula per USD TheThe 2 BankBank ofof Botswana’sBotswana’s MonetaryMonetary PolicyPolicy TheThe Pula10.0 depreciated againstagainst thethe SA SA r andrand1.15 in inRand per Pula The Bank of Botswana’s Monetary Policy Committee (MPC) The Pula depreciated against the SA rand in the fourth quarter of CommitteeCommittee (MPC) (MPC) reduced reduced the the BankBank RateRate byby thethe fourth quarter ofof 20172017 asas thethe 1.10randrand reduced0 the Bank Rate by 50 points basis in October 2017, to 201711.0 as the rand strengthened in the light of change in the ruling 5050 5.0%,points points due to basisa basispositive inpricein October stabilityOctober and low 2017,2017, inflation to outlook.to 5.0%,5.0%, As strengthenedstrengthenedparty’s leadership. inThe thethePula weakenedlightlight of ofby 4.2%changechange against inthe1.05in rand,the the dueduea result, toto the a a banks’ positivepositive Prime Rate priceprice was reduced stabilitystability from 7.0% andand to 6.5% lowlow rulingrulingclosing12.0 the party’s year with an exchangeleadership.leadership. rate of ZAR1.256 TheThe from ZAR1.3121.00PulaPula inflationinflationin Q4 2017. outlook.Bank outlook.However, moneyPrime AsAs market aa result, BoBC91interestresult, rates thethe continuedBoBC14 bbanks’anks’ to weakenedweakenedin Q3. On the otherby BWP4.2% hand, per the againstUSD againstPula-US Dollar thethe ZARexchange rrand perand BWP rate, ,closing closingwas 9.87 PrimePrimeincrease, Rate Rate with was thewas 14-day red red ucedBoBCuced rate from from rising 7.0% 7.0%from 1.42% toto 6.5%6.5% in Q3 thethein year yearDecember with 2017 anan compared exchangeexchange to 10.31 in rate rateSeptember of of ZAR1.256 ZAR1.2562017, reflecting The2017 toBank 1.45% inof Q4 2017Botswana’s and the 91-day Monetary BoBC rate rising Policy from Thean appreciation Pula depreciated of 4.4%. The Pula against exchange rate the policy SA was r reviewedand in Committee1.40% to 1.41% (MPC) over the same reduced period. the Bank Rate by thein Decemberfourth 2017, quarter and the rate of of crawl2017 against asthe basketthe adjusted rand downwards to 0.30%, from and upward crawl of 0.26% in 2017. 50 points basis in October 2017, to 5.0%, strengthenedThe Pula basket of weightsin the was light maintained of atchange 45% for thein South the due to a positive price stability and low rulingAfrican Randparty’s and 55% for theleadership. Special Drawing RightThe (SDR). Pula inflation outlook. As a result, the banks’ weakened by 4.2% against the rand, closing Prime Rate was reduced from 7.0% to 6.5%page the 5 year with an exchange rate of ZAR1.256 Economic Review Q4 2017

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500 600 400 US $ million 400 300 (pula/barrel) 200 200 www.econsult.co.bw 100 KEY0 ECONOMIC VARIABLES 0 Pump Retail (thebe/litre) and Brent Crude

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6 De Beers Global Sighholder Sales (DBGSS) recorded sales valued Bank liquidity further improved in October 2017 as a result of at USD1,292Bank million Deposits, from the three sightsLending held in Q4 & 2017, 6.9% growth in the bank deposit base. Excess liquidity was 5.9% of lower than the value of salesLiquidity the same period last year. Moreover, total assets in October, up from 4.6% in July 2017. Total bank De Beers recorded USD5,289 million in total sales of rough deposits grew by 5.7% y-o-y to P66.7 billion from P63.5 billion diamonds60,000 during 2017, which is 5.1% lower than USD5,57330% in July 2017. Bank deposits increased for high earning deposit million total sales in 2016. Global demand for rough diamonds was accounts. generally stable during the quarter going into the holiday season. 40,000 20% P million P

20,000 10% % of total assets

0 0% Economic Review Q4 2017 Stock Markets Formal Sector Employment Deposits Lending PageExcess LiquidityComment/Proposed changes Stock Markets6 150 Formal Sector Employment 400,000

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100 150,000 100,000 90 Index, Jan 2010 = 100 50,000 80 0 70

BSE DCI (BWP) BSE DCI (USD) MSCI EM Private Parastal Government

6 Formal Sector Employment 400,000The Botswana Stock Exchange (BSE)’s Domestic Companies Data on formal employment for June 2017 showed an overall Index (DCI) performed poorly over 2017, losing 8.9% and 1.7% decrease in the number of formally employed persons in Botswana. 350,000in Pula and USD terms respectively. On the other hand, both the Between June 2016 and June 2017, the total number of jobs lost 300,000MSCI World and MSCI Emerging Markets (EM) outperformed the was 1,724 across all sectors resulting in a negative growth of DCI during the year: MSCI World and MSCI EM rose substantially, 0.5%. This is attributable to 2,810 jobs lost in the private sector 250,000by 20.1% and 34.3% respectively, in USD terms. The BSE DCI as a result of 34.3%, 0.1% and 0.7% negative growth in Mining 200,000performance was mostly weighed down by underperformance of & Quarrying, Manufacturing and Construction respectively during 150,000local retailers. the same period. Government and parastatals had growth 0.8% and 0.5% (983 and 103 new jobs respectively) of new jobs 100,000 created between June 2016 and June 2017. 50,000 page 6 0

Private Parastal Government

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NEWS HIGHLIGHTS

6th October BDC borrows P131 The Botswana Development Corporation (BDC) has secured P131 million million to finance new in funding from the issuance of bonds on the local bourse. The funds projects. (Mmegi) acquired will be used to finance new projects and a loan refinancing facility. The targeted projects are in manufacturing, infrastructure development, solar power plant and agriculture. The BDC loan requirements are in line with their strategy to assist in economic diversification.

8th October Government adjusts The Botswana government has adjusted the minimum wage rates for minimum wage rates. 2017/2018 by 6% across the board and P80.00 for the agricultural (Daily News) sector, effective from 1 November 2017.

11th October Shumba Energy receives Shumba Energy has announced the first sales revenue from its trading first revenues from its division, Shumba Coal Trading (SCT). The miner has sold over 1,000 coal trading division. tonnes of coal to the regional market. SCT was established in 2015 to (Mining Review Africa) manage the company’s trade of coal, and also other Botswana coal producers.

17th October Bank Gaborone’s Bank Gaborone’s financial results for the year ended 30 June 2017 recovery firms as profits showed an impressive performance during the financial year, recording double. (Mmegi) 97.6% increase in profit after tax to P35.6 million in 2016/17 FY from P18.0 million in 2015/16 FY. Net interest income grew by 36.9% to P183.3 million during the same period. The bank’s impairment charges were 62% higher than in the previous year. During the 2016/17 FY, the bank exercised caution in providing credit facilities and benefitted from a stronger capital adequacy ratio.

17th October Waste mining revives Debswana Diamond Company’s Letlhakane Diamond Mine is set Letlhakane mine. to reopen after transitioning to a tailings plant that will re-treat the (Mmegi) accumulated waste materials at the mine. The tailings plant was built in 2014 following the end of the mine’s lifespan, at an estimated cost of P2.1 billion. It is expected that the plant will treat about 3.6 million tonnes per year of waste material with an estimated annual production of 800,000 carats.

23rd October Diamond fund donates The Diamond Empowerment Fund (DEF) has awarded the Botswana USD130,000 to Top Achievers program with USD130,000, for outstanding scholars. It Botswana program. is envisioned that the grant will assist in funding outstanding scholars (Rapaport News) with higher education. The Botswana Top achievers program is run by the Ministry of Tertiary Education, Research, Science and Technology (MoTERST) and the DEF has been supporting the program since 2011.

24th October BoB cuts interest rates Bank of Botswana’s Monetary Policy Committee (MPC) has reduced the to record low. (Mmegi) Bank Rate by 50 points basis to 5%, due to a positive outlook for growth and inflation in the medium term. As a result, the banks’ prime lending rate was reduced from 7% to 6.5%, thus, reducing interest costs for borrowers.

25th October De Beers Sees Sales De Beers’ sales volume and production increased in the third quarter Volume Rise. (Rapaport of 2017 as the market for rough diamonds stabilized. According to the News) company, demand for lower-value goods returned to normal in 2017 when compared to 2016. De Beers production increased across its mines with output increasing by 33% to 6.1 million carats from 4.1 million carats at Debswana mines and 46% to 9.2 million carats at its Gacho Kue mine in Canada. De Beers expects production for 2018 to be 33 million carats of rough diamonds.

6th November National Petroleum Fund According to the Botswana Energy Regulatory Authority (BERA), the is running dry. (Sunday National Petroleum Fund - from which the government pays petroleum Standard) retailers the difference between the administered and prevailing fuel prices - had come under pressure from rising crude oil prices. The spot price of Brent crude rose by 26.5% in November 2017, from USD47.95 in November 2016 to USD63.53. As a result of the rise in international fuel prices, local retail prices were adjusted upwards by 20 thebe for all grades. The NPF is funded by the fuel levy and is also used to finance construction of government fuel storage facilities, procurement of strategic stocks for the economy, financing insurance premiums as well as providing for price stabilisation.

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NEWS HIGHLIGHTS

11th World Bank injects The Ministry of Land Management, Water and Sanitation Services November P1.5 billion into water announced a P1.5 billion loan facility from the World Bank Group to projects. (Weekend Post) finance various water projects around the country. The Ministry launched the Botswana Emergency Water Security and Efficiency (BEWSE) project to address the increasing water demand in the country. The BEWSE projects will be divided into three components; improving water supply services, improving wastewater and sludge management systems and strengthening Water Sector Reforms and Institutions.

13th Three foreign The Botswana Power Corporation (BPC) plans to commission the November contractors snatch construction of the North West Transmission grid connection project BPC’s P2.4 billion power in 2018. The project, which is expected to be completed in 2020, grid project. (Sunday will be undertaken in two phases at an estimated total cost of P2.1 Standard) billion. The first phase of the project entails the construction of a 400,000V backbone transmission line from Morupule B to Maun, 400 Kv substations and a 132 Kv line and substations connecting Maun to Shakawe and Ghanzi. In turn, the second phase will extend the 400 Kv grid from Phokoje. Once complete, the project is envisioned to support large projects in the Ngamiland area.

13th SONA: Economic The State of the Nation Address (SONA) has forecast the economy will November outlook. (Weekend Post) grow by 4.7% in 2017 and 5.3% in 2018, higher than the 4.3% growth recorded in 2016. The forecasted growth is expected to be supported by high growth in Mining, Trade, Hotels & Restaurants, Transport & Communication and Water & Electricity sectors. The continued improvement in the global demand for diamonds is expected to bolster growth in mining as production increases. Moreover, the restoration of Morupule A and the additional unit at Morupule B power stations will improve the electricity supply in the country.

20th Environmental BCL’s environmental rehabilitation liability has made the sale of the mine November rehabilitation liability and the smelter difficult to parties who had expressed interest in acquiring of BCL deters buyers. the mine and/or its assets. The environmental liability of the miner is (Business Live) estimated to be more than P3 billion. According to the liquidator’s report, the liability accumulated over the years and was made worse by drawing down on the rehabilitation fund, used to finance operating costs. The BCL mine was placed under final liquidation in June 2017.

29th BoB introduces new P10 The Bank of Botswana has introduced a new P10 bank note, which November bank note. (Daily News) will start to circulate in February 2018. The new bank note has new security features and improved quality for longer duration compared to the outgoing bank note. When held up against the light, consumers should be able to see a rampant zebra, figure 10 in the shield besides the zebra and a shiny golden diamond in the middle of the note. Other features are also visible under the ultra-violet light.

30th Karowe to produce up to Lucara Diamond’s Karowe mine expects to process between 2.4 million November 290,000 carat in 2018. and 2.7 million tonnes of ore and produce between 270,000 carat (Engineering News) and 290,000 carat of diamonds in 2018. According to the company, production at the mine has improved with the engagement of the new contractor, and mined ore increased from 1.4 million tonnes to 1.6 million tonnes of ore in 2017. In line with mining production, Lucara expects to generate sales revenue between USD170 million and USD200 million in 2018. The company will further advance its exploration work on its prospecting licences.

3rd December Orapa Diamond Mine The Orapa Diamond Mine’s expansion project, Cut 2, is said to be at expansion slated a pre-feasibility study stage, and it is hoped to be complete by 2030. for 2030. (Sunday The scope of Cut 2 include the expansion of the mine’s open pit which Standard) will require relocating some buildings, services and waste stockpiles, as well as the construction of social infrastructure and other services in the township.

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NEWS HIGHLIGHTS

8th December Botswana cancels The Government has withdrawn plans to introduce a Tourism Develop- USD30 tourist levy. ment Levy that was intended to raise funds for the industry. The decision (Southern Times) to withdraw was to allow the Ministry of Environment, Natural Resourc- es and Conservation and the Botswana Tourism Organisation (BTO) time to engage with the various stakeholders in the industry.

10th Fuel prices up. (Daily The Botswana Energy Regulatory Authority (BERA) announced an December News) increase in retail pump prices for petrol, diesel and illuminating paraffin. Local fuel prices increased by 30 thebe for all types of fuel effective from 5th December 2017. The increase in local prices for fuel is the third in 2017 as the international prices for oil continue to increase.

11th BHC to deliver 3,300 The Botswana Housing Corporation (BHC)’s 2018-2023 strategic December houses every year. focus intends to deliver on the corporation’s mandate on social housing (The Patriot) aspect. During the strategy period, the BHC plans to deliver 1,500 social housing units and 1,800 commercial housing units, making a total of 3,300 housing units annually.

11th The money trail. The former Managing Director of Kgori Capital is being investigated December (Mmegi) in a case involving suspicious transactions of funds from the National Petroleum Fund (NPF). The P250 million funds was availed to the Directorate of Intelligence and Security (DIS) and managed by Khulaco Pty Ltd, for use in the construction of petroleum storage facilities, but was diverted to purchase anti-poaching equipment. The NPF was established to cushion against fluctuating international fuel prices and to finance the construction of fuel storage facilities.

14th Moody’s affirms the Moody’s Investor Service has affirmed Botswana’s sovereign credit rating December “A2” stable outlook of A2 for long and short term bonds denominated in both domestic and sovereign credit rating foreign currency. Moody’s also gave Botswana a stable outlook based for Botswana. (Bank of on prospects for continued fiscal prudence and the achievement of a Botswana) balanced budget in the medium term. The agency states that the country has a strong fiscal position, low debt burden, sizeable sovereign wealth fund, strong institutions, well designed macroeconomic frameworks and a stable political environment.

18th Moody cautions Moody’s Investment Service has warned Botswana against the slow December Botswana against slow progress in the implementation of structural reforms as well as limited structural reforms. economic diversification indicating that it would undermine the country’s (Sunday Standard) fiscal position. According to the agency, substantial depletion of fiscal reserves and/or a rapid increase in public debt in the near term could lead to a downgrade. However, this can be offset by accelerating diamond beneficiation, economic diversification and implementing efficiency- enhancing public and private sector reforms.

22nd BPOPF terminates Botswana Public Officers Pension Fund (BPOPF) has terminated all of December Kgori Capital contract. its asset management contracts with the investment management (Botswana Public firm Kgori Capital. The decision comes after consideration of the Officers Pension Fund) involvement of the then Managing Director of Kgori Capital in a money laundering scandal involving funds from the National Petroleum Fund (NPF).

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MACRO-ECONOMIC DATA

Key Economic Data unit 2012 2013 2014 2015 2016 2017Q1 2017Q2 2017Q3 2017Q4

Annual Economic Growth GDP % 4.5 11.3 4.1 -1.7 4.3 3.9 3.1 1.8 .. Mining % -5.8 24.2 0.5 -19.6 -3.7 -10.3 -10.1 -12.3 .. Non-mining private sector % 7.7 10.1 4.9 1.4 7.2 7.9 6.5 4.5 .. GDP current prices P mn 109,870 125,158 145,868 146,066 170,589 43,857 43,148 43,068 .. GDP 2006 prices P mn 75,515 84,081 87,569 86,083 89,797 22,467 22,884 22,689 ..

Money & Prices Inflation % 7.4 4.1 3.8 3.1 3.0 3.5 3.5 3.2 3.2 Prime lending rate % 11.0 9.0 9.0 7.5 7.0 7.0 7.0 7.0 6.5 BoBC 14-day % 4.64 3.06 3.07 0.97 0.84 1.26 1.34 1.42 1.45

Trade & Balance of Payments Exports - total goods P mn 45,915 66,404 76,261 63,484 80,336 17,214 14,821 .. .. Exports - diamonds P mn 36,143 55,367 65,328 52,730 70,781 16,084 13,709 .. .. Balance of payments P mn -862 1,340 11,404 - 57 2 843 -3 386 619 .. ..

Foreign Exchange Exchange rate BWP per USD end 7.776 8.718 9.515 11.236 10.650 10.526 10.215 10.309 9.872 Exchange rate ZAR per BWP end 1.090 1.196 1.217 1.383 1.279 1.278 1.274 1.312 1.256 FX reserves $ mn 7,628 7,726 8,323 7,546 7,189 7,041 7,288 7,454 .. FX reserves P mn 59,317 67,772 79,111 84,881 76,804 73,957 74,734 76,763 ..

Financial Sector Deposits in banks P mn 47,216 48,512 51,492 59,961 62,438 60,120 62,380 63,842 .. Bank credit P mn 34,555 39,763 45,116 48,307 51,316 51,141 52,555 53,290 .. BSE index 7,510.2 9,053.4 9,501.6 10,602.3 9,727.7 9,225.2 9,244.2 8,930.4 8,860.1

Business Indicators Diamond production (a) '000 cts 20,619 23,134 24,658 20,732 20,880 8,553 5,992 6,117 5,568 Copper production (c) tonnes 57,916 49,448 46,721 23,050 16,878 0 0 0 0 Nickel production tonnes 17,942 22,848 14,958 16,789 13,120 0 0 0 0 Business confidence index 47% 45% 52% 44% 43% 48% .. 46% .. No. of companies formed 16,561 14,190 16,300 19,134 17,133 4,604 5,661 .. .. Electricity consumption GWh 3,703 3,502 3,990 3,974 3,929 888 899 1,018 .. Crude oil (Brent) $/bar 110.80 109.95 55.27 36.61 54.96 52.20 47.08 57.02 58.02

Employment (formal) Government 131,033 130,175 129,918 130,220 129,216 129,078 128,520 Parastatals 17,484 18,838 18,790 19,411 19,008 19,314 19,579 Private sector 188,531 189,894 191,399 191,484 194,202 193,582 192,937 Total 337,048 338,907 340,107 341,115 342,426 341,974 341,036

2016/17 2017/18 2018/19 Govt Budget 2013/14 2014/15 2015/16 Outturn Revised Proposed Revenues P mn 48,951 55,904 47,420 56,828 57,187 58,811 Spending P mn 41,730 50,564 54,411 57,364 62,425 66,873 Balance P mn 7,222 5,340 -6,991 -536 -5,238 -8,062 Public debt & guarantees P mn 30,791 33,399 34,058 34,827 34,788 .. Govt deposits at BoB P mn 31,745 41,680 33,916 29,819 .. .. GDP P mn 131,241 147,920 149,111 174,836 186,363 201,543

Revenues %GDP 37.3% 37.8% 31.8% 32.5% 30.7% 29.2% Spending %GDP 31.8% 34.2% 36.5% 32.8% 33.5% 33.2% Balance %GDP 5.5% 3.6% -4.7% -0.3% -2.8% -4.0% Public debt & guarantees %GDP 23.5% 22.6% 22.8% 19.9% 18.7% .. Govt deposits at BoB %GDP 24.2% 28.2% 22.7% 17.1% .. ..

Sources: Bank of Botswana; MFDP; Statistics Botswana; Department of Mines; Registrar of Companies; BSE; Econsult Notes: (a) 2013 figures include production from Boteti Diamonds (Karowe mine) and Debswana (b) 2016 figures include production from Gem Diamonds (Ghagoo) and Lerala mines as well as Boteti and Debswana (c) Copper and Nickel production for Q3 2016 are for July and August only (d) Numbers in Italics reflect revisions from the previous review

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SPECIAL FEATURES

2015/16 Poverty Statistics

Introduction Statistics Botswana released poverty statistics from the 2015/16 Botswana Multi-topic House- hold Survey (BMHTS) in January 2018. As expected, the results showed a welcome decline in the poverty headcount rate, from 19.3% at the time of the previous survey in 2009/10, to 16.3% in 2015/16. This marks a continuation of a long-term trend in Botswana of poverty steadily declining as economic growth and policy interventions have led to rising incomes.

Figure 1: National Headcount Poverty Rates, 1985 – 2015

70%

60%

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30% % of population

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0% 1985/6 1993/4 2002/3 2009/10 2015/16

Source: Statistics Botswana, Poverty Stats Brief

The poverty headcount rate measures the proportion of households who were poor at the start of the year moved the population living in households with consumption out of poverty during the year. Hence the rate of poverty levels below the relevant poverty datum line (PDL). As reduction (by this measure) has fallen by more than half in poor households tend to be larger than the average, the the more recent period. proportion of households that are poor is less than the headcount rate, at 9.0% nationally. The geographical incidence of poverty is changing. A second striking change is where the decline in poverty is Key results being felt. Between 2002/3 and 2009/10, the reduction As noted above, the decline in the national poverty in poverty was felt in all settlement types - urban areas, headcount rate is both welcome and expected. However, urban villages and rural areas - with the latter experiencing digging deeper into the results, there are some less the largest decline. But between 2009/10 and 2015/16, encouraging findings as well as some surprising ones. the pattern was quite different, with poverty increasing marginally in urban areas, unchanged in rural areas, and The pace of poverty reduction is falling. Between 2002/3 declining only in urban villages. On the positive side, this and 2009/10, the poverty rate fell from 31% to 19% - benefits the largest settlement group, as more Batswana a dramatic reduction over 7 years. This meant that every live in urban villages than in either cities/towns or in rural year during this period, on average, 6.4% of households areas. But it does raise questions about why both urban who were poor at the start of the year moved out of and rural areas have not experienced a continued decline poverty during the year. However, the much smaller decline in poverty. Much of it may be to do with the dynamics of in poverty (to 16.3%) in the six years between 2009/10 population migration, which requires detailed demographic and 2015/16 meant that over this period, only 2.8% of analysis.

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SPECIAL FEATURES

Figure 2: Headcount poverty by settlement type

50%

45%

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30%

25%

20%

15%

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5%

0% National Urban Urban village Rural

2002/3 2009/10 2015/16

Source: Statistics Botswana Inequality is increasing. Many people will not be surprised by of 2.2%. But between 2009/10 and 2015/16 the rate of the conclusion of the BHMTS that inequality is increasing. formal job creation fell to 2000 jobs a year, reflecting an The Gini coefficient for consumption – a commonly-used annual growth of 0.6%. This illustrates the crucial role that measure of inequality – increased between 2009/10 and employment creation plays in bringing poverty down, and 2015/16. This is a troubling, if not an unexpected finding, the urgent need to address the barriers to business activity. given that Botswana has one of the highest levels of inequal- ity in the world. However, there is some uncertainty about Need for welfare reform. Although job creation is paramount the accuracy of the data presented; when the World Bank in bringing poverty down in the long-term, an important role calculated the Gini coefficient from the 2009/10 survey is also played by social safety net welfare measures that data, they got quite different results to Statistics Botswana. provide support to vulnerable and low-income households. It seems that this discrepancy remains unresolved. The BHMTS data indicate that poverty would be 8 percent- age points higher, at 24.3%, without existing government Major changes in spending patterns. The BHMTS data in- welfare programmes. However, it is widely acknowledged dicates large changes in spending patterns compared to (e.g. by the World Bank, various UN agencies, some gov- 2009/10. In particular, there are significant increases in the ernment departments as well as Econsult) that Botswana’s proportion of expenditure devoted to transport, housing, ed- social safety net (SSN) is not very efficient, and does not ucation, and communications, all of which would be expect- target support for poor households very effectively. This is ed as incomes rise. There are decreases in the proportion of in part because it is out-dated and comprised of piecemeal expenditure devoted to food, household goods & services, programmes that are not integrated with each other. A thor- clothing & footwear, alcohol & tobacco, and recreation & ough overhaul of SSNs is long overdue, to reduce waste and culture, some of which would be expected, but others are ensure that welfare spending is more effective in bringing surprising. These results require further analysis, particularly poverty down further. with regard to the patterns of expenditure by households in different income groups. Conclusions So what does this all mean? There are some conflicting re- Fall in household consumption levels in real terms. Aver- sults. Poverty has fallen, Average real consumption expen- age (mean) household consumption spending rose by 29% diture has fallen, indicating declining living standards for from P3046 per month in 2009/10 to P3927 per month. households in general, but at the same time poverty has Although this is a significant increase, it is not so impressive fallen, and inequality has risen. This suggests that those at once inflation of 40% over the period is taken into account. the upper end and the lower end of the income distribution Therefore, average real consumption level per household fell spectrum have done better than the average. This in turn by 8.1% over the seven year period, indicating a general suggests that the squeeze on living standards has mostly squeeze on living standards. Again, this is something that been felt by those in the middle of the income distribution needs further analysis to determine which parts of the in- spectrum, who make up the bulk of the population. Further come distribution spectrum have been most affected by this. analysis of income and consumption patterns across the in- come distribution spectrum will help to determine exactly Slowdown in employment creation. Why has the decline in where the squeeze is being felt. More work is also needed to poverty slowed? It seems likely that it is closely related to reconcile household spending data from the BMTHS and the the rate of employment creation, given that wages & salaries national accounts (GDP data). The latter show much higher are the main source of household income. Between 2002/3 levels of average household consumption, as well as rising, and 2009/10, when poverty fell rapidly, around 6600 new rather than declining, real consumption levels. formal sector jobs were created each year, an annual growth

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SPECIAL FEATURES

The Evolution of Botswana’s Parastatals – Part 2

In the last issue of the Economic Review we wrote about A note of caution is in order, however; as we reported in Botswana’s parastatal sector and its evolution over past our last issue, there is a great deal of inconsistency in the years. One of the key messages was that the number of quality of reporting by parastatals and several do not make parastatals has grown rapidly, despite a supposed commit- their annual reports or financial statements readily avail- ment to privatisation. A second message was that there is able, the main offenders being Botswana Railways, Air a huge variation in the transparency surrounding parastatal Botswana and CEDA. Hence, there are some gaps in the governance and operations. Some parastatals reach high numbers, which we highlight where relevant. standards with regard to disclosure, while others fall well short of minimum acceptable standards with regard to pub- Parastatal Subventions from Government lication of audited financial statements and annual reports. It is striking how fast the level of parastatal subventions Amongst the best performers regarding transparency and from government has risen in recent years, from P2.4 bil- efficiency were BoB, BHC, BTCL and the BSE, while the lion in 2011/12 to P5.9 billion in 2015/16. There are two worst performers were BMC, ODC, CEDA, PEEPA, SPEDU main reasons for this. First, the dramatic increase in sub- and MCM (see Table 1 for acronyms). sidies to Botswana Power Corporation (BPC), from P508 million in 2011/12 to P2.3 billion in 2015/16. BPC received We continue this discussion by looking at the financial per- a total of P7.5 billion in subsidies over the five-year period. formance of parastatals. This involves several elements. Second, the steady increase in the number of parastatals, First, we review the dependence of parastatals on govern- notably developmental and regulatory parastatals, most of ment subsidies, i.e., how much parastatals are costing the which are dependent on subventions from government. taxpayer. Second, we consider financial efficiency, at least These include the BEC, CAAB, BTO, BITC and BITRI. for those parastatals that are broadly commercial in their operations and which should be expected to generate a return on the capital that government has invested in them. For these parastatals, we consider profitability and return on assets.

Figure 1: Total subventions from government to parastatals

6,000

5,000

4,000

3,000 P million 2,000

1,000

0 2011/12 2012/13 2013/14 2014/15 2015/16

Commercial Financial Developmental Regulatory Education Other

Source: Annual Reports, Government Budget documents

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SPECIAL FEATURES

Over the five-year period, total subventions to parastatals These figures just refer to operational subsidies, and do were just under P20 billion. The major recipients were BPC not include capital injections or subsidised loans (including (P7.5 bn), UB (P1.9 bn), CEDA (P1.6 bn), BAMB (P1.2 these would make subsidies significantly higher). The also bn), BEC (P949 million), LEA (P750 mn), CAAB (P683 mn), exclude BR and AB, which have failed to make financial BIUST (P677 mn), BMC (P623 mn) and WUC (P613 mn). statements publicly available.

Table 1: Subventions by parastatal, total, 2011/12 – 2015/16

Commercial Parastatal Commercial Financial Air Botswana (AB) n/a Botswana Savings Bank (BSB) 0 Botswana Agric. Marketing Board (BAMB) 1,179,054 Botswana Development Corporation (BDC) 0 Citizen Entrepreneurial Development BCL Ltd n/a Agency (CEDA) 1,586,016 Botswana Couriers & Logistics (BC&L) n/a Motor Vehicle Accident Fund (MVAF) 0 Botswana Fibre Networks (BoFINET) 135,010 National Development Bank (NDB) 23,198 Botswana Housing Corporation (BHC) 0 Botswana Stock Exchange (BSE) 42,304 Botswana Meat Commission (BMC) 622,900 TOTAL 1,651,518 Botswana Oil (BOL) 0 Botswana Post (Bots Post) 102,853 Developmental Botswana Power Corporation (BPC) 7,515,160 Botswana Innovation Hub (BIH) 125,157 Botswana Railways (BR) n/a Botswana Tourism Organisation (BTO) 346,967 Botswana Telecomms Limited (BTCL) 0 Botswana Nat. Productivity Centre (BNPC) 108,644 Botswana Vaccine Institute (BVI) 0 Botswana Nat. Sports council (BNSC) n/a Morupule Coal Mine (MCM) n/a Botswana Inv. & Trade Centre (BITC) 322,670 Minerals Development Company Botswana Botswana Institute for Technology (MDCB) 88,101 Research and Innovation (BITRI) 123,286 Okavango Diamond Company (ODC) n/a Human Resources Dev. Council (HRDC) 118,518 Water Utilities Corporation (WUC) 612,956 Local Enterprise Authority (LEA) 750,661 Selibe Phikwe Economic Diversification TOTAL 10,256,034 Unit (SPEDU) 32,259 TOTAL 1,928,161 Regulatory Source: Annual Reports, Government Budget documents Botswana Accountancy Oversight Authority (BAOA) 24,966 Education Botswana University of Agriculture and Botswana Bureau of Standards (BOBS) 269,369 Natural Resources (BUAN) 466,661 Botswana Communications Regulatory Botswana International University of Auth. (BOCRA) 0 Science and Technology (BIUST) 676,750 Botswana Examinations Council (BEC) 943,009 BOCODOL n/a Botswana Institute of Chartered Accountants (BICA) 25,029 Botswana Accountancy College n/a Botswana Qualification Authority (BQA) 123,232 Univ. of Botswana (UB) 1,926,078 Civil Aviation Auth. of Botswana (CAAB) 682,522 TOTAL 3,069,490 Companies and Intellectual Property Authority (CIPA) 28,187 Competition Authority (CA) 108,158 Other TOTAL Copyright Society of Botswana (COSBOTS) 5,656 Bank Of Botswana (BOB) 0 Gambling Authority (GA) 12,200 Botswana Unified Revenue Service (BURS) 0 Public Enterprises Evaluation and Privatization Agency (PEEPA) 192,038 Legal Aid Botswana (LAB) n/a Public Procurement & Asset Disposal Board (PPDAB) 249,663 Statistics Botswana (StB) 293,913 Non-Bank Financial Institutions Regulatory Authority (NBFIRA) 70,357 TOTAL 293,913 TOTAL 2,734,387

Total 19,933,502

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Parastatal Profitability The absolute value of profits depends on the absolute Some parastatals are set to operate as commercial enti- size of an organisation as well as how efficiently it is run. ties, whereby they primarily derive income from the sale Hence, another way to measure profitability is by return on of goods or services. In many cases the Acts of Parliament assets, which adjusts profits for size. This gives a some- establishing such parastatals require that they operate in a what different ranking of parastatal performance. By this commercially sustainable manner and generate a reason- measure, the worst performing entity is BAMB with an av- able return on capital. For instance, the BPC and WUC Acts erage annual return on assets of minus 91%, followed by require “that its revenues are sufficient to produce on the BMC at minus 27%. BPC is no longer the worst performer; fair value of its assets a reasonable return measured by although its losses are huge, so are its assets, so its RoA is taking its net operating income as a percentage of the fair “only” minus 12%. At the other extreme are the BSE (RoA value of its fixed assets in operation plus an appropriate of 11%) and the MVA Fund again (RoA 4%). However, it allowance for its working capital”. There are similar provi- should be noted that even the profitable parastatals are not sions for Air Botswana and Botswana Railways. BHC’s Act very profitable, with RoAs that are meagre by the standards is slightly different, only requiring that “its revenue is suf- of the private sector. ficient for meeting all expenditure properly chargeable to revenue and sufficient provision is made for depreciation of assets”, but apart from this it does not have to make a profit. Indeed, BHC is one of the few parastatals to meet its statutory financial objectives.

Of the nineteen broadly commercial parastatals (including financial institutions), only seven have made a profit over the past five years. The major loss maker is BPC, followed by WUC, while the most profitable parastatal in terms of absolute values is the MVA Fund, followed by BTCL. (We do not include regulatory or developmental parastatals here, which cannot generally sell services to cover their costs, as they are providing public goods).

Most parastatals have therefore failed to meet their statu- tory financial objectives, or to operate in a commercially viable manner under the Companies Act. The widespread lossmaking means that for many parastatals, the share- holder – government – is breaking its own law.

Figure 2: Average annual profits, 2011/12 – 2015/16 (P million)

200

100

0

-100

P million -200

-300

-400

-500

BPC BSE BSB WUC BMC AB* NDB BVI* BOL^ BHC BDC BTCL CEDA* BAMB MVAF BoFINET^ BOTSPOST

Note: * indicates missing information for one or more years; ^ indicates new organisation. In both cases the figures are based on available data. Source: Annual Reports

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Figure 3: Average profitability (return on assets), 2011/12 – 2015/16 (%)

20%

10%

0%

-10%

-20%

-30%

-40%

BPC BSB BSE BMC AB* WUC BOL^ BVI* NDB BHC BDC BTCL BAMB CEDA* MVAF BoFINET^ BOTSPOST

Conclusions Commercial parastatals need not be loss-makers, indeed Why are Botswana’s “commercial” parastatals generally they should not be, on a sustained basis. They should be unprofitable? The reasons are a mixture of policy and mis- required to operate commercially and efficiently. Any sub- management. BPC, for instance, has made major losses sidies to achieve broader socio-economic objectives should due to the incompetently handled Morupule B power sta- be clearly justified on a cost-benefit basis, and explicitly tion project (leading to high costs), as well as government’s budgeted by the government (rather than paid as an emer- refusal to allow it to raise electricity tariffs to realistic levels. gency bail-out). It should also be recognised that many WUC’s losses are due to the transfer of decrepit village social objectives are best pursued by other means. For in- water infrastructure to it from the Department of Water Af- stance, keeping water and electricity tariffs generally “low” fairs, as well as its inability to charge cost-recovery tariffs. to help poor households largely benefits the rich, while also Air Botswana has been hampered by management insta- provides misleading incentives to both households and busi- bility, compounded by excessive government interference nesses (for instance by encouraging over-consumption and in its operations. Others are highly politicised. With some discouraging investment in more efficient ways producing parastatals, there are strong suspicions of corruption lead- or conserving these resources). Helping poor households ing to losses, although unfortunately the law enforcement can be more effectively done by direct welfare measures, authorities have been unable to bring any successful pros- or by keeping water and electricity tariffs low only for a ecutions for this. Fortunately both BPC and WUC are un- restricted initial consumption amount, and then charging der new management and are trying to address historical full-cost tariffs on the remainder. problems, although in other cases government seems to be resistant to making the required changes.

This feature was prepared with the assistance of Sekgwa Mark Teleki.

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