Botswana Botswana at a Glance: 2004-05

Country Report

Botswana Botswana at a glance: 2004-05

OVERVIEW The political scene will remain stable, with the ruling Botswana Democratic Party (BDP) maintaining its firm grip on power throughout the forecast period. It is expected easily to win the legislative election due in October 2004. Neither the BDP nor the president, Festus Mogae, will be threatened by any serious challenge from the opposition parties. In national accounts year 2003/04 (July- June) real GDP will rise by 7.4%, driven by a large jump in diamond output. In 2004/05 real GDP growth will fall to 3.5% as growth in the mining sector slows. In 2005/06 real GDP growth will rise to 4.1%, owing to a combination of robust mining activity and increased services and construction activity. The Economist Intelligence Unit expects average inflation to fall to 6.1% in 2004, helped by falling price pressures in South Africa. In 2005 inflation will fall slightly, to 5.8%, as the Bank of Botswana (the central bank) retains a tight monetary stance. The prospects for the rand will be reflected in the value of the pula, which we forecast will depreciate to P6.02:US$1 in 2004 and to P6.4:US$1 in 2005. The current-account surplus is forecast to widen in 2004 to 8.6% of GDP and to 9.2% of GDP in 2005 as a result of improvements in the transfers and incomes accounts.

Key changes from last month Political outlook • Low voter turnout and antipathy towards the opposition's new alliance saw the BDP retain the Francistown East seat in a by-election. The opposition alliance’s challenge failed—it garnered fewer votes than the alliance's member parties gained individually at the 1999 October legislative election. Economic policy outlook • The central bank has cut the bank rate by 50 basis points, taking it to 14.75%— the rate had been unchanged since November 2002. Further cuts are expected in 2004, but the bank is expected to keep monetary policy tight in an effort to reduce domestic demand and lower inflation. Economic forecast • There has been no change to the economic forecast outlook.

November 2003

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Outlook for 2004-05

Political outlook

Domestic politics The political scene will remain stable, with the ruling Botswana Democratic Party (BDP) maintaining its firm grip on power throughout the forecast period. It is expected to win an easy victory in the next legislative election, which is due in October 2004. Neither the BDP nor the president, Festus Mogae, will be threatened by any challenge from the relatively disorganised and ineffectual opposition parties, despite a recent electoral pact between some of them. Despite the external appearance of stability, all parties will be affected by internal disagreements in the run-up to the election and beyond. The overwhelming success of the vice-president, Ian Khama, in the vote for the chairmanship of the BDP at its congress in July has ruled out any challenge being made by his defeated rival, Ponatshego Kedikilwe, to Mr Mogae for the party presidency (and thus the party’s candidate for state president) at the BDP’s special congress in April 2004. Any challenge would end in another defeat for Mr Kedikilwe and he would be accused of undermining the party’s election prospects. Mr Kedikilwe will probably be content to remain in the BDP, but his loss of office will prompt most of his supporters to join the Khama- Mogae group, his influence having been seriously damaged. However, Mr Kedikilwe’s concerns about the dangers of dynastic and autocratic politics remain (Mr Khama is the son of Botswana’s first president, Seretse Khama). Having thwarted Mr Kedikilwe, Mr Mogae must continue to work with Mr Khama, who now has control over the BDP. This adds to his already strong public support base (some of Mr Khama’s supporters were elected to key positions in the BDP’s central committee at the congress). Mr Khama is unlikely to be sufficiently emboldened himself to challenge Mr Mogae in 2004, but in the past his loyalty to the president has been less than wholehearted. In 2005, following the election, he may seek increasingly to influence the direction of government policy as he prepares to succeed Mr Mogae in 2009. The September 2003 agreement between the main opposition party, the Botswana National Front (BNF), and two smaller parties to form an electoral pact remains to be tested. Along with the extent of disaffection towards the government, particularly among public-sector workers, combining forces should provide opportunities. However, with the creation of 17 additional constitu- encies earlier in 2003 that generally favour the BDP’s rural strongholds, as well as voters’ unwillingness to place much confidence in parties that have performed so poorly since the last election, renewed infighting appears to be more likely. International relations The situation in Zimbabwe will continue to affect Botswana. Relations will remain strained until the impasse over the disastrous rule of Zimbabwe’s president, Robert Mugabe, breaks. Botswana may increase its support for regional initiatives to resolve the economic and social crisis (although these are unlikely to have any effect). Relations with other regional neighbours will remain good. Botswana’s international standing, which is already high owing to

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its efforts in the fight against HIV/AIDS, will benefit from the visit in July of the US president, George W Bush, who has pledged funds for, among other things, tackling HIV/AIDS and developing trade links.

Economic policy outlook

Policy trends The government will continue to pursue largely prudent economic policies in 2004-05. However, the election is influencing the implementation of difficult economic policy choices (such as privatisation), some of which will be delayed until after the election. The Ninth National Development Plan (NDP9; April 2003-March 2009) has assumed the policy framework of the outgoing NDP8 and in part mirrors the goals in the long-term policy document, Vision 2016. The main policy objectives of NDP9—which will be only partly successful owing to capacity constraints, a lack of skilled labour and overoptimistic goals—are economic diversification; employment creation and poverty alleviation; maintaining macroeconomic stability and financial discipline; and the development of the country’s human resources (which includes the fight against HIV/AIDS). Diversification of the economy away from diamond mining is crucial. However, the plethora of government agencies trying to attract foreign investment, bureaucracy and small market size will remain problems. The timetable for privatisations, other than that of Air Botswana (which is close to being sold), will remain unclear, as the Public Enterprises Evaluation and Privatisation Agency (PEEPA) will struggle to co-ordinate its efforts with parastatals and parent ministries. The government successfully launched three pula-denominated bonds in March, April and May (to help develop the capital market); a further issue was made in October and one in November 2003 has been scheduled. The government has announced that a foreign-currency denominated bond will be issued in 2004.

Fiscal policy The finance minister, Baledzi Gaolathe, presented the budget for 2003/04 (April- March) to parliament on February 3rd. The budget projected that revenue and grants will rise to P17.54bn (US$3.13bn), 22% above the official revised estimate for 2002/03. Expenditure and net lending are expected to increase to P17.33bn, from P16.64bn in 2002/03. The 2003/04 budget therefore shows a small surplus of P206m, or around 0.5% of GDP (based on a projected 16% increase in mineral revenue). However, the forecast increase in diamond production to record levels in 2003 will not be accompanied by higher prices, and the continuing appreciation of the pula against the US dollar will depress mineral revenue (diamonds are priced in US dollars). It is therefore doubtful whether mineral revenue will meet expectations, given weak real GDP growth in OECD economies (the main market for diamond consumption). Despite an increase in revenue from value-added tax (VAT) in its first full year of operation (it was introduced in July 2002) and the new revenue-sharing agreement reached by the Southern African Customs Union (SACU) in 2002 (increasing revenue in late 2003/04 and beyond), the Economist Intelligence Unit forecasts that, following the supplementary budget passed by parliament in mid-August (raising approved spending by P786m:US$177m), a deficit of 0.4% of GDP will be recorded in 2003/04. In 2004/05 a public-sector pay rise will be

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awarded ahead of the October election (there was no rise in 2003). However, the publication in August of the de Villiers Commission’s report on civil service pay structures did not recommend widespread salary increases, so rises will be restrained. Expenditure under NDP9, although expansionary, will be controlled. Mineral revenue will rise in line with increased output and expected higher prices in 2004, and income and corporate taxes will rise in line with real GDP growth. Therefore, we forecast a fiscal surplus of 0.4% of GDP in 2004/05. In 2005/6 the budget is expected to be broadly in balance, owing more to a continuing lack of capacity in government to undertake spending programmes than to a commitment to fiscal prudence among spending ministries. Monetary policy Despite the 50-basis-point cut to the bank rate on October 14th, taking it to 14.75%—the rate was last changed in November 2002—the Bank of Botswana (the central bank) will keep monetary policy tight in 2004-05 in an effort to curtail the growth of commercial bank credit and, in turn, curb domestic demand and lower inflation. While the 2003 mid-year monetary policy review welcomed the more benign inflationary environment, and the intermediate target range for growth in commercial bank credit (12-14%) is close to being achieved, the emphasis remains on the need for caution. This is necessary given the inflationary consequences of additional government spending and the likely public-sector pay increase in the run-up to the 2004 election. How- ever, the improved prospects for lower inflation in South Africa will maintain pressure on the Bank of Botswana to cut its rates further. Although the bank rate may be reduced in 2004, the central bank may use the opportunity of falling inflation to push real interest rates higher, thus squeezing inflation further.

Economic forecast

International assumptions International assumptions summary (% unless otherwise indicated) 2002 2003 2004 2005 Real GDP growth World 2.9 3.3 3.9 4.1 US 2.4 2.6 3.4 3.1 South Africa 3.0 2.5 3.5 3.5 Exchange rates ¥:US$ 125.3 115.7 109.8 114.8 US$:€ 0.945 1.132 1.230 1.185 Rand:US$ 1817.00 1477.00 1424.73 1636.74 Financial indicators US$ 3-month commercial paper rate 1.70 1.08 1.38 3.56 € 3-month interbank rate 3.33 2.30 2.08 2.94 Commodity prices Oil (Brent; US$/b) 25.0 27.6 19.6 18.9 Nickel (US$/lb) 3.1 4.0 4.1 3.6 Food, feedstuffs & beverages (% change in US$ terms) 12.7 5.6 1.7 5.8 Industrial raw materials (% change in US$ terms) 2.2 8.9 3.0 4.3 Note. Regional GDP growth rates weighted using purchasing power parity exchange rates.

A global economic recovery is under way and we expect world GDP growth (on a purchasing power parity basis) to rise to an average of 3.9% in 2004 and 4.1% in 2005. The pace of growth will support Botswana’s diamond exports, as the US accounts for over 50% of retail diamond sales. In South Africa, Botswana’s main market for non-traditional exports, real GDP will rise by 3.5% in 2004-05.

Economic growth Debswana, the diamond mining company jointly owned by the government and De Beers, announced on March 7th that its output would increase by 11% in 2003, to 30m carats (benefiting for the first time from fully automated sorting). As a result, we estimate that real GDP will grow by 7.4% in national accounts year 2003/04 (July-June). In 2004/05, as growth in the mining sector slows (the 11% growth in diamond production is unsustainable), real GDP growth will fall to 3.5%, although it will be supported by continued growth in services. In 2005/06 real GDP growth will rise to 4.1%, owing to increased services and growth in consumer spending (as a result of the expected public- sector pay award and some easing in monetary policy). The services sector (which is skewed by the high level of government spending) is expected to become the main source of growth in 2004-05 as diversification efforts proceed (with varying results). The government will continue to promote financial services and more foreign firms are expected to enter Botswana (but the continuing problems at Botswana Telecommunications Corporation will prove a disincentive). Mining activity (led by diamond output) will remain the second-largest generator of GDP. Should the global economic recovery waver in 2004, leading to weaker diamond demand, we assume that production will not decline and that unsold diamonds will be stockpiled. Output from the Mupane gold mine and steady activity in the copper, nickel and soda ash mines will partly offset slower growth in diamond production. Tourism, agriculture and manufacturing will remain niche productive sectors. Inflation The central bank retained its 4-6% inflation target in 2003 (as stated in the mid- term review of monetary policy), suggesting that it believes that inflation will continue to fall. The 12-month inflation rate fell in September to 7.9%, from 8.3% in August (owing largely to the slowing of food price increases). Inflation will continue to edge downwards in 2004, helped by falling inflation in South Africa. A public-sector pay award is expected in early 2004, prior to the election. This, along with election-related spending, will add to inflationary pressure. However, offsetting this will be the expected appreciation of the pula against the rand in 2004-05 (which will reduce imported inflation from South Africa), South African inflation being brought under control and the central bank’s retention of a tight monetary policy. Thus, we expect average inflation to fall to 6.1% in 2004. In 2005 it is forecast to fall slightly, to 5.8%, as the central bank retains its tight monetary stance.

Exchange rates The calculation of movements in the real effective exchange rate, which is monitored as an indicator of competitiveness, is unlikely to result in any major readjustment to the basket mechanism that determines the value of the pula— the central bank appears more keen to control competitiveness through reducing inflation. The strength of the rand in 2003 (owing to higher gold and platinum prices, along with higher interest rate differentials with OECD economies) will not carry far over into 2004; the South African Reserve Bank is expected to cut its repo rate again in 2004 as inflation continues to fall. The prospects for the rand and the US dollar (which is expected to remain weak for most of 2004) will be reflected in the value of the pula, which we forecast will depreciate to P6.02:US$1 in 2004 (following its appreciation against the weak dollar in 2003). In 2005, with the rand continuing to depreciate (as investment demand slows, reducing demand for the rand) but the US dollar starting to strengthen (as the US economy grows more rapidly and investment returns improve), the pula is expected to weaken further to P6.40:US$1.

External sector The current-account surplus is forecast to widen to 8.6% of GDP in 2004 and 9.2% of GDP in 2005. The widening of the current-account surplus will be the result of an increase in the transfers surplus and a narrowing income deficit. Exports are forecast to increase in 2004-05, owing mainly to an incremental increase in diamond production. Consumer and government spending will support import growth over the forecast period. Food requirements will continue to be met mainly by imports. The deficit on the services account will remain fairly steady, largely because the cost of importing goods into land- locked Botswana will offset any slight increase in financial services and tourism receipts. Movements on the income account will depend in part on the state of the international financial markets, where foreign-exchange reserves and public pension funds are invested—such returns generate nearly all income credits. Debswana’s profit transfers to De Beers will form the main income debits, and are expected to grow in line with rising Debswana output and profits. Current transfers will benefit from the new SACU revenue-sharing formula in 2004 and beyond (owing to Botswana’s large share of intra-SACU imports), widening the surplus on the current-transfers account in 2004-05.

Forecast summary (% unless otherwise indicated) 2002a 2003a 2004b 2005b Real GDP growthc 4.2 7.4 3.5 4.1 Industrial production growth 4.2 10.6 1.9 2.0 Gross fixed investment growthc 2.5 3.8 2.0 2.1 Consumer price inflation (av) 8.1d 9.7 6.1 5.8 Consumer price inflation (year-end) 11.2d 6.7 6.7 5.1 Commercial bank prime rate (av) 16.0d 15.8 15.0 14.0 Government balance (% of GDP) -3.7 -0.4 0.4 0.1 Exports of goods fob (US$ m) 2,408 2,587 2,610 2,648 Imports of goods fob (US$ m) -1,704 -1,753 -1,786 -1,819 Current-account balance (US$ m) 570 632 645 709 Current-account balance (% of GDP) 10.2 7.9 8.6 9.2 External debt (year-end; US$ m) 383 415 816 804 Exchange rate P:US$ (av) 6.33d 5.21 6.02 6.40 Exchange rate P:¥100 (av) 5.05d 4.50 5.49 5.58 Exchange rate P:€ (year-end) 5.73d 7.07 7.43 7.72 Exchange rate P:R (year-end) 0.60d 0.68 0.74 0.71 a Economist Intelligence Unit estimates. b Economist Intelligence Unit forecasts. c Fiscal year. d Actual.

Editors: Angus Downie (editor); Paul Gamble (consulting editor) Editorial closing date: October 30th 2003 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule