ECONOMIC REVIEW Fourth Quarter October - December 2016 in This Issue

www.econsult.co.bw compiled by KEITH JEFFERIS Sethunya Sejoe ECONOMIC REVIEW fourth quarter october - december 2016 in this issue ...

COMMENTARY KEY NEWS MACRO- SPECIAL 1 ECONOMIC 4 HIGHLIGHTS 7 ECONOMIC 11 FEATURES 12 VARIABLES DATA

COMMENTARY

Pick up in economic activity but longer-term concerns weigh, as NDP 11 is finalised

Economic data released during the fourth quarter of 2016 showed some improvement in macroeconomic conditions. Annual GDP growth in Q3 2016 came in at 0.9%, not a high rate but a turnaround from four quarters of negative annual growth. This reflects a recovery in the global diamond market and the falling away of the impact of cutbacks in diamond production a year ago, due to market weakness in 2015. The value of diamonds sold through De Beers Global Sightholder Sales in 2016 was nearly 40% higher than in 2015, leading to an improvement in the balance of payments and government revenues. Inflation picked up slightly to 3%, but is still at the lower end of the Bank of Botswana’s inflation objective range, and interest rates were maintained at historically low levels.

For many people and firms, however, economic conditions last Review, the closure will have a major negative impact continue to be tough. Job creation picked up in the year on north-east Botswana if, as seems increasingly likely, no to September, but with only 1% annual growth in formal rescue or buyer is forthcoming. employment, it remains far too low and is well below the rate of population and labour force growth. Business confidence One further potential troubling sign has been the declining rose slightly in the second half of 2016 as compared to of liquidity in the banking system, last seen in 2014 and the first half, but remains low by the standards of recent early 2015. Consolidated data on banking system liquidity years. Botswana’s ranking improved in the World Economic recent months have not yet been released by the Bank Forum’s Global Competitiveness Index, but declined in the of Botswana, but liquidity in the overnight interbank World Bank’s Doing Business report. The impact of the money market dropped to very low levels in late 2016 closure of the BCL copper-nickel mine has not yet showed and early 2017. There could be several drivers of this, up in the jobs or GDP figures, but will have a negative including expenditure by parastatals prior to the end of impact when the Q4 data are released. As discussed in the the government fiscal year, and capital outflows. In view of

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the emerging interest rate differential between Botswana There is, however, some detail in the listing of development and South Africa (where rates have been rising), and the projects that have been approved for funding and imple- strengthening SA rand, such outflows are to be expected. mentation. Out of a total development budget allocation for Declining returns on the Botswana Stock Exchange and NDP 11 of P101.4 billion, the two largest allocations are to in the property market, coupled with perceptions of a defence (P15 bn) and support for Botswana Power Corpo- deteriorating business environment and economic growth ration (P10 bn) – although the latter seems to be for ongo- prospects, may also be driving capital outflows. There are ing operational subsidies rather than for the development also indications that government is delaying or deferring of new power generation infrastructure. This illustrates one payment due to firms for the procurement of goods and of the puzzles of the development budget, which is that it services. This means less money deposited in the banking clearly includes several items that are not investment, but system, and greater use of loans and overdrafts, which are disguised recurrent spending (another item is some so- further reduces liquidity. While there are no major liquidity cial welfare programmes). It also appears that, despite ear- related concerns in the banking system on yet, it will be lier commitments to a rigorous system of project appraisal necessary to monitor developments closely. to ensure that only high-return projects will be adopted, this has not been done. And several projects appear to be National Development Plan (NDP) 11 under-funded, e.g. there is an allocation of P400m to the One of the most important developments of Q4 was the Mohembo Bridge, even though the contracted construction release of NDP 11 and its approval by Parliament. NDP 11 price is reported to be just over P1 billion. Unfortunately, the covers the period 2017-2023, and lays out government’s Ministry of Finance and Economic Development has been fiscal plans, economic growth projections, broad strategies unable to convince the rest of government of the need for and development projects. disciplined resource allocation and budgeting decisions.

Much of the content of NDP 11 is familiar: the theme is “In- On the macroeconomic side, NDP 11 entails an expansion clusive Growth for the Realisation of Sustainable Employ- of government spending in the first half of the Plan, driven ment Creation and Poverty Eradication”, with macroeco- in part by expenditure on the Economic Stimulus Package nomic strategy focused on “Developing Diversified Sources (ESP), leading to modest budget deficits. However, the of Economic Growth”, which is little different to past NDPs. second half of the Plan entails a significant contraction in The key challenge remains implementation: previous com- spending, leading to budget surpluses, and a broadly bal- mitments to the type of business environment reform that is necessary to achieve the transformation to diversified, export-led growth and meaningful job creation have not re- Figure 1: NDP 11 Fiscal Projections sulted in enough concrete actions. Unfortunately, NDP 11 (percent of GDP) provides little detail as to how past constraints to implementation will be addressed; indeed they are hardly even ac- knowledged. The Plan contains little of the detail that would 40% 40% be expected in such a document (e.g., what will be done, 35% 35% by whom, when, at what cost; and what measures will be 30% 30% taken to ensure that these and other policy commitments 25% 25% actually happen). Instead, the Plan is more general, more 20% 20% of a strategy document than a “plan”. For instance, there 15% Surplus/deﬁcit Expenditure Revenue 15%

are no timelines or details for the implementation of the “do- percent of GDP 10% 10% ing business” reform roadmap and action plan; or for crucial 5% 5% items such as the development of water and electricity in- 0% 0% frastructure, the introduction cost-recovery tariffs and open- -‐5% -‐5% ing up those sectors to private sector participation.

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anced budget over NDP 11 as a whole. The challenge will the trade sector has increased (by up to 25%). Overall, be to ensure that this anticipated contraction in spending recorded GDP varies between being 2.1% smaller (in is actually achieved, and that sufficient business environ- 2012) and 2.4% larger (in 2014) following the revision. ment reforms take place to ensure that the private sector takes up the slack. NDP 11 also introduces a new fiscal Economic growth has also been affected, and is now high- rule, whereby 40% of mineral revenues will be saved. In er than previously through in 2013 and 2014, but lower in terms of the NDP 11 fiscal forecasts, the target implied by 2015 and 2016. This is because the inclusion of diamond the rule is achieved in the final year of the Plan. trading activities accentuates the swings in growth that are driven by fluctuations in diamond mining activity. Revisions to GDP data The third quarter release of Botswana’s GDP data includ- The GDP revisions provide a more accurate picture of eco- ed some important revisions to the historical data series, nomic activity and are therefore to be welcomed. However, which have had an impact on recorded GDP and calculated the data still obscure certain aspects of economic activity growth rates. The main changes were as follows: in Botswana. In particular, downstream activities in the diamond sector are not separately identified; whether it be dia- 1. Revision of data on the value of copper-nickel output, mond cutting and polishing, diamond sorting and valuing, due to inconsistencies between data on the value of or diamond marketing and trading – all of these activities production and the value of exports, despite the fact are hidden in the “Other Manufacturing”, “Wholesale” and that all copper-nickel is exported. The revision only af- “Business Services” sub-sectors of GDP. It would be help- fected copper-nickel production at current prices, but ful for assessing both economic development and policy was substantial – reducing the value of the sub-sector’s impact if Statistics Botswana can identify these activities contribution to GDP by an average of 70% from 2011- separately in the national accounts. 15. However, recorded real output, and hence real growth, was unaffected, as this is driven by the volume of copper-nickel production, which had been recorded Figure 2: Impact of GDP Growth Revisions correctly.

2. The inclusion of information from new entities in dia- 14% mond marketing, viz. De Beers Global Sightholder Sales (DBGSS) and the Okavango Diamond Company 12% (ODC). DBGSS and ODC started operating in Botswana 10% in 2013, but their activities had not previously been in- 8% cluded in the national accounts. They are now included 6% in the Trade (Wholesale) sector, and have made a large 4% impact on recorded activity in both current and constant 2% prices, and hence on growth rates. Annual real GDP growth 0% -‐2% 3. To some extent the two revisions offset each other, as -‐4% the first reduces GDP while the second increases it. 2013 Q2 Q3 Q4 2014 Q2 Q3 Q4 2015 Q2 Q3 Q4 2016 Q2 Q3

However, the recorded size of the mining sector has Revised Original fallen (by 3-10%, depending on the year) while that of

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KEY ECONOMIC VARIABLES

Annual GDP Growth Sectoral GDP Growth

AnnualAnnual GDPGDP Growth SectoralSectoral GDP GDP Growth Growth 30%30% Water & Elec. Annual GDP Growth Water & Elec.Sectoral GDP Growth 20%20% Trans. & Comm. 30% Annual GDP Growth Trans. Water & Comm. &Sectoral Elec. GDP Growth 30% Fin. Water& Bus. & Service Elec. 10%10%20% Fin. Trans.& Bus. &Service Comm. 20% Trans.ConstructionConstruction & Comm. 0%10%0% Fin. & Bus. Service 10% Soc.Soc.Fin. && Pers. Bus.Pers. ServiceServices Services -10% Construction -10%0% ConstructionTrade 0% Soc. & Pers. ServicesTrade -20% -20%-10% Soc. & Pers.GovernmentGovernment Services -10% Trade -30% TotalTrade VA -30%-20% Total VA -20% Government -40% GovernmentManuf 0.0% -40%-30% TotalManuf VA 0.0% -30% AgricultureTotal VA -1.3% -50% Agriculture -1.3% -50%-40% Manuf 0.0% -40% ManufMining -11.9%0.0% AgricultureMining -11.9%-1.3% -50% Agriculture -4% -2%-1.3% 0% 2% 4% 6% 8% -50% NMPS-VA Mining GDP Mining-4% -2%-11.9% 0% 2% 4% 6% 8% NMPS-VA Mining GDP Mining -11.9% Overall GDP improved in Q3 2016, recording The improvement-4% in growth-2% 0% was2% reflected4% 6% in8% Overall GDPNMPS-VA improved inMining Q3 2016GDP, recording The improvement-4% -2%in growth0% 2% was4% reflected6% 8% in theOverall first GDP positiveNMPS-VA improved growth in Q3Mining 2016, rate recording sinceGDP thethe first first mostThe improvementsectors of in growththe economy was reflected, with in most higher sectors the first positive growth rate since the first most sectors of the economy, with higher OverallhalfOverallpositive of growth2015,GDP GDP rate improvedas improved sincea result the infirst ofin Q3 theQ3half 2016 ofstronger2016 2015,, recording, asrecording a globalresult The growthTheof improvthe improv economy,acrossementement withthe in higher boardgrowthin growth growth in was Q3 acrosswas reflectedthan thereflected boardin thein in in halfof the of stronger 2015, globalas a diamondresult ofmarket. the Year-on-yearstronger global real growthQ3 than acrossin the previous the boardquarter. Miningin Q3 and than Agriculture in the thediamondthe firstfirst positive positivemarket. growth growthYear -rateon rate-year since since real the the GDPfirst first most previousmost sectors sectors quarter. of ofthe theMining economy economy and, with,Agriculture with higher higher diamondGDP growth market. increased toYear 0.9%,- onfrom-year (a revised) real minusGDP previouscontinued toquarter. be the laggards, Mining with andnegative Agriculture growth of halfgrowthhalf of of 2015, 2015,increased as as a aresult resultto 0.9% of of the ,the from stronger stronger (a revised) global global growth continuedgrowth across across to bethe thethe board laggards,board in Q3in with Q3than thannegative in thein the growth1.6% in increasedQ2 2016. The higherto 0.9% real ,growth from is attributable(a revised) continued11.9% and 1.3%to be respectively, the laggards, although stillwith better negative than in diamondminusdiamondto an improvement 1.6% market.market. in in Q2 mining,Year Year2016.- onalthough-on- yearThe-year still higherreal realrecording GDP realGDP previous growthpreviousQ2. The Waterofquarter. quarter.11.9% & Electricity Mining andMining sector 1.3 andwas% andthe respectivelyAgriculture fastest Agriculture growing , minusgrowthgrowthnegative 1.6%increased growth,isincreased attributable into minusQ2 to to 11.9%0.9%2016. 0.9%to an,y-o-y from, Theimprovementfrom in Q3 (ahigher from(a revised) revised)minus real in continued althoughgrowthcontinuedsector, recording ofstillto tobe 11.9%better be144%the the thanlaggards, andy-o-y laggards, in growth,1.3 Q2 %with. The althoughwithrespectively negative Water negative this &is , growthminusminingminus22.9% 1.6%,inis 1.6% Q2.altattributable houghHowever, inin Q2 Q2 thestill2016. 2016. tonon-mining recordingan The improvementThe privatehigher highernegative sector real real in growth Electricityalthoughgrowthdistorted of by ofstill 11.9%sectornegative 11.9%better valuewasand than andadded the1.3 in in 1.3% Q2fastestelectricity %respectively. Therespectively production.growing Water, & , mininggrowthgrowth,growth(NMPS) , is showedis alttoattributable attributablehoughminus some resilience11.9%still to to anrecording anwithy -improvemento -improvementgrowthy in Q3ofnegative 3.8% from in in although sectorElectricityalthoughTotal ,value stillrecording addedstill sectorbetter better increased thanwas 14than from 4in%the Q2 in minus Q2.yfastest -The o1.8%.- yThe Water y-o-y growth growingWater in &Q2 , & y-o-y in Q3 2016, up from 2.7% in Q2. to plus 1.0% y-o-y in Q3. growth,miningminusmining, 22.9% , toaltalt houghminushough in Q2. 11.9%still However,still recording recordingy-o -they in non negativeQ3negative-m iningfrom Electricity althoughsectorElectricity, thisrecordingsector sector is distortedwas was 14the 4 the% byfastest negativefastesty-o- ygrowing growthgrowingvalue , minusgrowth,privategrowth, 22.9% totosector minusminus in Q2. 11.9%(NMPS) 11.9%However, y -yo--show oythe- yin noninedQ3 Q3- msomefrom iningfrom sector addedalthoughsector, in, recording thiselectricityrecording is distorted 14 production414%4 %byy - onegative.y- y-Total o-ygrowth valuegrowth value, , privateminusresilienceminus 22.9% 22.9%sector with in in Q2. growth Q2.(NMPS) However, However, of 3.8 showthe% the ynon- edonon--y m -ininingmsome iningQ3 although addedaddedalthough increased inthis electricitythis is distortedis fromdistorted production minus by bynegative 1.8% negative. Total y -valueo - yvaluevalue in resilienceprivate2016,private up sector fromsectorwith 2.7% growth (NMPS)(NMPS) in Q2of . 3.8 show%show yed-oed -y someinsome Q 3 added Q2addedadded to plusin increased inelectricity 1.0%electricity y- o from-productiony inproduction Q3.minus . 1.8%Total. Total yvalue-o -valuey in 2016,resilienceresilience up % fromwith ofwith firms 2.7%growth growth rating in Q2ofcurrent of .3.8 3.8 %business% y -oy- oy -yin inQ 3Q 3added Q2added to increasedplus increased 1.0% fromy- ofrom-y minusin minusQ3. 1.8% 1.8% y-o -yy- oin-y in % of firms rating current business AnnualAnnual Credit Credit Growth Growth 2016,2016, up up% from offrom firmsconditions conditions2.7% 2.7% rating in in satisfactoryQ2 Q2 satisfactorycurrent. . business Q2Q2 to45% toplus plus 1.0% 1.0%Annual y-o y-y-o in- yCredit Q3.in Q3. Growth 100% conditions satisfactory 40%45% 100%90% %% of of firms firms rating rating current current business business AnnualAnnual Credit Credit Growth Growth conditions satisfactory 45%35%40%45% 100%90%80% conditions satisfactory 100% 35% 80%70% 40%30%40% 90%90% 70%60% 35%25%30%35% 80%80% 60%50% 30%25% 70%70% 20%30% 50%40% 60%60% 25%15%20%25% 40%30%

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

40% % of credit to sector 15%10%5%15% 30%20%10% 30% % of credit to sector 10%0% % of credit to sector 5% 20%10%0% 10% 20% 2010 2011 2012 2013 2014 2015 2016 10%0% 2008 2009 2010 2011 2012 2013 2014 2015 2016 5%0% 10% 5% 0%2008 2009 2010 2011 2012 2013 2014 2015 2016 0%2010 2011 2012 2013 2014 2015 2016 0% Exporters Non-Exporters All 0% Total Firms Households 2008 2009 2010 2011 2012 2013 2014 2015 2016 2010 2011 2012 2013 2014 2015 2016 2008 2009 2010 2011 2012 2013 2014 2015 2016 2010 2011 2012 2013 2014 2015 2016 The BankExporters of Botswana’s Non-Exporters H2 2016 BusinessAll Annual growthTotal in creditFirms from Householdscommercial Exporters Non-Exporters All Total Firms Households ExpectationsExporters Survey (BES)Non-Exporters showed thatAll banks in BotswanaTotal Firmscontinued Householdsto move The Bank of Botswana’s H2 2016 Business Annual growth in credit from commercial ExpectationsTheoverallThe Bank Bank business of of Botswana’s Botswana’sSurvey confidence (BES) H2 H2 increased2016 2016showed Business Business whenthat Annual downwardsbanksAnnual growth ingrowth , Botswanareflecting in incredit creditslower continued from fromgrowth commercial commercial toin creditmove Expectations Survey (BES) showed that banks in Botswana continued to move overallcomparedExpectationsThe Bank business of toBotswana’s H1 Survey 2016,confidence H2 2016 from(BES) Business 36% increased showed toExpectations 43%. when Thethat todownwardsbanks Annualboth firmsgrowthin , reflectingBotswana andin credit households. fromslower continued commercial growth Annual to banksin bank creditmove in overall business confidence increased when downwards, reflecting slower growth in credit comparedleveloverallSurvey of(BES) businessconfidence to showedH1 2016, confidencethat increased fromoverall 36%business increased for to domesticconfidence43%. whenThe - credittodownwardsBotswana both growth firms continued , slowed reflectingand to households. fall, from reflectingslower 8.7% growth inslowerAnnual July growth in2016 bankcredit in comparedincreased when to H1 compared 2016, tofrom H1 36%2016, tofrom 43%. 36% The to to bothcredit firmsto both andfirms households.and households. AnnualAnnual bank bank credit levelorientedcompared of confidencebusinesses to H1 2016, increasedfrom from 31% 36% tofor to43%, domestic 43%. while The- tocreditto 7.8% both growth in firms October slowed and 2016.households. from Growth 8.7% inAnnualin Julycredit 2016 bankto leveldeteriorating43%. ofThe confidence level ofsignificantly confidence increased increased for forexporters fordomestic domestic- by- creditfirmsgrowth growthdecreased slowed slowed from from8.7% from in6.5% 8.7% July 2016 yin-o July- yto in 7.8%2016 July in orientedlevel of businessesconfidence fromincreased 31% tofor 43%, domestic while - tocredit 7.8% growth in October slowed 2016. from Growth 8.7% in in July credit 2016 to oriented29%oriented points businesses businesses from from 71% 31% from to to 42%43%,31% while into H1 43%, deteriorating 2016 while and to2016 7.8%October toin 2016. October5.6% Growth y2016. -ino -credity Growthin to firmsOctober indecreased credit 2017. fromto deterioratingorientedsignificantly businesses for exporterssignificantly by from29% points 31%for from exportersto 71%43%, to 42% while by firmsto6.5% 7.8% decreasedy-o-y in in OctoberJuly 2016 from to2016. 5.6% 6.5% y-o-yGrowth iny- Octobero- yin creditin 2017. July to deterioratingH2 2016 respectively.significantly forOptimism exporters about by firmsHousehold decreased credit from growth 6.5% alsoy-o-y declinedin July 29%deterioratingin H1 points 2016 andfrom H2significantly 71%2016 torespectively. 42% for in Optimism H1exporters 2016 about and by 2016firmsHousehold todecreased credit5.6% growth yfrom- oalso-y declined6.5%in October significantlyy-o-y in2017. fromJuly 29%business points conditions from 71% increases to 42% in inH1 the 2016 next and six 2016significantly to 5.6% from y10.9%-o-y iny -oOctober-y to 8.5% 2017. y-o-y H229%business 2016 points conditions respectively.from increases 71% in theto next42%Optimism six in to twelveH1 2016 monthsabout and Household201610.9% y-o-yto to5.6% credit8.5% y-o-y y-growtho during-y in the Octoberalsosame period.declined 2017. H2despite 2016 uncertainties respectively. about commodity Optimism demand in the aboutglobal Household credit growth also declined businessto twelve conditionsmonths despite increases uncertainties in the next about six duringsignificantly the same from period. 10.9% y-o-y to 8.5% y-o-y businessH2market. 2016 conditions respectively. increases Optimism in the next aboutsix significantly Household from credit 10.9% growth y-o-y to also8.5% declinedy-o-y tocommodity twelve months demand despite in the uncertaintiesglobal market. about during the same period. tobusiness twelve months conditions despite increases uncertainties in the nextabout six during significantly the same from period. 10.9% y-o-y to 8.5% y-o-y commodity demand in the global market. commodityto twelve monthsdemand despite in the global uncertainties market. about during the same period. commodity demand in the global market. page 4 www.econsult.co.bw

KEY ECONOMIC VARIABLES

Inflation and Forecast Interest Rates 16% Inflation and Forecast 14 Interest Rates Inflation and Forecast Interest Rates 14% 16% Inflation and Forecast 1214 Interest Rates Inflation and Forecast 14 Interest Rates 16% 14 12% 14%16% 1012 14% 12 12 10% 12%14% 108 12% 10 12% % 10 8% 10% 68 10% % 8 10% 8 6% 8% % 6

8% 4% 8% 6 4% 6% 6 6% 24 6% 4 2% 4% 4 4% 2 4% 02 0% 2% 2 2% 0 0%2% 0 0% 0 0% BoB Upper BoB Lower Bank Prime BoBC91Bank PrimeBoBC14 ActualBoB Upper ForecastBoB Lower BoBC91Bank BoBC14Prime BoBActual Upper ForecastBoB Lower Bank Prime Annual inflationBoB remained Upper below theBoB Bank Lower of Interest rates haveBoBC91 been fairly BoBC14stable during Actual Forecast BoBC91 BoBC14 Annual inflationActual remained below theForecast Bank of Interest rates have been fairly stable during Botswana’sAnnual inflation lower remainedlimit of below3% in the the Bank last of Q4Interest 2016. rates During have the been last meetingfairly stable of 2016during of quarterBotswana’sAnnual of 2016inflation lower. Headline remained limit inflationof below 3% inwasthe theBank 3.0% last of theQ4Interest 2016.Bank rates Duringof Botswana’shave the been last meetingfairly Monetary stable of 2016 duringPoli ofcy Botswana’squarterBotswana’sAnnual inflation of 2016 lowerlower remained. Headline limitlimit at ofor ofinflation below3%3% theinin was thetheBank 3.0% lastlastof theQ4Q4Interest 2016.2016.Bank rates DuringDuringof have Botswana’s been thethe fairlylastlast meetingmeeting stableMonetary during ofof Q4 20162016Poli 2016. cy ofof in DecemberBotswana’s lower 2016 limit, ofslightly 3% in the lastlower quarter than of 2016. the CommetteeDuring the last meeting(MPC), of 2016the of theBank Bank ofRate Botswana’s was quarterinquarter December ofof 20162016 2016.. HeadlineHeadline, slightly inflationinflation lower was wasthan 3.0%3.0% the Commetteethethe BankBank of of(MPC), Botswana’sBotswana’s the BankMonetaryMonetary Rate PoliPoliwascycy 3.1%inHeadline Decemberannual inflation inflation 2016 was 3.0%, recordedslightly in December lowersame 2016, than monthslightly the maintainedCommetteeMonetary Policy at(MPC), Committee 5.5% ,the (MPC),reflecting Bank the BankRate Ratethe waswaslow 3.1%inlower December thanannual the 3.1% inflation2016 annual, inflationslightly recorded recorded lower same same than monthmonth the maintainedCommetteemaintained at 5.5%,at(MPC), reflecting5.5% , the thereflecting lowBank inflation Ratethe outlook waslow and in 20153.1%in3.1%in 20152015,, annualbutannual but, but upup from upinflationinflationfrom thefrom 2.8%the therecordedrecorded inflation2.8% 2.8% inflation rate sameinflationsame recorded month monthrate rate in inflationinflationmaintainedmaintainedprospects outlook outlookof continued atat and5.5%5.5% price prospectsprospects ,,stability reflectingreflecting in the ofof medium continued continuedthethe term.lowlow recordedinrecordedinQ3 2015 20152016. in ,We, butinQ3but expect Q3 up2016.up inflation2016. fromfrom We the Wetheto expectrise 2.8%2.8%expect slowly inflation inflationthrough inflation 2017 raterateto to pricepriceinflationinflationConsequently, stabilitystability outlookoutlook the Prime andandin Rate prospectsprospectsthe thehas was medium maintainedmedium ofof continuedcontinued at term.7.0%.term. riserecordedriserecorded toslowly end slowly the year inthroughin Q3throughQ3around 2016.2016. 4%,2017 2017 withWeWe to increases expectexpectto end end in inflationthe inflationfood,the yearfuelyear toto Consequently,Consequently,pricepriceThe BoBC stabilitystability 91 and 14 the dayinin rates PrimePrimethethe also remained RatemediummediumRate soft hashas during term. term.w thewasas and utilities prices. During the fourth quarter, Statistics quarter with marginal changes. aroundrisearoundrise slowly4%,slowly 4%, with throughwiththrough increases increases 20172017 in toin tofood, food,endend fuel thethefuel and yearyearand maintainedmaintainedConsequently,Consequently, at 7.0%.thethe PrimePrimeTheThe BoBC BoBC RateRate 91 91hashas and and w w14 asas14 aroundBotswana 4%, rebased with the increasesConsumer Price in indexfood, (CPI) fuel from and maintained at 7.0%. The BoBC 91 and 14 utilitiesutilitiesaroundSeptember prices 4%,prices 2006. with During.to DuringSeptember increases the the2016 fourth in fourth andfood, revised quarter, fuelquarter, the and daydaymaintained ratesrates alsoat 7.0%. remained The BoBC softsoft during91during and the 14the StatisticsutilitiesStatisticsutilitiesweights of Botswa pricesitems pricesBotswa in .the.na During Duringnabasket rebased rebased (see thethe later the fourthdiscussion).thefourth Consumer Consumer quarter,quarter, quarterquarterdayday ratesrates withwith alsomarginalalso remainedremained changes.changes. softsoft duringduring thethe PriceStatisticsPriceStatistics index index Botswa(CPI)Botswa (CPI) fromnana from rebasedrebased September September thethe ConsumerConsumer2006 2006 toto quarterquarter withwith marginalmarginal changes.changes. SeptemberPriceSeptemberPrice indexindex 2016 2016 (CPI)(CPI) and and from fromrevised revised SeptemberSeptember the the weights weights 20062006 of oftoto Exchange Rates De Beers Diamond Sales itemsSeptemberitemsSeptember in thein the basket. 2016basket.2016 andand revisedrevised thethe weightsweights ofof items in the basket. items in the Exchangebasket.Exchange Rates Rates DeDe Beers DiamondDiamond Sales Sales ExchangeExchange RatesRates 900900 DeDe BeersBeers DiamondDiamond SalesSales 2009 2010 2011 2012 2013 2014 2015 2016 900 2009 2010 2011 2012 2013 2014 2015 2016 800800900 6.0 2009 2010 2011 2012 2013 2014 2015 2016 1.45 6.0 2009 2010 2011 2012 2013 2014 2015 20161.45 800 6.0 1.45 700800 6.0 1.401.45 700 1.40 700 7.0 1.40 700 7.0 1.35 600 7.0 1.351.40 600 7.0 1.35 600 8.0 1.301.35 500600 8.0 1.30 500 8.0 1.30 500 8.0 1.251.30 400500 9.0 1.25 US $ mn 400 1.25 US $ mn 400 9.0 1.201.25 US $ mn 300400 Pula per USD 9.0 US $ mn 9.0 1.20 300 Pula per USD 1.20 300 Pula per USD 10.0 1.151.20 Rand per Pula 200300 Pula per USD

10.0 1.15 Rand per Pula 10.0 1.101.15 Rand per Pula 200200 10.0 1.15 Rand per Pula 100200 11.0 1.101.10 11.0 1.051.10 100100 11.0 1000 11.0 1.051.05 12.0 1.001.05 00 12.0 12.0 1.001.00 0 12.0 BWP per USD ZAR per BWP 1.00 BWPBWP per perUSD USD ZARZAR per per BWP BWP BWP per USD ZAR per BWP Foreign exchange rates were volatile in the The global diamond market was generally ForeignForeign exchange exchange rates rates were were volatile volatile in in the the TheThe globalglobal diamonddiamond market waswas generallygenerally lastForeignForeign quarter, exchange exchange reflecting rates were rates volatileuncertain were in thevolatile tylast over quarter, in thethe quietTheThe globalduring diamond diamondthe lastmarket quartermarket was generally ofwas 2016 quietgenerally , duringwith lastlastoutcome lastreflectingquarter, quarter,quarter, of uncertaintyreflecting the reflectingreflecting U.S over Presidential uncertain theuncertainuncertain outcomety electionty ty ofover over overthe theU.S andthethe quietdemandquietquietthe last duringduringduring quarter for diamonds thetheofthe 2016, lastlast with quarterquarter indemand the forimportantofofof diamonds 201620162016, , in , with withUSthewith outcomeoutcomeotheroutcomePresidential geopoliticalof theof ofelection thethe U.S U.SU.S eventsPresidentialand PresidentialPresidential other. 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NEWS HIGHLIGHTS

1st October The International The International Monetary Fund (IMF) has added the Chinese Monetary Fund (IMF) Renminbi (RMB) to the basket of currencies that make-up its Special adds Chinese Renminbi Drawing Right (SDR), joining the US Dollar, Euro, Japanese Yen and to Special Drawing the British Pound. China is increasingly integrated in international Rights (SDR). (IMF) markets and the inclusion of RMB marks the country’s expanding role in global trade. The SDR is an international reserve asset created by the IMF to supplement its member countries’ official reserves, as well as an important unit of account.

3rd October Botswana crawls up in Botswana has improved in the 2016/17 World Economic Forum Global Competitiveness (WEF)’s Global Competitiveness rankings by moving up 7 places, from rankings. (Sunday position 71 out of 140 countries in 2015/16 to 64 out of 138 countries in Standard) 2016/17. Botswana performed better in infrastructure, higher education and goods market efficiency.

3rd October MOD Resources upbeat MOD Resources has declared a maiden mineral resource of 28.36 on substantial maiden million tonnes (Mt) containing about 350,200 tonnes of copper and 14.27 copper resource in mn oz of Silver in the Kalahari Copper Belt. The project is a joint venture Botswana. (Weekend between MOD Resources, listed on the Australian Stock Exchange, and Post) Metal Tiger, listed on the AIM in London.

9th October BCL Mine under The Ministry of Minerals, Energy and Water Resources (MMEWR) liquidation. (Daily News) made a decision to close and place the BCL Ltd mine under provisional liquidation. The cash-strapped copper and nickel mine has not been doing well, making losses perpetuated by depressed international base metal prices and declining ore grades.

11th October Botswana pulls out of Botswana withdrew from a commitment to buy a 50% stake in Norilsk the P3 billion Norilsk Nickel’s Nkomati mine in South Africa. The decision to withdraw comes Nickel mine deal. after BCL, which in 2014 agreed to buy the 50% share of Nkomati (Mining Weekly) nickel held by Norilsk, was place under liquidation. BCL has no funds to continue with the transaction, and could not raise the USD250 million needed to fund the purchase from a proposed bond sale.

14th October Botswana diamond Construction at Debswana’s Letlhakane mine tailings resource project poised for treatment plant project (LMTRTP) is reportedly 80% complete, and the 2017 completion as project is reported to be within budget. The plant is planned to undergo it surpasses 80% commissioning and attain full production in Q3 2017. The LMTRTP will completion mark. extend production beyond the existing mine’s life and is expected to (Mining Weekly) achieve yearly production of 800,000 carats of diamonds.

17th October New Bank of Botswana The President has appointed Mr Moses Pelaelo to the position of Governor appointed. Governor of the Bank of Botswana. Mr Pelaelo joined the Bank in (Daily News) 1990, and has assumed different positions within the Bank, most recently Deputy Governor.

17th October Shumba Energy raise Shumba Energy has raised P14 million required for the purchase of P14 million. (Mmegi) the Mabesekwa Prospecting License from Daheng Group, through the issue of convertible loan notes.

19th October Botswana Diamonds Drilling has commenced at the AK 22 kimberlite pipe in Orapa for starts drilling at Orapa. diamond exploration. The work is a joint venture partnership between (Rapaport New) Botswana Diamonds and Alrosa.

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NEWS HIGHLIGHTS

20th October Air Botswana partners Air Botswana secured a code-share partnership deal with Qatar with Qatar Airways. Airways, one of the world’s major airlines, with a network that accesses (Daily News) over 150 destinations worldwide. The partnership gives Qatar access to Botswana’s route network to Gaborone, Francistown and Maun via Qatar’s South Africa gateway. Botswana sought to benefit from Qatar’s developed IT and infrastructure and gateway to Qatar’s network.

24th October Liquidator retrenches About 5,000 employees at the BCL copper-nickel mine face all 5,000 workers at the retrenchment, following the Government’s decision to provisionally mothballed BCL mine. liquidate the mine. According to the liquidator, a few of the employees (Mining Weekly) will be retained during the liquidation process.

26th October Botswana’s growth Botswana is expected to achieve an annual growth of 4.4% during the seen at 4.4% annually period of the National Development Plan (NDP) 11 from 2017 to 2023. for the next six years – The mining sector is forecast to have an annual growth of 2.8%, with non- Government. (Reuters) mining sector growing at 4.6% annually. In addition, a new fiscal rule will be adopted during the Plan period. The Government plans to save 40% of annual mineral revenues, and allocate 60% to development (investment) spending.

27 October Giyani acquires Giyani Gold Corp. has acquired shares in various prospecting licenses Botswana manganese that are highly prospective of manganese development with two project. (Marketwired) companies, Menzi Battery Metals Pty Ltd and Qakaza Diamond Corp. Pty Ltd. According to the company, the acquisition positions Giyani to world class manganese project and virtually untapped mineral potential within the Kalahari Manganese Field. The licenses are in the Kanye Basin and extend to the Griqualand West basin, which hosts a number of manganese mines that collectively comprise the Kalahari Manganese Field.

30th October Lerala Mining Production at Lerala Diamond mine has been suspended to reduce Operations halted excess ore stockpiles that accumulated as a result of increased mining to ease stockpiles. rates, which exceeded the plant’s ability to process feed. Pit mining will (Rapaport News) begin once the stockpiles have been reduced.

31st October S&P maintains negative Standard & Poors (S&P) affirmed Botswana's investment-grade credit outlook for Botswana. rating but maintained the negative outlook, reflecting the risks over (Bank of Botswana) the next 12 to 18 months if the current diamond-sector slump proves more structural than cyclical in nature. S&P maintained an A-/A-2 long and short-term foreign and local currency sovereign credit rating for Botswana, and forecasts gradual recovery of diamond prices in the medium term.

7th November Botswana to sell The Government intends to sell the 600 megawatt Morupule B power Morupule B. (Reuters) plant. The power plant has persistently had technical problems and had at times contributed to power shortages and load shedding. Due to its problems the plant has become expensive to maintain and operate as a result of construction defects rendering the plant unreliable.

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NEWS HIGHLIGHTS

13th Local companies have The Managing Director of Econsult, Dr Keith Jefferis, advised that November to wise up to the outside companies that are successful are those that expand to regional – Econsult. (Sunday markets once they have exhausted the scope to grow in their core Standard) domestic markets. According to him, companies need to understand the local conditions regarding competition and politics, prepare for risk and do not shy away from retreating if not successful.

14th Statistics Botswana Statistics Botswana has rebased the Consumer Price Index (CPI) to November changes CPI base year. September 2016 from September 2006. The index basket has been (Weekend Post) re-weighted using the 2009/10 BCWIS results. The rebasing of the CPI was necessary to reflect changing consumer expenditures and to improve the quality of the data as socio-economic and monetary policies depend on price statistics. It is expected that another rebase of the CPI will be done in 2019 using data from the 2015/16 Botswana Multi-topic Household Survey results.

1st December Lucara sees more Lucara Diamond Corp. is shifting operations to a higher-value part of lucrative mining in 2017. the Karowe mine, which it believes will enable an increase in dividend (Rapaport News) payments in 2017 to USD0.07 per share up from USD0.04 per share in 2016. Lucara had a successful 2016 and will focus on advancing the push back at the Karowe open-pit.

2nd December Botswana and Namibia The scope of the Trans-Kalahari Railway Line project promoted by expand scope of Trans- the governments of Botswana and Namibia has been expanded from Kalahari railway project. being a dedicated coal export route to a multi-sectoral project designed (Mining Weekly) to unlock the potential of other economic sectors along the corridor. The project was remodelled in 2015 as coal prices slumped and threatened the viability of the project. The proposed Trans-Kalahari railway is a 1,500 km railway line that now includes other sectors of agriculture, manufacturing, mining, real estate and transport and logistics.

4th December Housing will remain a According to the 2016 Centre for Affordable Housing Finance in Africa pipe dream for many (CAHF) report, housing affordability in Botswana is a challenge for – report. (Sunday many as the average income needed to buy the cheapest formally- Standard) built house is almost double the average annual urban household income. The 2009/2010 Botswana Core welfare Indicators Survey (BCWIS) estimates that 50% of households in Botswana has monthly consumption expenditure of P1,600 or less. When using the benchmark that housing cost should not exceed 40% of household income, an average household cannot afford to spend approximately P1,100 monthly on housing. Thus, home ownership in Botswana will remain an idea sought after by many and gravely unattainable.

7th December BDC double profits to The Botswana Development Corporation (BDC) doubled its profits P224 million. (Mmegi) before tax for the year ended 2016 after from P110 million in 2015 to P224 million in 2016. Assets grew by 6% to P4.4 million in 2016 from P4.1 million in 2015. According to the BDC, it was able to achieve profitability by re-modelling its programme in order to address its major challenges.

8th December De Beers reduced rough According to De Beers Diamond Company, prices for rough diamonds prices by 5% in 2016. fell 5% in 2016 (from January to November) despite the diamond (Rapaport News) industry having shown recovery. Nevertheless, De Beers diamond sales in 2016 were far better when compared to 2015.

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NEWS HIGHLIGHTS

9th December Botswana diamond At least 450 miners will be retrenched at Karowe Diamond miner mine to retrench 450 following a decision by Lucara Diamonds to prematurely terminate workers. (Mining a mining services contract with South African company Eqstra, Weekly) over differences in the volumes of diamond ore mined by Eqstra. Eqstra’s contract was due to expire in 2020 and was contracted for mining Karowe’s open-cast pit. However, most retrenched miners are expected to be re-employed by the replacement mining contractor.

13th Tight liquidity slows De De Beers revenue from rough diamonds declined to USD418 million in December Beers sales. (Rapaport the final sales’ cycle of the year, as tighter liquidity in India hit demand News) for lower-priced stones. Sales were 12% lower in December, compared to USD476 million sales in November. However, when compared to the last cycle of 2015 rough diamond sales in December 2016 was 69% higher than the USD248 million in December 2015.

16th BTCL records P87.8 Botswana Telecommunications Corporation Limited (BTCL) recorded 19 December million profit, declares percent growth in profit after tax of P87.8 million for the six months ended dividend. (Mmegi) 30 September 2016, up from P73.9 million recorded the same period in 2015. Revenues during the period also increased, mainly attributable to growth in sectors of retail and wholesale. At the end of the period BTCL declared a dividend of 3.6% per share.

13th Bank of Botswana The Bank of Botswana Monetary Policy Committee (MPC) decided to December maintains Bank Rate. maintain the Bank Rate at 5.5 percent at the last meeting of the year. (Bank of Botswana) The outlook for price stability remains positive and inflation is expected to be within the Bank’s medium term objective range of 3-6 percent. Monetary policy is aligned with the need to safeguard financial stability.

15th Business Confidence According the Business Expectations Survey (BES) released by Bank December increases in H2 2016. of Botswana, overall confidence among businesses in Botswana (Bank of Botswana) increased in the last half of 2016 (H2 2016) when compared to H1 2016, from 36 percent to 43 percent. The level of confidence for exporters fell significantly, from 71 percent to 42 percent, while increasing by 12 percentage points for domestic-oriented businesses from 31 percent to 43 percent. Optimism about business conditions in the future increased, despite uncertainty surrounding demand for commodities in the global market.

21st Alecto looks to buy Alecto Minerals announced its intent to acquire 60 percent interest in December Mowana Copper Mine. Cradle Arc Investments. Cradle Arc owns Leboam Holdings and has (Mining Weekly) recently acquired Messina Copper’s Mowana and Thakadu copper mines. Alecto intends to raise funds through issuing convertible loan notes. Production is to be increased from 1.2 million tonnes per year to 2.6 million tonnes per year.

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MACRO-ECONOMIC DATA

Key Economic Data unit 2012 2013 2014 2015 2016Q1 2016Q2 2016Q3 2018Q4

Annual Economic Growth GDP % 4.5 9.3 4.4 -1.7 -2.0 -1.6 0.9 .. Mining % -5.8 23.9 4.5 -19.6 -21.4 -22.9 -11.9 .. Non-mining private sector % 7.7 6.8 4.1 1.4 1.7 2.7 3.8 .. GDP current prices P mn 111,896 125,158 145,868 145,715 39,079 40,932 42,761 .. GDP 2006 prices P mn 75,515 84,081 87,569 86,081 22,103 22,107 21,920 ..

Money & Prices Inflation % 7.4 4.1 3.8 3.1 3.0 2.7 2.8 3.0 Prime lending rate % 11.0 9.0 9.0 7.5 7.5 7.5 7.0 7.0 BoBC 14-day % 4.6 3.1 3.1 0.97 1.0 0.84 0.76 0.84

Trade & Balance of Payments Exports - total goods P mn 45,915 66,404 76,233 63,467 19,877 25,378 18,872 .. Exports - diamonds P mn 36,143 55,367 65,328 52,730 17,003 22,741 16,581 .. Imports - total goods P mn 62,114 70,218 72,418 73,168 16,374 17,180 15,869 .. Balance of visible trade P mn -16,199 -3,814 3,816 -9,701 3,503 8,198 3,003 .. Balance of payments P mn -862 1,340 11,404 - 57 - 261 2,432 .. ..

Foreign Exchange Exchange rate BWP per USD end 7.776 8.718 9.515 11.236 10.929 10.941 10.373 10.650 Exchange rate ZAR per BWP end 1.090 1.196 1.217 1.383 1.366 1.361 1.295 1.279 FX reserves $ mn 7,628 7,726 8,323 7,546 7,559 7,402 7,631 .. FX reserves P mn 59,317 67,772 79,111 84,881 81,891 80,283 79,990 ..

Financial Sector Deposits in banks P mn 47,216 48,512 51,492 59,961 61,078 61,700 61,198 .. Bank credit P mn 34,555 39,763 45,116 48,307 49,040 50,476 51,703 .. BSE index 7,510.2 9,053.4 9,501.6 10,602.3 10,202.6 10,081.3 9,797 9,728

Business Indicators Diamond production (a) '000 cts 20,619 23,134 24,658 20,732 5,429 5,294 .. .. Copper production (c) tonnes 57,916 49,448 46,721 23,050 5,777 2,747 .. .. Nickel production tonnes 17,942 22,848 14,958 16,789 7,303 3,770 .. .. Business confidence index 47% 45% 52% 44% 36% .. 43% .. No. of companies formed 16,561 14,190 16,300 19,134 4,592 ...... Electricity consumption GWh 3,703 3,502 3,990 3,974 967 955 995 .. Crude oil (Brent) $/bar 110.80 109.95 55.27 36.61 36.75 48.05 48.24 54.39

Employment (formal) Government 131,033 130,175 129,918 130,220 126,737 127,537 128,279 .. Parastatals 17,484 18,838 18,790 19,411 19,999 19,476 19,101 .. Private sector 188,531 189,894 191,399 191,484 193,460 195,747 197,107 .. Total 337,048 338,907 340,107 341,115 340,196 342,760 344,487 ..

2015/16 2016/17 Govt Budget 2013/14 2014/15 Sources: Bank of Botswana; MFDP; Outturn Budget Statistics Botswana; Department of Mines; Registrar of Companies; BSE; Revenues P mn 48,951 55,904 48,291 48,062 Econsult Spending P mn 41,730 50,564 54,923 54,445

Balance P mn 7,222 5,340 -6,632 -6,382 Notes: (a) 2013 figures include production from Boteti Public debt & guarantees P mn 29,481 32,991 33,670 34,459 Diamond and Debswana

Govt deposits at BoB P mn 31,745 41,680 33,916 (b) 2016 figures include GDP P mn 131,221 148,027 148,353 159,888 production from Gem Diamonds and Lerala mines Revenues %GDP 37.3% 37.8% 32.6% 30.1% Spending %GDP 31.8% 34.2% 37.0% 34.1% (c) Numbers in Italics reflect revisions from the previous Balance %GDP 5.5% 3.6% -4.5% -4.0% review Public debt & guarantees %GDP 22.5% 22.3% 22.7% 21.6% Govt deposits at BoB %GDP 24.2% 28.2% 22.9%

Sources: Bank of Botswana; MFDP; Statistics Botswana; Department of Mines; Registrar of Companies; BSE; Econsult Notes: (a) 2013 figures include production from Boteti Diamond and Debswanapage 11 (b) 2016 figures include production from Gem Diamonds and Lerala mines (c) Numbers in Italics reflect revisions from the previous review www.econsult.co.bw

SPECIAL FEATURES

Household Consumption Expenditure in Botswana

Household final consumption expenditure (HFCE) by private households has become progressively more important over the past 20 years, as economic activity has become driven less by net exports and government consumption spending. Household consumption spending is now the largest contributor to gross domestic product (GDP) by expenditure. In this note weSept. highlight 2006 Weightsthe growing Sept. 2016 Weights importance of household spending in GDP, and alsoGroup consider the types of goodsCities & andUrban services Rural that Cities & Urban Rural National Towns Villages Villages National Towns Villages Villages Food & Non-‐Alcoholic households spend money on. 21.84 18.06 22.21 28.82 16.51 10.79 17.51 25.14 Beverages Alcoholic Beverages, Tobacco 9.29 7.76 7.95 15.48 7.83 7.04 7.81 9.26 & Narcotics Clothing & Footwear 7.52 6.77 9.33 6.17 6.27 5.59 6.83 6.63 Housing, ties. Businesses Water, Electricity, were also established and more revenues GDP can be measured and analysed in different ways, 11.46 13.87 11.36 5.60 14.90 15.77 16.33 11.30 including the Output (value added) approach, and the In- Gas for & the government Other Fuels were collected from taxes. Hence, the Furnishing, Household 6.79 6.56 7.18 6.52 6.39 6.32 6.44 6.42 come (wages, return on capital etc.) approach. The GDP Equipment Government & Maintenancewas able to accumulate more resources and by Expenditure approach adds household consumption Healthpublic spending became more2.71 important.1.59 The2.17 development6.50 3.62 1.74 3.08 7.70 spending, government consumption spending, investment Transportof the mining sector also involved18.98 20.45high levels19.16 of investment.14.98 20.65 24.60 18.86 16.27 or gross fixed capital formation (GFCF), inventory accu- Communications 3.01 3.51 2.85 2.06 4.27 4.16 4.61 3.99 mulation and net exports (export less imports). Hence, the Recreation The contribution & Culture of net exports2.22 to 2.99GDP also1.58 became 1.45 more 2.92 3.34 2.63 2.59 Education 3.37 4.34 3.09 1.44 3.34 4.42 3.16 1.69 expenditure measure of GDP totals theSept. amount 2006 spent Weights on Restaurants important & asSept. Hotelsdiamond 2016 mining Weights 3.27 developed.3.48 The3.07 external3.07 bal-2.76 4.32 1.98 1.14 goodsGroup and services produced in the economyCities & forUrban a particu Rural - Misc. ance Goods was & positiveCities Services & forUrban many 9.57 yearsRural 10.62 and recorded9.04 surpluses7.90 10.55 11.91 10.75 7.86 lar period, usually a year. National Towns Villages Villages thatNational enabled Towns savings Villages in the Villages form of foreign exchange re- Food & Non-‐Alcoholic 21.84 18.06 22.21 28.82 16.51 10.79 17.51 25.14 Beverages serves. It was only in 2008, during the global financial crisis HouseholdAlcoholic Beverages, final consumption Tobacco expenditure (HFCE) is de- that the country recorded a trade deficit for the first time in 9.29 7.76 7.95 15.48 7.83 7.04 7.81 9.26 fined& as Narcotics the final amount of spending made by households many years. to acquireClothing goods & Footwearand services. An7.52 analysis 6.77 of GDP9.33 by ex-6.17 50,000 6.27 5.59 6.83 6.63 Housing, Water, Electricity, penditure in Botswana shows that11.46 historically 13.87 the 11.36contribu -5.60 In the40,000 14.90 ten years15.77 from 16.33 1995 to11.30 2004, household final con- tion Gas of HFCE & Other to total Fuels GDP was very high - in 1960 it was sumption fluctuated between 33% and 42% of GDP –a Furnishing, Household 6.79 6.56 7.18 6.52 30,000 6.39 6.32 6.44 6.42 89.2Equipment percent. After & Maintenanceindependence in 1966 and the discov- relatively low figure by international standards. However, it ery ofHealth mineral resources, the share2.71 of household1.59 final2.17 con-6.50 rose 20,000 sharply3.62 over1.74 the ten3.08 years 7.70 to 2015. In the last decade, HFCE more than doubled in real terms, and rose from 38% sumptionTransport expenditure in total GDP18.98 decreased20.45 gradually.19.16 14.98 10,000 20.65 24.60 18.86 16.27 ValuableCommunications mineral resources brought3.01 in high3.51 revenues2.85 for2.06 to 52%4.27 of GDP.4.16 4.61 3.99 the governmentRecreation & in Culturethe form of taxes,2.22 dividends2.99 and1.58 royal -1.45 2.920 3.34 2.63 2.59 Education 3.37 4.34 3.09 1.44 prices) 2006 (constant million P 3.34 4.42 3.16 1.69 -‐10,000 Restaurants & Hotels 3.27 3.48 3.07 3.07 2.76 4.32 1.98 1.14

Misc. Goods & Services 9.57 10.62 9.04 7.90 10.55 1995 1996 11.911997 1998 1999 2000 10.752001 2002 2003 2004 2005 7.862006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Government Expenditure Household Expenditure Figure1: Contributions to GDP by Gross Expenditure Fixed Capital FormaTon Net Exports

50,000 100%

40,000 80% 30,000 60% 20,000

10,000 40%

0 20% P million (constant 2006 prices) 2006 (constant million P -‐10,000 0% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2011 2011 2001 1995 1996 1997 1998 1999 2000 2002 2003 2004 2005 2006 2007 2008 2009 2010 2012 2013 2014 2015

Government Expenditure Household Expenditure Household Consumption Government Consumption Gross Fixed Capital FormaTon Net Exports Gross Fixed Capital Formation

100%

80% page 12

60%

40%

20%

0% 2011 2011 2001 1995 1996 1997 1998 1999 2000 2002 2003 2004 2005 2006 2007 2008 2009 2010 2012 2013 2014 2015

Household Consumption Government Consumption Gross Fixed Capital Formation www.econsult.co.bw

SPECIAL FEATURE

Patterns of Consumption Spending food expenditures decrease with increase in incomes (in relative terms) is a good indicator that household well be- A closer look at individual household expenditures uses the ing is improving. This is so because as household incomes results from the Botswana Core Welfare Indicators Survey increase, resources become available for spending on non- (BCWIS) of 2009/10, a nationwide household survey on food items. welfare and poverty. The survey results provide an inter- esting insight into how households distribute their income Interestingly, however, lower income households spend a across different commodity groups, and how it varies by lot on alcohol and tobacco, and the proportion of income income level. spent on alcohol and tobacco falls when income increases. The outcome that alcohol and tobacco is the second Household expenditure patterns differ according to the largest expenditure category for low income households level of each household’s income, as well as other charac- is worrying and raises social welfare and health questions teristics such as where they live and their life stage. Their regarding lifestyles of some low income households. It also expenditure pattern provides an indication of the goods indicates where the incidence of the alcohol levy is most and services that they consume, which in turn reflects their keenly felt. choices and priorities. High income households spend more on luxury goods and services while a large share of income When it comes to housing, there is a only a small varia- is spent on necessary goods and services for low income tion in housing expenditure across the income groups; the households. Financing of this consumption expenditure proportion spent on housing averages 15 percent of total comes from sources such as wages and salaries, savings, consumption spending. In some respects it is surprising investment income, loans and other incomes sources. that the proportion of housing expenditure is fairly constant

Figure 2: Proportion of household consumption spending by category and consumption level (2009/10)

Miscellaneous 100% 100%

90% 90% Restaurants & hotels

80% 80% Education

70% 70% Recreation & culture

60% 60% Communication

50% 50% Transport

40% 40% Health care

30% 30% Household goods & services 20% 20% Housing Expenditure

10% 10% Clothing & footwear

0% 0% Alcohol & tobacco

Food Consumption group (P/month, 2009/10 prices) Cum % of HHs

As expected, the proportion of household income level across income groups and does not increase with income. spent on food declines as income increases. Households Given that housing is expensive in Botswana, relative to that have low incomes spend more on food (as a proportion incomes, one might expect that when incomes increase, of their income) and less on luxury items while the opposite the proportion of housing expenditure would also increase. is true for high income earning households. The fact that

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SPECIAL FEATURE

Given that 50 percent of the population had monthly con- economic growth or population growth. While low income sumption expenditure of P1,500 or less (in 2009/10 – equiv- households allocate only around 3% of their expenditure to alent to around P2,200 in 2016 prices), affordability of hous- transport, for high income households this rises to 40%. In ing for households in the lower half of the national income terms of choices and priorities, it is clear that as households distribution is a challenge. And access to housing finance become better off, they choose to spend more of their inis also a problem for these households. There is limited come on vehicles rather than housing. availability of financing through Government schemes such as Self Help Housing Agency (SHHA) home improvement The BCWIS 2009/10 also notes that priority spending on in- loans and the Turnkey houses, but the demand for these come has changed when compared to the previous nation- services is high and supply is limited due to the availability al survey (HIES 2002/03), with a decrease in the amount of funding as well as non-repayment of loans by beneficia- of income allocated to food, while that for transport has in- ries. creased.

As income increases, households have more likelihood of Changes in consumption patterns from food to non-food obtaining financing from commercial banks and other lend- items correspond to improving living standards of living of ers. Given that financing constraints should be relaxed as the population. However, more still needs to be done to ad- income rises, it is a puzzle that households do not in gen- dress the socioeconomic issues of poverty and inequality eral choose to spend more of their income on housing as in Botswana. Poverty rate remains high and Botswana is they become better off. still ranked among the most unequal countries in the world. Income disparity between the rich and poor is extreme, and By contrast, it is clear that for transport, the share of expen- many households have to survive on very low incomes. diture has increased over time and rises with income. This Many initiatives can contribute to addressing this situation, category includes spending on public transport, vacations including improving the role and efficiency of social welfare and - most importantly - the acquisition of motor vehicles. programmes, and ensuring that the economy is dynamic According to the Transport and Infrastructure Statistics, the enough to create jobs and other income earning opportuni- national stock of vehicles increased at an average annual ties. rate of 9.3% from 2006 to 2015, far higher than the rate of

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SPECIAL FEATURE

Updating and Rebasing of the Consumer Price Index (CPI)

The recent move by Statistics Botswana to rebase and update the consumer price index (CPI) is a welcome development in terms of aligning statistics with the changing economy. Statistics agencies regularly revise the CPI to reflect current prices and changing lifestyles of the population. When re- vising the CPI, items in the index may be dropped, new items added, or the weights of items remain- ing in the index may be changed. Essentially, revisions to the index reflect changes in the spending patterns of consumers.

What is the CPI? will have a different impact on overall inflation. For example, the impact of a change in the price of petrol depends on the The consumer price index is used to measure changes in weight that petrol has in the overall CPI basket. As it stands the prices of goods and services over a base period (Sta- it is impossible to tell whether the CPI revision will cause tistic Botswana, 2016), and to track changes in the overall recorded inflation to be higher or lower. Ideally, Statistics price level. The CPI is used to show the cost of living and Botswana could have calculated changes in the CPI for the is sometimes referred to as the Cost-of-Living Index. It is two series in parallel over a year to September 2016, which essentially a weighted average of price changes for a wide would have allowed an assessment of the impact on infla- range of goods and services, classified into groups such as tion over this period, but this was not done. Food, Clothing and Transport. The CPI basket comprises all of the items in the index. Reasons for CPI revision and rebasing

In Botswana the CPI provides information on the cost of Until October 2016, the CPI had a base period of Septem- living for three groups of the population: towns and cities, ber 2006, with basket weights based on the 2002/3 House- urban villages and rural villages. The needs of the three hold Income and Expenditure Survey. Over time, these groups are different and are reflected by the varying weight weights became less representative of consumer spend- of each item in the basket for the population groups. How- ing patterns. CPI revision was therefore needed to reflect ever, it does not mean that each area of the population has changes in household spending patterns. The revision of its own CPI basket. The CPI is one index apportioned to the CPI used the results of the Botswana Core Welfare In- three areas. Every month Statistics Botswana releases the dicators Survey (BCWIS) 2009/10 to reflect consumption CPI and the report reflects price changes of items for that expenditures. period (monthly). The percentage price change for all items index (CPI) give the inflation rate for that month. The na- When Statistics Botswana changed the reference period to tional inflation rate or the headline inflation rate is calculated 2016 a number of other changes were made. The revised year-on-year, and data for inflation is released every month. CPI was enhanced by:

When Statistics Botswana released the October 2016 CPI, • Expanding the coverage area and including new cover- a new basket was introduced, marking the start of a new age areas. A total of 49 areas is now covered compared CPI index series. The old index series was linked with the to 46 previously, and the number of outlets for price col- new series by allocating a common index level 100 to all lection also increased to 2100 from the previous 1288; prices as at September 2016, and splicing the old series with the new reference period. This is rebasing. • Modifying the index basket items from a total of 384 items to 393 items. The CPI basket category groups, Introducing the new series and linking it to the old index sections have not changed from the initial 12 groups series did not in itself change the annual inflation rate. How- and 51 sections. ever, recorded inflation may be different with the new basket than it would have been with the old basket, because of The table below shows some of the items which have been the new basket composition and item weights. With the new removed, replaced and added in the new index. weights, price changes for individual items and categories

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SPECIAL FEATURE

New items Items replaced Items removed

• 500g Oats • 5kg Tastic rice replaces 1kg • Fresh chicken per kg* • 500g Fattis & Monis macaroni • 5kg White Star maize-meal • Condensed milk • Rape leaves replaces 5kg Super A1 maize- • Repair to men’s trouser with a • Ceramic floor tiles meal hole at the back • Chicken braai pack • 1 kg Kellogs cornflakes • Paraffin stove, single • Black label Beer 750ml can replaces 500g • Chicken necks per kg • Castle lite 330ml bottle • 410g KOO baked beans • Windhoek light lager 340ml can • Consultation to optician replaces 420g • Baby’s nappy 68 x 68 cm • Second hand car (Toyota • 80g Cadbury chocolate dairy • Rump steak and chips Corolla 1.4) milk replaces 100g • Blank video cassette • Electric cooker – 4 plates with • 330ml Coca cola can replaces • Panasonic video cassette oven 340ml recorder • Sunday Standard newspaper • Private rent, 2 ½ house with • All train fares • The Voice newspaper servant quarter (SQ) replaces 2 • Pre-recorded cassette, popular • USB flash drive – 4 GB ½ house without SQ music • Laptop personal computer • The Johannesburg Star • Legal services fees newspaper (consultation for will and trust) • Union monthly subscription fee

* Frozen chicken per kg remains

It is internationally recommended that national statistics in Botswana is therefore far from ideal. In future, the CPI is offices’ revise their CPI baskets at least every five years expected to be revised every five years from 2019, using to accurately reflect changes in the economy. This in turn data from more frequent household surveys. improves the quality of CPI data and informs a more accurate policy decision making, especially monetary policy The 2016 revision involved changing the CPI basket group decisions which depend on inflation data. The ten year gap weights as shown below.

Comparison of group weights for CPI 2006 and 2016

Sept. 2006 Weights Sept. 2016 Weights Group Cities & Urban Rural Cities & Urban Rural National Towns Villages Villages National Towns Villages Villages Food & Non-‐Alcoholic 21.84 18.06 22.21 28.82 16.51 10.79 17.51 25.14 Beverages Alcoholic Beverages, Tobacco 9.29 7.76 7.95 15.48 7.83 7.04 7.81 9.26 & Narcotics Clothing & Footwear 7.52 6.77 9.33 6.17 6.27 5.59 6.83 6.63 Housing, Water, Electricity, 11.46 13.87 11.36 5.60 14.90 15.77 16.33 11.30 Gas & Other Fuels Furnishing, Household 6.79 6.56 7.18 6.52 6.39 6.32 6.44 6.42 Equipment & Maintenance Health 2.71 1.59 2.17 6.50 3.62 1.74 3.08 7.70 Transport 18.98 20.45 19.16 14.98 20.65 24.60 18.86 16.27 Communications 3.01 3.51 2.85 2.06 4.27 4.16 4.61 3.99 Recreation & Culture 2.22 2.99 1.58 1.45 2.92 3.34 2.63 2.59 Education 3.37 4.34 3.09 1.44 3.34 4.42 3.16 1.69 Restaurants & Hotels 3.27 3.48 3.07 3.07 2.76 4.32 1.98 1.14 Misc. Goods & Services 9.57 10.62 9.04 7.90 10.55 11.91 10.75 7.86

page 16 50,000

40,000

30,000

20,000

10,000

0 P million (constant 2006 prices) 2006 (constant million P -‐10,000 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Government Expenditure Household Expenditure Gross Fixed Capital FormaTon Net Exports

100%

80%

60%

40%

20%

0% 2011 2011 2001 1995 1996 1997 1998 1999 2000 2002 2003 2004 2005 2006 2007 2008 2009 2010 2012 2013 2014 2015

Household Consumption Government Consumption Gross Fixed Capital Formation www.econsult.co.bw

Consistent with survey results, Transport has the high- partly reflects the fact that rural areas are poorer than urban est weight followed by Food & Non-Alcoholic Beverages, areas; elsewhere in this Review, we note that relative food Housing, Water, Electricity, Gas & Other Fuels and Alco- expenditures decline with income, while relative transport hol Beverages, Tobacco & Narcotics. As mentioned before, expenditures rise with income. the CPI is a reflection of consumption expenditure and is shown for three geographical areas of the population. Com- People sometimes question the accuracy of inflation figures paring the weights, the share of consumption expenditure in Botswana, especially now that recorded inflation has (given by the weight) on food is higher in rural villages than been consistently low by historical standards. The calcula- it is for cities and towns. Expenditures are higher for bread tion of inflation is based on information on a large number and cereals, in particular maize meal. On the other hand, of prices, collected regularly all over the country, and is in the weight for transport in cities and towns is high for both line with international standards and practices. In view of periods indicating that the proportion of income spent is this, our view is that inflation is one of the most reliable of higher on transport. The food weight is high in rural areas the macroeconomic data series in Botswana. while the transport weight is high in cities & towns. This

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