ECONOMIC REVIEW Second Quarter April - June 2016 in This Issue

www.econsult.co.bw compiled by KEITH JEFFERIS Sethunya Sejoe ECONOMIC REVIEW second quarter april - june 2016 in this issue ...

COMMENTARY KEY NEWS MACRO- SPECIAL 1 ECONOMIC 3 HIGHLIGHTS 7 ECONOMIC 12 FEATURE 13 VARIABLES DATA

COMMENTARY

Deterioration contained as improvements seen in economic conditions

Introduction The second quarter of 2016 has seen some improvement in economic conditions, at least to the extent that the deterioration experienced towards the end of 2015 has been contained, and in some respects macroeconomic conditions have improved. This is largely the result of the stabilisation – albeit at a somewhat subdued level - of global commodities markets.

Diamonds stabilised, major producers are being extremely cautious, and As always, the global diamond market is of greatest importance Debswana has no plans at present to increase production for Botswana. After a dismal performance in the second half of above the revised target of 20 million carats for 2016. Other 2015, the recovery in sales of rough diamonds that started in signs of weakness are reflected in the decision by one of the first quarter of 2016 continued through the second quarter. Botswana’s smaller diamond producers, Gem Diamonds, to The reduction of rough supplies in 2015 had the desired effect reduce production at the Ghagoo mine. It may also be one of unblocking the diamond pipeline – the downstream diamond reason why Lucara Diamonds’ Lesedi La Rona gem from the traders, cutters, polishers and jewellery retailers – and Karowe mine – the largest rough diamond found in over 100 restoring demand for rough. This recovery provided a major years – failed to reach its reserve price when put up for auction boost for export earnings and government revenues, such in London in late June. More positively, another small mine, that the large balance of trade and fiscal deficits experienced Kimberley Diamonds’ Lerala Mine, re-opened in Q2. towards the end of 2015 should have been eliminated, or at least significantly reduced. Copper-nickel and BCL The stabilisation of the global rough diamond market is also This doesn’t mean that the diamond market is out of the woods reflected in other commodities markets. By the end of June yet. Consumer demand for jewellery remains weak, especially 2016, crude oil prices had risen by 85% from their mid-January in China, meaning that even a restored flow of diamonds lows, while copper and nickel prices have risen by 12% and through the pipeline is at lower levels than in recent years. 22% respectively. The ability of mid-stream players to hold diamond stocks is also under pressure, especially with the announcement The recovery in base metals prices, while welcome for by Standard Chartered Bank that it is withdrawing from the Botswana, does not, however, fundamentally change the financing of diamond firms, which will take around $2 billion critical situation facing the country’s largest copper-nickel out of the global industry. Hence, even though the market has producer, BCL. The company’s costs of production are well page 1 www.econsult.co.bw

COMMENTARY

above current price levels, even with the recovery, and it is Other events and developments contributing to global facing problems of low-grade ore, overstaffing, and the constant uncertainty include the US presidential elections in November, expectation that it will operate as a social welfare provider as the pace of economic slowdown in China, stresses within well as a commercial entity. It has high levels of debt, and as a the Chinese financial sector, the pace of monetary policy loss-making fully government-owned entity, is dependent upon tightening in the US, and concerns about over-valuations in government’s financial guarantees and cash injections for its major financial markets. survival. Undoubtedly, BCL’s survival is critical for the town of Selebi-Phikwe and the surrounding region, given that - apart Global growth forecasts have been revised downwards slightly, from government - BCL is the largest employer in north-east post-Brexit.2015 Nobody knows2016 how these will 2017play out, but there Botswana. But continuing “as is” is not an option, given the is consensus that risk is on the downside. Nevertheless, the World 3.10% 3.10% 3.40% huge financial cost this is likely to impose on taxpayers. A hard- IMF’s core scenario is that global growth will improve slightly, headed review is needed to determine whetherAdvanced the company economies from 3.1%1.90% in 2016 to 3.4%1.80% in 2017, although1.80% still below long- has any chance of commercial viability, whichChina is likely to term trend6.90% growth. 6.60% 6.20% require a fundamental restructuring to achieve a reduction in costs of around one-third, including a comparable reduction Figure 1: Global economic growth forecasts in staffing. Obviously such a large employer has important social and economic benefits to the region, including multiplier effects that support economic activity more broadly, but this 8% does not mean that it is entitled to a blank cheque of indefinite 7% or unlimited financial support from the taxpayer. 6% The ownership of BCL is being transferred from a direct 5% government shareholding to an indirect holding through the 4% Pecent new Minerals Development Company of Botswana (MDCB). Percent 3%

The intention is that MDCB will operate on a commercial basis, 2% and how it manages BCL, as the sole shareholder, will be 1% a crucial test of its ability to ensure that government-owned 0% mining companies operate efficiently in future. 2015 2016 2017

Global Uncertainty World Advanced economies China The stabilisation of global commodities markets removes, or Source: IMF World Economic Outlook, July 2016 at least reduces, one element of the spectrum of uncertainty that has affected the world economy over the past 12 months. But there are other risks that could yet be destabilising. The National Development Plan 11 and Vision 2036 UK’s “Brexit” vote to leave the European Union, which was Uncertain global economic prospects provide the backdrop unexpected by most commentators, shows that people are for two important medium and long-term planning exercises prepared to support something that is not in their economic currently under way in Botswana. The 11th National self-interest, if other factors are perceived to be more Development Plan (NDP 11) is due to run from April 2017 to important. Misinformation and scaremongering by the media March 2023, and is currently being finalised. As with several and politicians may well be believed. But the result, as noted recent NDPs, NDP 11 is focused on economic diversification, the following day by the respected commentator Martin Wolf and has to do so in the context of declining fiscal revenues in the UK’s Financial Times, is “probably the most disastrous (relative to GDP) and continued expectations of high levels single event in British history since the second world war”, of government provision of infrastructure, services and social and as a result, “the UK, Europe, the west and the world are safety nets. damaged”. Certainly, it has had a destabilising effect on the global economy, not to mention the UK economy; for instance, The exercise to prepare a new Long-term Vision for Botswana the proposed mega-merger between the brewers ABInbev is also nearing completion. The new Vision 2036 will follow on and SABMiller may well fall apart, because it is no longer as from Vision 2016, which is coming to an end. Vision 2036 will attractive given that it is priced in devalued post-Brexit sterling. provide the framework for NDP 11 and the next two NDPs. Even for Botswana, Brexit adds to uncertainty, given that Botswana’s beef is exported to the UK under the recently- Both NDP 11 and Vision 2036 contain commitments towards signed EPA trade agreement with the EU. This uncertainty will the transformation of the economy towards a more diversified, remain for quite some time, until the form of post-Brexit trade private sector-led, outward-looking open economy integrated and economic relations between the UK, the EU and the rest into global markets, which is exactly what is needed to ensure of the world become much clearer. sustained growth. The test will be whether policies and the related actions and decisions are consistent with these objectives.

page 2 Q3 182.5 23.0 150.0 359.4 1,550.5 412.6 Q4 162.8 23.8 156.5 345.3 2,085.4 675.7 2013 Q1 169.5 25.3 152.1 347.8 1,705.7 1,092.9 Q2 192.8 26.5 165.1 370.5 2,344.9 1,212.8 Q3 195.7 25.3 164.8 371.9 1,930.5 1,057.4 Q4 162.4 25.4 183.1 358.0 2,402.7 968.0 2014 Q1 182.9 26.5 160.7 348.9 2,145.3 785.4 Q2 185.8 27.5 163.3 370.6 2,304.8 939.7 Q3 193.2 26.3 147.4 360.1 2,260.7 868.7 Q4 181.4 24.5 160.3 363.4 2,233.1 1,065.1 2015 Q1 190.2 25.2 143.3 353.6 2,091.3 902.5 Q2 195.2 25.9 158.6 374.8 2,172.6 847.1 Q3 191.8 26.1www.econsult.co.bw147.6 358.4 1,505.0 232.4 Q4 188.4 24.6 158.5 360.9 1,778.7 429.2 KEY ECONOMIC 2016 Q1 VARIABLES189.3 25.5 140.2 342.5 1984.5 797.1 Annual GDP Growth Sectoral GDP Growth 30% Annual GDP Growth Sectoral GDP Growth Annual GDP Growth Trade Sectoral GDP Growth 20% 30% Annual GDP Growth Trans. & Comm.Trade 20% 2016 Q1 Sectoral GDP Growth 30%10% Water & Elec. -‐63.8% Fin. & Bus.Trans. Service Trade& Comm. 10% Sectoral GDP Growth 20%0% Fin.Government & Bus. Service Mining -‐21.4% Trans. & Comm.Trade 10% 0% Soc. & Pers. ServicesGovernment -10% Agriculture -‐0.8% Fin.Trans. & Bus. & Comm. Service -10% Soc. & Pers. Services -20%0% Total VA -‐0.6% Fin. &Construction Bus.Government Service -20% GovernmentConstructionManuf -10%-30% Manuf 0.9% Soc. & Pers. Services Soc. & Pers. ServicesManuf -30% Construction 2.5% ConstructionTotal VA -20%-40% Total VA Construction Agriculture -40% Soc. & Pers. Manuf -30%-50% Manuf Agriculture MiningTotal VA 2007-50% 2008 2009 2010 2011Services 2012 2013 20143.3% 2015 2016 Total VAMining -40% Water & Elec. 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Agriculture Agriculture -64% Government 4.1% Water & Elec. -64% -50% MiningMining -4% -2%-21% 0% 2% 4% 6% 8% NMPS-VAFin. & Bus. Mining Service 4.5%GDP 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Water & Elec. -4% -64%-2% 0% 2% 4% 6% 8% NMPS-VA Mining GDP Water & Elec. -64% The economy showedTrans. signs & Comm. of bottoming5.4% out Services sectors continued to be the fastest The economy showed signs of bottoming out Services sectors-4% -2%continued 0% 2%to be4% the 6%fastest 8% in the first quarter ofTrade the year6.4%, after growing sectors -4%in the-2% economy 0% 2% during4% 6% year 8% in the NMPS-VAfirst quarter Mining of the GDPyear , after growing sectors in the economy during year deteriorating performance in 2015. Real GDP to March 2016, while the water & electricity, The economydeteriorating showed performance signs of in bottoming 2015. Real out GDP S ervicesto March sectors 2016 ,continued while the waterto be &the electricity, fastest contractedThe economy byshowed 0.2% signs inof bottomingthe 12 outmonths in the first to miningServices and sectors agriculture continued tosectors be the fastestrecord growinged in thecontracted first quarter by 0.2% of in thethe year12 ,months after togrowing mining sectors and agriculturein the economy sectors during record yeared Marchquarter of2016 the year,,a slight after a improvdeterioratingement performance from the in negativesectors ingrowth. the economy Finance during year andto March business 2016, while deteriorating2015.March Real GDP 2016 performance contracted,a slight by 0.2% improvin 2015 in theement. Real12 months fromGDP theto theMarchnegative water 2016 & growth.electricity,, while miningFinancethe water and agricultureand & electricity, business sectors contracted0.3% 0.3%negative bynegative 0.2% growth ingrowth the in 12 in2015months 2015 but to but servicemi ningservices ands and governmentagriculture government weresectors were the the recordfastes fastesedt t significantlyto March 2016, lower a slight than improvement 3.2% growthfrom the same0.3% growrecordeding sectors negative, at growth. 4.5% Finance and 4.1% and business in March services, Marchnegativesignificantly 2016 growth,a inslight 2015lower butimprov than significantly ement3.2% growthlowerfrom than thesame negative andgrow governmenting growth.sectors were , theatFinance fastest4.5% growingand and 4.1% sectors, business in atMarch 4.5% , period in 2015. Overall economic output is up from 3.2% and 3.3% recorded in Q1 2015 0.3%3.2%period growthnegative inin the2015 periodgrowth. Overall ending March economicin 2015.2015 Overall outputbut isservice andup 4.1%froms and in3.2% March, government and up from3.3% 3.2% recorded were and 3.3% the in recorded Q1fastes 2015 int therefore flat. However, growth in the non- respectively. The subdued growth in significantlyeconomictherefore output l ower isflat. therefore However,than flat. 3.2% However, growth growth growth in insamethe the non grow- Q1respectively ing2015 sectors respectively.. , atThe The4.5% subdueds ubduedand growth 4.1% ingrowth in agriculture March in, miningnon-mining private private sectorsector (NMPS) (NMPS) was 3.9%, was similar 3.9% to , agriculturesector is attributablesector isto theattribu contractiontable ofto crops the and periodmining in 2015 private. Overall sector economic (NMPS) outputwas 3.9%is up, agriculturefrom 3.2% andsector 3.3% is recorded attributable in Q1 to 2015 the similarits growth to rate its through growth 2015,rate but through this was offset2015 by, stillbut contractionhorticulture. of The crops crops sub-sector and horticulture had negative .growth The of thereforesimilar flat. to However,its growth rategrowth through in the 2015 non, -butrespectively contraction. ofThe crops s ubduedand horticulture growth. Tinhe thissignificant was miningoffset contraction. by still significant mining crops1.3% sub and- horticulturesector had contracted negative by 1.5% growth in the period. of miningthis private was offsetsector by (NMPS) still significant was 3.9% mining, agriculture crops sub sector-sector ishad attribu negativetable growthto the of contraction. 1.3% and horticulture contracted by 1.5% in similarcontraction. to its growth rate through 2015, but contraction1.3% and ofhort cropsiculture and contracted horticulture by 1.5%. The in the period. this was offsetBusiness by Confidencestill significant mining cropsthe period.sub-sector Annual had Credit negative Growth growth of contraction.% of Firms% of Firms Rating Rating Current Current Business Business 1.3% and hortAnnualAnnualiculture Credit Creditcontracted Growth Growth by 1.5% in ConditionsConditions Satisfactory Satisfactory 45% 45% 100% 100% the period. 40% 40% 90% 90%% of Firms Rating Current Business Annual Credit Growth 35% 35% 80% 80% Conditions Satisfactory 45% 100% 70% 70% 30%40% 30% 90%60% 60% 25%35% 25% 80%50% 50% 20% 20% 30% 70%40% 40% 15% 15% 60%30% 30% 25% 50%20% 20% 10% 10%

20%% of credit to sector % of credit to sector 40%10% 10% 5% 5% 15% 30%0% 0% 0% 0% 2008 20092008 20102009 20112010 20122011 20122013 20132014 20142015 20152016 2016 20% 10% 2010 20102011 20112012 20122013 20132014 20142015 2015 2016 2016 % of credit to sector 10% ExportersExporters Non-ExportersNon-Exporters All All 5% Total Total FirmsFirms HouseholdsHouseholds 0% 0% 2008The 2009Bank 2010 2011of 2012Botswana’s 2013 2014 2015Business 2016 Credit growth in the year to April The Bank of Botswana’s Business Credit 2010growth 2011 in2012 the2013 year2014 to2015 April2016 The BankExpectations of Botswana’s Survey Business (BES) Expectations for the firstSurvey half of Credit2016 increasedgrowth in theto year9.5%, to April from 2016 increased7.1% toin Expectations(BES) for theExporters first Survey half of(BES) 2016Non-Exporters showedfor the that first the half overallAll of 20169.5%,increased from 7.1%to in9.5%, December from 2015, 7.1attributable% in to 2016 showedthat the overall rating of DecemberTotal 2015 , attributableFirms toHouseholds faster growth 201rating6 ofshowed business confidencethat the declined overall in the ratingMarch 2016of Decemberfaster growth 2015 in, lendingattributable to both tohouseholds faster growthand firms. Thebusinesssurvey business whenBank confidence compared confidenceof to the Botswana’sdeclined September declined in2015 the insurvey.Business theMarch The March inC reditlendingCreditin lending togrowth firmsto bothto increased bothin households thouseholdsbyhe 4.5% year in theand andtoyear firms. toAprilfirms. April Expectations2016BES measures 2016survey thesurvey Survey proportionwhen (BES)when of firmscompared for thatcompared the are satisfiedfirstto halftothe with of theCredit2016 2016,Credit increasedto up firms tofrom firms 3.2%increasedto increased in 9.5%,December by 4by 2015.from.5% 4.5% Household in the7.1in the %year credit year in 201Septembercurrent6 September businessshowed 2015 conditions,that 2015 su rvey which thesu.rvey Thedeterioratedoverall. TheBES BES frommeasuresrating 44% measures inof toDecember Aprilgrowthto April 2016,was 2015 2016,13.7%, up, attributable upfrom fromfrom 3.2% 12.8% 3.2% to inin fasterDecemberDecemberin December growth 2015. businesstheSeptember proportionthe proportion2015confidence to of 36% firms ofin Marchfirmsdeclined that 2016.thatare Whilesatisfiedinare the satisfiedconfidence March with with 2015.in Rising2015.lending Household household Household to bothcredit credit growthcredithouseholds growth isgrowth due mainlywas andwas to13.7% growth 13.7%firms., in , among exporting firms improved drastically, from 33% in unsecured lending, with slower growth in borrowing for 2016current current surveybusiness businesswhen conditions, comparedconditions, to which thewhich downCredit down from to fromfirms 12.8% 12.8% increased in December in December by 4.5% 2015 2015in. theRising. Rising year Septemberdeteriorated 2015 to 71% from in 44%March in2016, September it decreased 2015 by to propertyhousehold mortgages credit and growthvehicles. is due mainly to Septemberdeteriorated 2015 from su44%rvey in. SeptemberThe BES measures 2015 to householdto April 2016, credit up growth from 3.2%is due in mainlyDecember to 13% 36%to 31% in Marchfor non-exporting 2016. While firms cduringonfidence the period. among growth in unsecured lending, with slower the36%Nevertheless, proportion in March there 2016.of is firmsoptimism While that thatc onfidenceare business satisfied conditions am ongwith growth2015. Householdin unsecured credit lending growth, with was slower 13.7% , exporting firmsimproved drastically, from growth in borrowing for property mortgages exportingwill improve infirmsimproved the next 12 months drastically despite uncertainty, from growth in borrowing for property mortgages current33% inbusiness September conditions,2015 to 71% inwhich March down and from vehicles. 12.8% in December 2015. Rising deteriorated33%surrounding in September the fromsupply of44% key2015 inputs,in Septemberto water 71% and in electricity, 2015March to andhousehold vehicles. credit growth is due mainly to which contributed to overall decline in business confidence. 36% in March 2016. While confidence among growth in unsecured lending, with slower exporting firmsimproved drastically, frompage growth 3 in borrowing for property mortgages 33% in September 2015 to 71% in March and vehicles. 2016, it decreased by 13% to 31% for non- exporting firms during the period.2016, Neverthelessit decreased ,by there 13% isto optimism31% forwww.econsult.co.bw nonthat- businessexporting conditionsfirms will improveduring in the nextthe 12period.KEY months NeverthelessECONOMIC despite , uncertaintythere VARIABLES is optimism surrounding that thebusiness supply conditionsof key inputs, will waterimprove and in electr the icity,next which12 months contributed despite touncertainty overall surroundingdecline in businessthe supply confidence. of Arrearskey inputs, on Bank water Lending and electricity, Bank Deposits, Lending & Liquidity which contributed to overall decline in Arrears on Bank Lending business10% confidence.Arrears on Bank Lending BankInflation Deposits, and ForecastLending & 10% 16% 9% 9% Arrears on Bank Lending Liquidity 10%8% 14% Bank Deposits, Lending & 8% 60,000 30% 7%9% 12% Liquidity 7% 8% 6% 10% 60,000 30% 6% 40,000 20% 5%7% 5% 8% 4%6% P million P 4% 6% 40,000 20% 3%5% 20,000 10% 3% % of total assets % of credit to sector 4% P million P % of credit to sector 2% 4% 3%2% 20,000 10% 1% 2% % of total assets % of credit to sector 0 0% 2%1% 0% 0% 1%0% 0 0% 0% Business Households Total DepositsBoB Upper Lending BoBExcess lower Liquidity Business Households Total Actual Forecast Total arrearsBusiness as a proportionHouseholds of outstanTotal ding BankingDeposits liquidity Lendinghas beenExcess stable Liquidity at bankTotal creditarrears asincreased a proportion ofto outstanding6.4% in bank the credit first adequateBanking liquidity levels has been in stable recent at adequate months, levels in recentafter Total arrears as a proportion of outstanding Banking liquidity has been stable at quarterincreased of to 20166.4% in fromthe first 4.9 quarter% recorded of 2016 from in4.9% the havingmonths, improved after having improvedmarke dlymarkedly in 2015 in 2015 from from thethe bankrecorded credit in the increasedlast quarterInterest of to2015. Rates 6.4 The% sharpin theincrease first adequatevery lowExports levels levels experienced of in Goods recentearlier. &In Servicesthemonths, first four aftermonths last14 quarter of 2015. The sharp increase in quarterin arrears of was 2016 driven from by both 4.9 households% recorded and businesses. in the havingveryof 2016, low improved both levels bank deposits experiencedmarke anddly lending in 2015increasedearlier.Copper from at & similarIn thethe Nickel arrearsTotal12 arrears was ondriven household by bocreditth rosehouseholds from 4.8% andto firstrates. four Banks months as a whole of have2016, excess both liquid bank assets equivalentdeposits last quarter of 2015. The sharp increase in very Otherlow levels experienced earlier.7% In the businesses6.4% while .total Tota arrearsl arrearson firms’ crediton increasedhousehold from andto aroundlendingmanuf. 5% increasedof total assets, atwhich similar is a comfortable rates.Gold Banks buffer arrears10 was driven by both households and first four months of 2016, both bank deposits1% credit5.5% roseto 6.8% from from Q44.8 2015% toto Q1 6 2016.4% respectively. while total asto supportagoods whole lending havedemand, althoughexcess there liquid are significant asses businesses. Total arrears on household andvariations lending3% across increased individual banks. at similar rates.Salt Banks & Soda arrearscredit8 roseon firms’ from credit4.8% increasedto 6.4% whilefrom 5.5total% equivalent to around 5% of total assets,Ash % as a whole Serviceshave excess liquid asses1% to 66.8% from Q4 2015 to Q1 2016 which is a comfortable24% buffer to support arrears on firms’ credit increased from 5.5% equivalentMachinery to around 5% of total assets, respectively. lending4% demand, although there are to 4 6.8% from Q4 2015 to Q1 2016 which is a comfortable buffer to support significant variations across individual banks. respectively. lendingVehicle demand, althoughRough there are 2 Stock Markets Inflation and Forecast parts diamonds Stock Markets significant variationsInflation acrossand Forecast individual48% banks. 150 16% 1% 0 Arrears on Bank Lending Inflation and Forecast 10% Stock Markets 16%Textiles Inflation and Forecast 140150 16%14% 1% 9% 14% 130140 Bank Prime 14%12% Beef Polished 8% diamonds BoBC91 BoBC14 12% 2% 120130 7% 12%10% 8% 10% 110120 6% 10% 8% 8% 5% 8%6% 100110 Foreign Exchange Reserves Copper & Nickel Prices 13 4% 6%30,000 12,000 Index, Jan 2010 = 100 6%4% 10090 3% 90

% of credit to sector 4% Index, Jan 2010 = 100 12 2% 4%2% 25,000 10,000 8090 80 2% 11 1% 2%0% 7080 0% 0%20,000 8,000 2012 2013 2014 2015 201670 0% 7010 2012 2013 2014 2015 2016 15,000 BoB Upper BoB lower 6,000

BSE DCI (BWP) BSE DCI (USD) MSCI60 EM Pula bn USD bn 9 BoB Upper BoB lower Business Households Total BoBActual Upper BoBForecast lower BSE DCI (BWP) BSE DCI (USD) MSCI EM Nickel/tonne Actual Forecast The domestic companies index (DCI) of50 the Headline10,000 inflationActual in Q2 2016 decreasedForecast 4,000 Copper/tonne 8 The domestic companies index (DCI) of the Headlinefurther below inflation the inlower Q2 2016limit of decreased the Bank of BotswanaThe domestic Stock companies Exchange index (DCI) performed of the Botswana poorly Headline inflation in Q2 2016 decreased further below 7 40 further 5,000 below the lower limit of the Bank 2,000of inBotswana Stockthe secondExchange Stock performed quarter Exchange poorly of the inperformed the year, second falling quarter poorly by Botswanathe lower limit inflation of the Bankrange of Botswanaof 3-6%, inflation recording range inof the the secondyear, falling quarter by Interest1.2% andof the 1.3%Rates year, in Pula falling and US by Botswanaa newof 3-6%, lowExports recording inflationrate of of2.7%a range newGoods lowin of June, rate 3&-6%, Servicesof down2.7% recording infrom June, 1.2%14 6 and 1.3% in Pula and US Dollar terms30 0 0 Dollar terms respectively. However, emerging stock a3.0% newdown in lowfrom March. rate3.0% of inThe 2.7%March. downward inThe June, downward movementdownCopper movement from & inin respectively.1.2%2008 and 2009 1.3% 2010 However, 2011in Pula2012 2013and 2014e mergingUS 2015 Dollar 2016 termsstock Nickel markets12 were generally weak in Q2 and MSCI EM 3.0%inflation inOther March. is attributable The downward to lower rates movement of price increase in marketsrespectively. were However,generally weakemerging in Q2 stockand inflation is attributable to lower rates7% of Goldprice declined by 0.3%, USlargely dollar attributablePula slow economic acrossmanuf. most commodity groups, especially food and markets10 were generally weak in Q2 and inflatioincreasen is across attributable most tocommodity lower rates groups, of price1% MSCIgrowth EMexperienced declined in the emergingby 0.3% markets,, largelywhile housinggoods costs. It is Nickelexpected that Copperinflation will remain MSCI EM declined by 0.3%, largely increase3% across most commodity groups,Salt & Soda the 8 MSCI World index, which mainly reflects larger subdued before increasing towards the end of the Ashyear developed% markets, gained 0.3%. and rising to aroundServices 4% by mid-2017. 1% 6 24% Machinery 4% 4 Vehicle Rough 2 page 4 parts diamonds 1% 48% 0 Textiles 1%

Bank Prime Beef Polished diamonds BoBC91 BoBC14 2% 8%

Foreign Exchange Reserves Copper & Nickel Prices 13 30,000 12,000 90 12 25,000 10,000 80 11 20,000 8,000 70 10 15,000 6,000

60 Pula bn USD bn 9 Nickel/tonne

10,000 4,000 Copper/tonne 8 50

7 40 5,000 2,000

6 30 0 0 2008 2009 2010 2011 2012 2013 2014 2015 2016

US dollar Pula Nickel Copper

Arrears on Bank Lending Inflation and Forecast 10% 16%

9% 14% 8% 12% 7% 6% 10% 5% 8%

4% 6% 3%

attributable% of credit to sector slow economic growth especially4% food and housing costs. It is attributable2% slow economic growth especially food and housing costs. It is experienced in the emerging markets, while expected2% that inflation will remain subdued experienced1% in the emerging markets, while expected that inflation will remain subdued the MSCI World index, which mainlywww.econsult.co.bw reflects before increasing towards the end of the the MSCI0% World index, which mainly reflects before0% increasing towards the end of the larger developed markets, gained 0.3%. year and rising to around 4% by mid-2017. larger developed markets, gained 0.3%. year and rising to around 4% by mid-2017. KEYattributable ECONOMIC slowInterest VARIABLESeconomic Rates growth especially foodBoB Upper Exchangeand housing rates costs.BoB Itlower is 14 BusinessInterest Households Rates Total Exchange rates 14 Actual Forecast experienced in the emerging markets, while expected2009 that 2010 inflation 2011 2012 will 2013 remain 2014 subdued2015 2016 12 6.0 2009 2010 2011 2012 2013 2014 2015 2016 1.45 12the MSCI World index, which mainly reflects before increasing towards the end of the Interest Rates 6.0 Exchange Rates 1.45 larg10 er developed markets, gained 0.3%. year and rising to around 4% by mid-20171.40. 10 7.0 1.40 8 InterestInterest RatesRates 7.0 ExportsExchange of Goods rates & Services 1.35 1414 1.35

8 % Copper & 8.0 1.30 % 6 2009 2010 2011 2012 2013 2014 2015Nickel 2016 1212 8.0Other 1.30 6 6.0 7% Gold1.451.25 manuf.9.0 1.25 10104 1%1.40 4 9.0goods 1.20 7.0 3% Salt &1.20 Soda Pula per USD 828 10.0 Ash1.351.15 Rand per Pula Pula per USD 2 Rand per Pula % % 10.0 1.15 8.0 Services 1.301% 606 24% 1.10 0 Machinery11.0 1.251.10 11.04% 1.05 44 9.0 1.201.05 12.0 1.00 Bank Prime Vehicle Rough Pula per USD 22 Bank Prime 12.010.0 diamonds 1.151.00 Rand per Pula BoBC91 BoBC14 parts BWP per USD ZAR per BWP BoBC91 BoBC14 1% 48% 00 BWP per USD ZAR per BWP 1.10 The Monetary Policy Committee Exchange11.0Textiles rates continued to be volatile The Monetary Policy Committee Exchange rates continued to be volatile1.05 (MPC)maintained its monetary policy stance during1% Q2, although in the event the Pula (MPC)maintained its monetary policy stance during12.0 Q2, although in the event the 1.00Pula and held the BankBank Rate at 6%Prime in June 2016, endedBeef the Polishedquarter little changed against both diamonds and held the BankBoBC91BoBC91 Rate at 6% inBoBC14 June 2016, ended 2%the quarterBWP per USDlittle changedZAR per against BWP both due to a positive price stability and inflation the SA rand8% and US dollar compared to the due to a positive price stability and inflation the SA rand and US dollar compared to the outlook.The MonetaryThe BoBC -14Policy and BoBCCommittee-91 yields Exchangeend of Q1.rates Currencycontinued marketto be volatilevolatility outlook. The BoBC-14 and BoBC-91 yields have(MPC)maintainedThe Monetary continued Policy Committeeto its move monetary (MPC) slowly maintainedpolicy downward, stance its endduringfollowedExchange of Q2, Q1.rates changingalthough continuedCurrency in investor tothe bemarket eventvolatile sentiment theduringvolatility Pula Q2,s in havemonetary continued policy stance to andmove held theslowly Bank Rate downward, at 6% in followedalthough inchanging the event theinvestor Pula ended sentiment the quartersin withand heldyieldsForeign the of Bank0.84 Exchange %Rate and at 1.09 6% Reserves %in respectivelyJune 2016, endedforeign the exchange quarterCopper little markets & Nickelchanged, with Prices against the possible both withJune 13yields 2016, due of to0.84 a positive% and price 1.09 stability% respectively and inflation foreignlittle30,000 changed exchange against markets both the ,SA with rand the and possibleUS 12,000dollar whendueoutlook. to The compareda positiveBoBC 14-day toprice andthe BoBCstability 1.00 91-day% and andyields inflation have1.9036% thecreditcompared SA ratingrand to the anddowngrade end US of Q1.dollar Currency of comparedSouth market Africa volatilityto ,the and when12 compared to the 1.00% and 1.36% credit rating downgrade of South Africa, and prevailingoutlook.continued to The movein Q1 slowlyBoBC 2016 downward,-14. Theand with commercialBoBC yields- of91 0.84% yields bank endthefollowed25,000 Unitedof changingQ1. Kingdom investorCurrency sentiments’s votemarket in foreignto leavevolatility exchange10,000 the prevailingand 1.09% inrespectively Q1 2016 when. The compared commercial to the 1.00% bank80 themarkets, United with Kingdomthe possible’s creditvote rating to downgradeleave the of primehaveand11 1.36% continuedlending prevailing rate toin Q1move 2016.remained Theslowly commercial constantdownward, bank at followedEuropeanSouth Africa, changing andUnion. the United investorThe Kingdom’s Pula sentimentvote-US to leave Dollar sthein prime lending rate remained constant at European20,000 Union. The Pula-US Dollar8,000 7.5%withprime yields.lending rateof 0.84remained% and constant 1.09 at% 7.5%. respectively70 foreignexchangeEuropean exchange Union. rate The was marketsPula-US 10.94 Dollar, atwith theexchange the end possible rateof Junewas 7.5%10. exchange rate was 10.94 at the end of June when compared to the 1.00% and 1.36% credit2016,10.94 rating atcompared the end downgrade of June to 2016,10.93 of compared South at the toAfrica end10.93 , of atand theQ1, end15,000 of Q1, while the Pula depreciated by 0.4% against6,000

60 Pula bn 2016, compared to 10.93 at the end of Q1, prevailingUSD bn 9 in Q1 2016. The commercial bank thewhile United the Pula Kingdom depreciated’s vote byto 0.4%leave against the whilethe SAthe Rand Pula during depreciated the quarter, from by ZAR1.37 0.4% againstto 1.36. prime lending rate remained constant at EuropeanNickel/tonne Union. The Pula-US Dollar

the10,000 SA Rand during the quarter,4,000 from Copper/tonne 7.5%8 . 50 theexchange SA Randrate was during 10.94 theat thequarter, end of Junefrom Diamond Sales ZAR1.37 to 1.36.International Trade ZAR1.372016, compared to 1.36. to 10.93 at the end of Q1, 7 DBGSS 40 5,000 2,000 900 DBGSS while the Pula Internationaldepreciated by Trade 0.4% against 900 25,000 International Trade 6 30 0 0 800 the25,000 SA Rand during the quarter, from 2008800 2009 2010 2011 2012 2013 2014 2015 2016 ZAR1.3720,000 to 1.36. 700 20,000 700 US dollarDBGSS Pula 600900 15,000 InternationalNickel TradeCopper 600 15,00025,000 500800 10,000 500 10,00020,000 400700 US $ mn 5,000 400 US $ mn 15,0005,000 300600 mn BWP Trade

300 mn BWP Trade 0 200500 10,0000 200 -5,000 400 US $ mn 100 -5,0005,000 100

3000 mn BWP Trade -10,000 0 -10,0000 200 -5,000 100 Trade Balance Imports Exports Trade Balance Imports Exports The global0 market for diamonds in the As-10,000 expected, total trade improved in the year ThesecondThe globalglobal marketquarter mark for etdiamondsof forthe diamondsin theyear second has quarterin beenthe AstoAs expected, Marchexpected, 2016total total trade tradeconsistent improved improved in, thewith year in the improvedto March year secondof the yearquarter has been of generally the stable,year withhas demand been to 2016,March consistent 2016 withconsistent improved, globalwith demandimproved for generally stable, with demand for rough global demandTrade Balance for diamonds.Imports TotalExports goods generallyfor rough diamondsstable, andwith corresponding demand roughfor pricesrough globaldiamonds. demand Total goodsfor diamonds.exports went Totalup from goods 4.4% diamondsThereflecting global demand and mark fromcorrespondinget consumers for diamonds and diamondrough cuttinginprices the Asexportquarterly expected,s growthwent total inup Q4 trade 2015from toimproved 4.4%61% growth growth in in the Q1 2016,yearin Q4 diamondsreflectingand polishing and firms.demand correspondingSales by fromDe Beers consumers Globalrough Sightholder prices and export2015due tos improved tow ent61% diamondup growth from sales 4.4%in which Q1 contributedgrowth 2016, 86%indue Q4 of to reflectingsecond quarterdemand of fromthe consumersyear has beenand 2015to March to 61 2016% growth consistent in Q1, with2016 improved, due to diamondSales (DBGSS) cutting in Q2 andimproved polishing when compared firms . to De improvedtotal exports diamond in the year tosales March. whichImports movedcontri frombuted a diamondgenerallythe same periodcutting stable, in 2015, andwith from polishingdemand USD1,520 firmsformillion .rough toDe improvedglobalcontraction demand diamond of 5.6% for in Q4salesdiamonds. 2015 towhich a contraction Total contri ofgoodsbuted 4.1% diamondsUSD1,856 million. and correspondingDe Beers’ fifth sightholderrough prices and exportin Q1s 2015, went attributable up from to a4.4% lower valuegrowth of diamondsin Q4 reflectingauction sale wasdemand successful fromand rejections consumers were made and 2015imported to 61during% growththe period. in This Q1 resulted 2016 ,in due a trade to diamondonly on lower cuttingquality goods. and However, polishing sales at firmsthe fourth. De improvedsurplus of P3,512diamond million. sales This whichcompares contri with abuted trade and fifth sights of the year were slightly below those deficit of P4,713 million in the final quarter of 2015. of the third sight, and the industry remains cautious of market developments. page 5 Beers global sightholder sales (DBGSS) in 86% of total exports in the year to March. Q2 improvedBeers global when sightholder compared sales to the(DBGSS) same inImports 86% ofslightly total exportsimproved in thein Marchyear to from March. a periodQ2 in improved 2015, from when USD1,520 compared millionto the sameto contraction Imports slightlyof 5.6% improved in December in March 2015 from to aa USD1,856period million. in 2015, De fromBeers’ USD1,520 fifth sightholder million tocontraction contraction of of4.1% 5.6% March in December 2015,attributable 2015 to a and USD1,856auction salemillion. was De Beers’successful fifth sightholder and to contractiona lower valueof 4.1% of March diamonds 2015, attributableimported rejectionsand wereauction made sale only was on lowersuccessful www.econsult.co.bwquality and during to athe low period.er value This of resulteddiamonds in importeda trade goods.rejections However, were sales made at theonly fourth on lower and fifthquality surplus during of the P3,512 period. million.This resulted This comparesin a trade sighKEYtsgoods. of ECONOMIC the However,year were sales slightlyVARIABLES at thebelow fourth those and of fifth with surplus a trade of deficitP3,512 of million.P4,713 Thismillion compares in the the thirdsigh tssight, of the yearand werethe slightlyindustry below remains those offinal with quarter a trade of 2015deficit. of P4,713 million in the cautiousthe ofthird marketExports sight, ofdevelopments. Goodsand &the Services industry remains final quarterForeign of 2015 Exchange. Reserves cautious of market developments. Exports of Goods & Services Foreign Exchange Reserves 13 Exports of Goods & CopperServices & Foreign Exchange Reserves 13 NickelCopper & 90 Other Nickel 12 90 7% Gold manuf. Other 7% 12 manuf. 1% Gold 80 goods 1% 11 80 3% goods Salt & Soda 11 3% AshSalt & Soda 70 Services Ash 10 70 1% 10 24% Services 1%

Machinery 24% 60 Pula bn USD bn

Machinery 9 60 Pula bn 4% USD bn 9 4% 50 Vehicle RoughRough 8 8 50 Vehicle diamonds parts parts diamonds 48% 40 1% 1% 48% 7 7 40 Textiles Textiles 1% 1% 6 6 3030 20082008 2009 2009 2010 2010 2011 2011 2012 2012 2013 2013 2014 2014 2015 2015 2016 2016 Beef BeefPolished Polished 2% diamonds2% diamonds 8% 8% US USdollar dollar PulaPula In 2015In 2015Botswana’s Botswana’s exports exports were, were, as iasn thein theForeign Foreign Exchange Exchange Reserves Reserves decreased decreased byby past,In 2015 past,dominated Botswana’s dominated exportsby diamonds. by were, diamonds. as in the Excluding past, Excluding dominated re - re3.- 53.%fromForeign5%from ExchangeP84.9 P84.9 billion Reservesbillion in in Decemberdecreased December by 20153.5% 2015 fromto to exportsby diamonds.exports of Excluding aggregatedof aggregated re-exports diamonds of aggregateddiamonds imported diamonds imported P81. P81.P84.99 9billion billionbillion in in December in MarchMarch 2015 201 201to 6.P81.96. BesidesBesides billion in imported from other countries, total exports of goods and March 2016. Besides exchange rate effects, the decline from fromother other countries, countries, total total exports exports of goodsof goods exchange exchange rate rate effects, effects, the the decline decline is is driven driven servicesand amounted services to P53.6 amounted billion (approx. to US$5.3bn).P53.6 Ofbillion byis drivendrawing by drawing down down on ongovernment government savings, savings which, andthis total,services rough diamondsamounted mined into Botswana P53.6 accounted billion by drawinghas an indirect down impact on on thegovernment foreign exchange savings reserves., (approx. US$5.3bn). Of this total, rough (approx.for almost half,US$5.3bn). 48%. Polished Of diamonds this accountedtotal, rough for a whichwhichReserves has has anincreased an indirect indirect in USimpact impactDollar on termson the the by foreign foreign0.2% to diamondsfurtherdiamonds 8%. mined As previously mined in Botswana reported,in Botswana 2015 accounted was accounted not a good for forexchange exchangeUSD7.6 billionreserves. reserves. while decreasingReserves Reserves by 1.4%increased increased in SDR terms inin almostyear alfor most diamonds,half, half, so48%. exports48%. Polishedwere Polishedsomewhat diamonds lowerdiamonds than US US toDollar SDR5.4 Dollar terms billion. terms by by 0.2% 0.2% to to USD7.6 USD7.6 billionbillion normal.accounted A striking resultfor a is largefurther contribution 8%. As of servicespreviously while decreasing by 1.4% in SDR terms to accounted for a further 8%. As previously while decreasing by 1.4% in SDR terms to exports,reported, at 24% 2015of the total;was thenot majority a good of this year was for SDR5.4 billion. reported, 2015 was not a good year for SDR5.4 billion. tourism.diamonds, The third solargest exports export were was copper-nickel,somewhat atlower diamonds,7%. thanThe remaining sonormal. exports 13% Awas were spreadstriking somewhat across result gold, soda loweris ashlarge thanand manufacturedcontributionnormal. products.A of strikingservices resultexports, is at large24% of contributionthe total; of the services majority exports,of this was at tourism. 24% of The the total;third the largest mCopperajority export & ofNickel wasthis Priceswascopper tourism.-nickel, The at 7%. Electricity third largestThe remaining export was13% copperwas spread-nickel, across at 7%. gold, CopperCopper & Nickel & Nickel Prices Prices ElectricityElectricity The 30,000remainingsoda 30,000 ash and 13% manufactured was spread products.across12,000 gold, 12,000 3,500 3,500 70 70 soda ash and manufactured products. 3,000 60 25,000 25,000 10,000 10,000 3,000 60

2,500 2,500 50 50 20,000 20,000 8,000 8,000 2,000 2,000 40 40 15,000 15,000 6,000 6,000 GWh GWh 1,500 1,500 30 30 Percent Percent Nickel/tonne Nickel/tonne Copper/tonne 10,000 10,000 4,000 4,000Copper/tonne 1,000 1,000 20 20

5,000 2,000 5,000 2,000 500 500 10 10

0 0 0 0 0 0 0 0

Nickel Nickel Copper Copper GenerationGeneration Imports ImportsGeneration Generation % of total % of total

The internationalThe international commodities commodities market market for Duringfor During the year the toyear March to March 2016, 2016,electricity electricity baseThe international metals,base metals, copper commodities c opperand nickel, marketand nickel, continuesfor base continues metals, to generated to generatedDuring declined the year declined 14.5%to March 14.5% year 2016, on year electricityyear on from year generated from copperbe and sluggish nickel, ;continues however to therebe sluggish; is some however sign that 518.8GWhdeclined 14.5% in year March on year 2015 from 518.8GWhto 443.6GWh. in March bethere sluggish is some; signhowever that the there bottom is hassome been sign passed that as 518.8GWh2015 toin 443.6GWh. March Correspondingly,2015 to 443.6GWh. the volume of im- the bottom has been passed as demand from Correspondingly, the volume of imported thedemand bottom from has major been importers passed is improving, as demand albeit fromslowly. Correspondingly,ported electricity the during volume the period of increased imported by 16.1% to majorCompared majorimporters to Q1 importers 2016, is copper improving is prices improving softened, albeitslowly, marginallyalbeitslowly. electricity. electricity451.1GWh. during This during thetranslated periodthe to periodtotal increased electricity increased consumptionby by Comparedin the Comparedsecond quarter,to Q1to falling 2016,Q1 by 0.6% 2016,copper from copper USD4,855prices prices 16.1% 16.1%in to the 451.1GWh. first to 451.1GWh.quarter Thisof 967.4GWh, translatedThis translated down in from total in969.9Gwh total softenedto USD4,826softened marginally per tonne.marginally Onin thethe otherin second the hand, second nickel quarter prices quarter, electricity, electricityin Q1 consumption2015, aconsumption decrease in of the 0.3%. infirst theElectricity quarter first quarter consumption to to fallingimprovedfalling by substantially, 0.6% by 0.6%from by USD4 from13.7%, USD4,855 to USD9,412 to,855 USD4,826 to up USD4,826 from amount amountfell toin the967.4GWh periodto 967.4GWh as a resultfrom of from969.9GWhslowing 969.9GWh economic in growth, in perUSD8,275. tonneper .tonneThere On the.is Onsome other the hope otherhand, that prices hand,nickel will nickelprices recover prices 2015, 2015,reduceda decrease mininga decrease demand, of and 0.3%. powerof 0.3%.rationingElectricity dueElectricity to contin - improvedfurtherimproved as marketsubstantially, substantially,imbalances bybetween 13.7%by supply13.7%, andto , consumptionto consumptionued plant fellfailures in fell theat Morupule inperi theod peri Bas power oda resultas station a resultof combined of USD9,412demandUSD9,412 improve up fromwith up China’s USD8,275. from increasingUSD8,275. The demand.re The is somere is someslowing slowingwith economic power economicshortages growth, in Southgrowth, reduce Africa. reduce d miningd mining hope hopethat pricthates pric willes recoverwill recover further further as page demand,as 6demand, and andpower power rationing rationing due due marketmarket imbalances imbalances between between supply supply and andtocontinued tocontinued plant plantfailures failures at Morupule at Morupule B B demanddemand improve improve with withChina’s China’s increasing increasing power power station station combined combined with withpower power demand.demand. shortagesshortages in South in South Africa. Africa.

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5th April Botswana makes According to the Millennium Development Goals (MDGs) Status progress in MDGs. Report for Botswana, the country has achieved nine out of twelve (Daily News) MDG targets. This was made possible through a combination of prudent macroeconomic policies and good governance. Botswana was able to make commendable process in the 15 years of MDGs as demonstrated by sustained economic growth and strong social and development programmes, which had been positive for Batswana.

11th April Kimberley starts mining Kimberley Diamonds has started operations at its Lerala open-pit at Botswana's Lerala diamond mine, and first production is scheduled for April 2016.The diamond mine. (Mining Lerala mine’s life span is estimated at least seven years, and it is Weekly) projected to produce an average of 357,000 carats of diamonds per year.

13th April Fiscal boost as De De Beers’ rough diamond sales in the first quarter of the year showed Beers’ rough sales signs of market rebound, a development that will be a boost for the rebound. (Mmegi) government, anticipating a P6 billion deficit for the 2016/17 financial year. The first three sightholder rough diamond sales recorded sales of USD545 million, USD617 million and USD660 million respectively, significantly higher than in the same period in 2015. The improved diamond sales are a fiscal boost to Botswana - through royalties, dividends and taxes the country receives about 80% of the income generated by Debswana’s sales to De Beers.

15th April Three suitors bid for At least three companies have expressed interest in purchasing the Mowana mine. (Mmegi) Mowana copper mine. The mine was placed under liquidation last year when it could not pay it creditors. It is expected to go on sale in August 2016.

18th April Lucara’s first In its first exceptional stone tender of the year, Lucara Diamond exceptional tender of Corporation sold rough diamonds with a value of USD51.3 million. Out years fetches USD51 of the seven diamonds sold, the company sold two stones for more million. (Rapaport New) than USD10 million each (USD10.49 million and USD12.19 million for 245.4 carat and 296.7 carat diamonds respectively).

19th April Botswana nickel Botswana’s top nickel and copper producer, Bamangwato Concessions producer starts massive Limited (BCL), issued workers with retrenchment notices in an exercise worker lay-off. (Mining that is aimed at cutting operational and salary costs to save the Weekly) company from collapse. It is estimated that at least 2,000 workers will be affected in the retrenchment process. Meanwhile, the Government has approved a USD100 million loan to BCL for recapitalisation.

21st April De Beers reduces De Beers’ diamond production slid 10% to 6.9 million carats in the first Q1 output by 10%. quarter of 2016, as the miner reduced output in response to market (Rapaport News) conditions.Production at Debswana mines fell in the period by 5% to 5.3 million carats.

22nd April Another 300MW The Public Procurement and Asset Disposal Board (PPADB) approved extension for Morupule a request from government to expand Morupule B by another 300MW, B. (Mmegi) a few months after the awarding of a tender to expand the station from 600MW to 900MW. The approval allows the government to directly appoint an Independent Power Producer (IPP) to construct additional two units (unit 7 and 8) at Morupule B. This will increase total electricity generation to 1200MW, above the current national demand of 610MW.

28th April Botswana retains A-/A-2 Standard and Poor’s (S&P) Rating Service maintained Botswana’s credit rating. (Sunday sovereign credit rating, reaffirming an “A-/A-2” rating for 2016. S&P’s Standard) review took into account the impact of commodity price shocks on Botswana’s fiscal position and economic activity, including also the accumulated buffers which have enabled absorption of trade shocks. However, Botswana’s credit rating is constrained by the narrow economic base and the dominance of the diamond sector in the economy making it vulnerable to external shocks.

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29th April Botswana gets USD76.2 The African Development Bank (AfDB) will lend Botswana USD76.2 million AfDB support million to support economic diversification efforts. According to to help economic AfDB, Botswana needs to invest in sectors such as agriculture and diversification. (Public manufacturing and support entrepreneurship development, with the Finance International) aim to reduce dominance of mining and government in the economy. The line of credit will assist the Botswana Development Corporation (BDC) to expand its investment funding options.

3rd May African Energy Development work has started on African Energy Resources’ two coal Resources’ Botswana projects in Botswana, the Mmamabula West and Mmamantswe projects, projects aimed at SA’s for submission into South Africa’s cross border IPP programme. The IPP coal programme. two coal projects are owned 100% by African Energy, and the company (Mining Review) is collaborating with two other companies at each site to develop the power projects. Mmamabula West and Mmamantswe projects are expected to each produce 600MW of electricity, should the company be successful in the South African IPP tender.

8th May Botswana Diamond Botswana Diamonds managed to raise up to USD722,000 through share raises USD722 thousand issuance to fund the ongoing diamond exploration at its joint venture for Orapa project. project with Alrosa in the Orapa area. The funds will be used for drilling, (Rapaport News) sampling, geophysics programme as well as providing additional working capital.

9th May Lucara sells its 813 Lucara sold its 813 carat rough diamond named “The Constellation” carat diamond. (Lucara for USD63.1 million, the highest price ever achieved for the sale Diamond Corporation) of a rough diamond. The type IIa diamond was recovered from the company’s Karowe mine in Botswana.

10th May Modest economic The government projected a modest average growth rate of 4.4% for growth seen in NDP 11. the next six years under its medium term socio-economic framework, (Mmegi) the 11th National Development Plan (NDP11), higher than the 3.8% growth recorded during the NDP10 period. However, the projected growth will not be enough to address Botswana’s development challenges of unemployment, poverty and income inequality. NDP 11 covers the period from April 2017 to March 2023.

11th May Botswana Diamonds to Maibwe Diamonds will begin drilling for diamond within the Gope area. start drilling at PL 186. The programme is part of the Maibwe block of licenses in Gope region (Rapaport News) which holds a high potential for diamond discoveries. It is stated that the drilling will establish the grade and quality of diamonds found in the area. Maibwe Diamonds is owned 15% by Botswana Diamonds and 51% by Bamangwato Concessions Limited (BCL).

13th May Government proposes According to the draft NDP 11 document, the government proposed P370 billion NDP 11 a P370.2 billion budget for the NDP 11 period, including P90 billion budget. (Mmegi) for development spending. Revenues during the period are forecast at P372.3 billion over the entire Plan period, resulting in a slight budget surplus of P2.1 billion. The government intends to keep total expenditures at 30% of GDP and maintain a 70% to 30% allocation between recurrent and development spending.

13th May Stronger Pula stifles SA The appreciation of the Pula against South Africa’s Rand is putting bound exports. (Mmegi) Botswana’s economic growth at risk, making exported goods and services expensive compared to imported goods and services. Thus, a strong Pula against its major trading partner’s currency erodes the competitiveness of domestic products which in turn hurts local manufacturers, and their ability to create employment opportunities.

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18th May Botswana grants A-Cap The government has approved the Environmental Impact Assessment environmental approval (EIA) of the Letlhakane uranium project, to be developed by A-Cap for uranium mine. Resources. This would be Botswana’s first uranium mine, with an (Mining Weekly) estimated 18 years of operation. A-Cap has identified a deposit with approximately 365.7 million pounds of uranium oxide, and the mine would produce 3.75 million pounds each year for the first 5 years.

20th May Production halved at Production from Gem Diamonds’ Ghaghoo mine in the CKGR halved Ghaghoo mine. (Mmegi) in the first quarter of the year as the company downsized operations to reduce costs. In a production update, Gem Diamonds stated that output at Ghaghoo stood at 11,029 carats in the first three months of 2016, down by 55% when compared to the last quarter of 2015. Reducing production at the mine is in line with Gem Diamonds’ strategy for 2016 to keep production in line with market conditions.

27th May Bruce Cleaver is new Bruce Cleaver will with effect from July 2016 be the new De Beers De Beers CEO. (Mining Chief Executive Officer (CEO), succeeding the outgoing Philippe Weekly) Mellier, who is stepping down after five years.

27th May Peregrine Diamonds Core drilling has started at Peregrine Diamonds’ 100% owned Sikwane starts core drilling at project, which comprises of nine kimberlites. Diamonds have already Botswana prospect. been recovered from surface samples and from down hole samples. (Mining Weekly)

31st May Bank of Botswana The depreciation of the Pula against most major currencies, doubles on weaker particularly the US Dollar, has seen Bank of Botswana (BoB) income Pula. (Mmegi) for 2015 doubling from the previous year, largely due to currency revaluations. Net income for the Bank amounted to P9.1 billion, significantly higher than the P4.1 billion realised in 2014. Total assets rose by P5.7 billion to P85.4 billion, of which foreign exchange reserves were P84.9 billion in 2015.

3rd June Banks’ profitability sinks Profitability among commercial banks contracted to a new low in 2015 to new lows. (Mmegi) as the sector suffered the effects of low interest rates, a freeze in bank charges and negative economic growth. According to the 2015 Bank of Botswana (BoB) Annual Report, banks’ profitability as measured by Return on Equity (RoE) and Return on Assets (RoA)was subdued in 2015, with one bank recording a loss.The maximum RoE and RoA achieved by individual banks were 21.4% and 2.6% down from 27.7% and 3.8% respectively. However, the situation is considered “normal” by the BoB, as banks in Botswana were making large profits in previous years.

7th June Analysts cast down NDP According to the Standard Bank Group’s Africa Markets Revealed 11 Growth forecasts. report, Botswana’s economy is expected to grow by no more than 4% (Mmegi) a year during National Development Plan 11 (NDP 11), lower than the 4.4% forecast by government officials. Thus, government revenue in NDP 11 may likely to be lower than the estimated P372.3 billion prompting the government for further fiscal consolidation by either increasing borrowing or drawing down on its savings.

8th June Kimberley to sell Following the commencement of production in April 2016, Kimberley first diamonds from Diamond’s Lerala diamond mine is ready for its first sale of diamonds. Botswana mine. (Mining The first sale will be conducted through an online auction at the end of Weekly) June 2016.

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11th June Slow growth hurts job The slow economic growth experienced in recent years is limiting opportunities – BoB. the creation of job opportunities in Botswana, as evidenced by (Business Weekly & sluggish employment growth. Formal sector employment statistics Review) from Statistics Botswana (StB) showed that only 1,008 new jobs in all sectors were created between 2013 and 2015, growth of 0.3%. According to the Bank of Botswana, factors such as the skills gap and slow economic diversification contribute to high unemployment levels and negatively impacts productivity, thus, undermining the ability to create jobs. As a result, there is need to rethink development strategies and create sustainable employment.

12th June Botswana’s electricity The Africa Infrastructure Development Index of 2016 by the African index at the lowest Development Bank revealed that Botswana’s electricity index in 2016 in 16 years. (Sunday is 80.98, the lowest in 16 years. The country is placed at position 38 in Standard) Africa, down from positions 34 and 27 in 2015 and 2014 respectively. This reflects the country’s electricity supply problems.

13th June Informal sector critical A review in Bank of Botswana’s Annual Report for 2015 stated that the for employment high unemployment rate is perpetuated by the small informal sector in the creation. (Weekend country, which also has its own challenges. Factors such as lack of access Post) to infrastructure and services, insufficient skills, and rigid trade and land use regulations hinder growth of the sector despite its potential to create more jobs. According to the Bank, there is a crucial need to create an enabling environment and accommodate growth of informal enterprises.

15th June Protea Hotels expands Protea Hotels has announced the conclusion of an agreement to enter into Botswana. (Mmegi) into Botswana’s hotels industry. Protea Hotels has footprints in different African countries and Botswana would be the ninth country for their brand. Facilities at the hotel will include 160 rooms (different sizes), business centre, bar, restaurant, fitness centre, conferencing rooms and an outdoor pool. The decision to enter the Botswana market was cemented by economic and political stability in the country as well as a positive economic outlook in the long-term.

15th June Botswana mine closures The closure of mines in Botswana had placed emphasis on the highlight need for low absolute necessity for low-cost mining production in Botswana. cost production. (Mining According to Econsult Botswana Managing Director Dr. Keith Jefferis, Weekly) mining companies in Botswana need to rethink their strategies and adopt low cost production strategies to survive, even in unfavourable market conditions, as this will help prevent mine closures and loss of employment.

16th June Government buys Government has moved to acquire 100 percent shareholding in Debswana shares in Morupule Coal Mine Limited (MCM) through the newly established MCM. (Business Weekly Minerals Development Company Botswana (MDCB), buying out & Review) Debswana Diamond Mining (Pty) Ltd in the process.Through Debswana, the Government and De Beers previously each held 50% of MCM indirectly.

17th June EPA: A window for The Economic Partnership Agreement (EPA) signed between the Botswana to boost European Union (EU) and six of Southern African Development exports. (Mmegi) Community (SADC) countries including Botswana, known as the SADC EPA, provides an opportunity for the country to increase its export base and increase exports to the EU market. The EPA eliminates tariffs and barriers and guarantees 100% free access to the EU market as a way of promoting seamless and efficient trade.

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NEWS HIGHLIGHTS

19th June National Development The 2015 financial results of the National Development Bank (NDB) Bank (NDB) shows showed an improvement, with losses reduced significantly from signs of financial P86.4 million in 2014 to P48.4 million in 2015. The bank’s impairment recovery. (Sunday charges also declined. Loans and advances increased from P1.3 Standard) billion to P1.37 billion while assets decreased marginally by 1.7%. Its turnaround strategy to return to profitability and operational efficiency has worked well for the bank to reduce losses.

20th June Bank Rate remains The Monetary Policy Committee (MPC), at the meeting held on the unchanged at 6%. 15 June 2016, maintained the Bank Rate at 6%, due to a positive (Weekend Post) price stability outlook. Inflation is forecast to remain within the Bank of Botswana medium-term objective range of 3-6%, and the prevailing monetary policy stance is also consistent with maintaining inflation within the Bank’s medium-term objective range.

20th June Revenue pool under Econsult Botswana Managing Director, Dr Keith Jefferis, emphasised pressure. (Weekend the need to expand the government revenues from domestic sources Post) as Botswana’s other revenue sources are under pressure. The 2016/17 budget estimated revenues at P48.4 billion, a reduction of P3.36 billion from the revised 2015/16 budget estimates on revenues of P51.76 billion. Thus, there is need to mobilise revenues as dependency on mineral and customs and excise revenues is not sustainable.

21st June Botswana: Posco and A consortium of South Korea’s Posco Energy company and Japan’s Marubeni to develop Marubeni company has been selected as preferred bidders to develop 300MW coal plant. the 300MW units 5 and 6 at Morupule B coal power station. The (African Energy) expansion of the power station will cost USD800 million which will be financed by the Export-Import Bank of Korea and Japan Bank for International Coorperation. Construction is scheduled to commence in the second half of 2016 and be completed in 2020.

23rd June Botswana records The Business Expectations Survey (BES) by Bank of Botswana further decline in showed an overall decline in the level of optimism among businesses. business confidence. Measured by the Business Confidence Index, the overall confidence (Sunday Standard) in the first half of 2016 (H1:2016) is at 36% down from 44% in 2015. The subdued levels of confidence particularly reflect the water and electricity challenges in the country.

24th June Economic growth target According to the central bank’s BES, the economy is unlikely to too optimistic – Bank of expand by the projected 4.2% this year as the country continues to Botswana. (Mmegi) encounter multiple challenges. On average, businesses’ sentiments on real GDP are that the economy will grow by 3.3% and 3.5% in 2016 and 2017 respectively. Problems experienced in the water and electricity sectors are at the top of challenges for growth prospects.

30th June Lesedi la Rona diamond The 1,109 carat Lesedi la Rona diamond shocked the market when it fails to sell at auction. did not sell at the long awaited London auction sale. Bidding failed to (Rapaport News) reach the anticipated higher price than that of The Constellation (the previous record), and did not go higher than USD61 million. Prior to the auction sale, the rough diamond was estimated to sell for more than USD70 million (a world record price for a rough diamond).

30th June Lucara to evaluate Lucara Diamond Corporation will pursue alternative market alternative market opportunities for sale of the 1,109 carat Lesedi la Rona rough options for 1,109 carat diamond, after it failed to sell at the Sotheby’s London auction. Options Lesedi la Rona. (Mining include increasing exposure of the diamond to the market by placing Weekly) it on display at various museums for a period of more than a year. In a company statement, Lucara said they are not in a rush to sell the diamond.

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MACRO-ECONOMIC DATA

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

Annual Economic Growth GDP % 4.8 9.3 4.4 3.1 1.2 -0.3 -0.2 .. Mining % -4.6 23.9 4.5 -0.4 -11.8 -19.7 -21.4 .. Non-mining private sector % 8.0 6.8 4.1 3.8 3.9 3.8 3.9 .. GDP current prices P mn 112,705 125,810 142,466 37,267 37,319 34,912 39,239 .. GDP 2006 prices P mn 75,786 82,961 85,619 21,450 20,707 21,730 22,120 ..

Money & Prices Inflation % 7.4 4.1 3.8 3.1 2.9 3.1 3.0 2.7 Prime lending rate % 11.0 9.0 9.0 8.0 7.5 7.5 7.5 7.5 BoBC 14-day % 4.6 3.1 3.1 1.9 1.18 0.97 1.0 0.84

Trade & Balance of Payments Exports - total goods P mn 45,719 66,402 76,208 19,773 11,830 12,355 19,875 .. Exports - diamonds P mn 36,143 55,367 65328 16,618 9,609 10,026 17,003 .. Imports - total goods P mn 62,112 70,210 72,394 19,760 18,077 17,068 16,363 .. Balance of visible trade P mn -16,393 -3,808 3,814 13 -6,247 -4,713 3,512 .. Balance of payments P mn -862 1,340 11,404 942 - 468 -5 529 .. ..

Foreign Exchange Exchange rate BWP per USD end 7.776 8.718 9.515 9.911 10.638 11.236 10.929 10.941 Exchange rate ZAR per BWP end 1.090 1.196 1.217 1.237 1.329 1.383 1.366 1.361 FX reserves $ mn 7,628 7,726 8,323 8,572 8,179 7,546 7,559 .. FX reserves P mn 59,317 67,772 79,111 84,536 86,190 84,881 81,891 ..

Financial Sector Deposits in banks P mn 47,216 48,512 51,492 57,628 61,780 59,961 61,078 .. Bank credit P mn 34,555 39,763 45,116 45,866 47,209 48,307 49,040 .. BSE index 7,510.2 9,053.4 9,501.6 10,690.1 10,624.3 10,602.3 10,202.6 10,081.3

Business Indicators Diamond production (a) '000 cts 20,619 23,134 24,658 5,999 4,176 4,836 5,429 5,294 Copper production (c) tonnes 57,916 49,448 46,721 7,530 2,518 3,349 5,777 2,747 Nickel production tonnes 17,942 22,848 14,958 6,439 1,194 3,987 7,303 3,770 Business confidence index 47% 45% 52% .. 44% .. 36% .. No. of companies formed 16,561 14,190 16,300 4,904 5,071 3,921 4,592 .. Electricity consumption GWh 3,703 3,502 3,990 1,006 956 1,041 967 .. Crude oil (Brent) $/bar 110.80 109.95 55.27 60.31 47.29 36.61 36.75 48.05

Employment (formal) Government 131,033 130,175 129,918 .. 130,220 ...... Parastatals 17,484 18,838 18,790 .. 19,411 ...... Private sector 188,531 189,894 191,399 .. 191,484 ...... Total 337,048 338,907 340,107 .. 341,115 ......

2014/15 2015/16 Govt Budget 2013/14 Outturn Revised Revenues P mn 48,951 55,904 51,764 Spending P mn 41,730 50,564 55,961 Balance P mn 7,222 5,340 -4,197 Public debt & guarantees P mn 29,481 32,991 33,670 Sources: Bank of Botswana; MFDP; Statistics Govt deposits at BoB P mn 31,745 41,680 36,752 Botswana; Department of Mines; Registrar of Companies; BSE; Econsult GDP P mn 129,425 145,435 153,844 Notes: (a) 2013 figures include production Revenues %GDP 37.8% 38.4% 33.6% from Boteti Diamond and Spending %GDP 32.2% 34.8% 36.4% Debswana (b) Numbers in Italics reflect Balance %GDP 5.6% 3.7% -2.7% revisions from the previous Public debt & guarantees 21.9% review %GDP 22.8% 22.7% (c) Copper production figures in Govt deposits at BoB %GDP 24.5% 28.7% 23.9% Q2 2016 are for the months of April and May. Data for June is not yet available

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SPECIAL FEATURE

The Botswana Economy at 50 - Achievements and Challenges

An Economy and Society Transformed The run-up to Botswana’s 50th anniversary of independence on September 30th provides an opportunity to highlight some of the key economic developments that have occurred over the past half-century. It also provides a good opportunity to highlight some of the key challenges that we face entering the next fifty years, and to identify how the second fifty years of independence may (or may not) be different from the first.

The broad outline of Botswana’s economic development GDP growth averaged 8.2% a year from 1966-2015; this was history is well known. The economy has grown rapidly over the faster than other rapidly-growing countries such as Singapore period since 1966, and has indeed been one of the fastest- (7.3%), Malaysia (6.4%), and South Korea (7.4%). Only growing economies in the world. The result has been rising China, with growth of 9.3% a year, grew faster (at least per capita incomes, and a transformation of one of the amongst countries for which the World Bank reports data for world’s poorest economies in 1966 to an upper-middle income the entire period). country. Furthermore, a country that was in a precarious macroeconomic position at Independence – with substantial As a result, per capita incomes in Botswana increased 13-fold balance of payments and fiscal deficits, heavily dependent upon in real terms (from $483 in 1966 to $7,080 in 2015, measured foreign aid to balance these deficits – has achieved prolonged in constant 2010 US dollars). Only China and South Korea had macroeconomic stability with, in many years, balance of larger increases over this period. payments and fiscal surpluses. The country has long moved on from dependence on foreign aid. Substantial net asset positions Figure 1: GDP per capita in 1966, and real GDP have been built up, in terms of both government’s investment growth rates, 1966-2015 (selected countries) account and the nation’s foreign exchange reserves.

At Independence, GDP per capita (average income) was 700 10% 9% US$84 (then R60). As is widely noted, this made Botswana 600 8% one of the poorest countries in the world at that time. Of 500 7% the 113 countries for which data is available from the World 6% 400 Bank for per capita income in 1966, Botswana was the 7th 5%

300 1966-2015 poorest, with only Rwanda, Burundi, Lesotho, Malawi, Nepal 4% and Burkina Faso having lower per capita income. Botswana 200 3%

was just below India ($92), China ($103), Kenya ($119), per capita, US$, 1966 GDP 2% 100 Nigeria ($124), and well below other African countries such 1% Average annual real GDP growth rate, annual real GDP Average as Zimbabwe ($281) Ghana ($270) Zambia ($337) and South 0 0% BDI IND ZAF NPL NPL LSO BFA MWI KEN SGP SGP ZMB CHN MYS KOR ZWE NGA NGA GHA SWZ BWA Africa ($591). RWA

Over the fifty-year period since 1966, Botswana’s economic 1966 GDP per capita GDP growth growth has exceeded that of almost all other countries. Real Source: World Bank, World Development Indicators

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SPECIAL FEATURE

This growth has been translated into important advances in social indicators and the quality of life. On the health front, infant mortality has decreased by two-thirds, life expectancy has increased from 52 to 64 years – notwithstanding the devastating impact of HIV/AIDS - and the number of doctors per 10,000 population has increased tenfold. The provision of education has improved dramatically, with the number of students in primary education rising from 71,577 in 1966 to 340,000 in 2013, and the number of secondary students rising from 1,800 to 175,000 over the same period. expectancy has increased from 52 to 64 years – notwithstanding the devastating impact of HIV/AIDS -‐ and the number of doctors per 10,000 population has increased tenfold. The provision of education has improved dramatically, with the number of students in primary education Table 1: rising Key from Economic 71,577 and Social in Indicators, 1966 to 340,000 1966 and 2015 in 2013, and the number of secondary Table 1: Key students Economic rising from 1,8 and 00 to Social 175,000 Indicators, over 1966 and 2015 the same period. Indicator 1966 2015 Population, total 575,000 2,262,485 GDP at market prices (current US$ million) 51.5 14,390.9 GDP at market prices (constant 2010 US$ million) 296.1 16,018. 6 GDP per capita (current US$) 84.0 6,361 GDP per capita (current Rand/Pula ) R60.2 P64,410 Mining value added of (% total) 0.0 20.2 Manufacturing, utilities, construction value added (% of total) 14.4 13.2 Services value added (% of total) 33.1 47.2 Agriculture value added (% total of ) 39.3 2.4 Cereal yield (kg per hectare; 5 year average) 353.6 361.8* Number of cattle 2,159,000^^ 2,084,000** Mortality rate, infant (per 1,000 live births) 97.0 34.8 Mortality rate, under-‐5 (per 1,000 live births) 139.5 43.6 Mortality rate, adult, female (per 1,000 female adults) 312.3 262.2* Mortality rate, adult, male 1,000 (per male adults) 374.1 345.2* Birth rate, crude (per 1,000 people) 46.2 25.0* Death rate, crude (per 1,000 people) 14.5 7.5* Life expectancy at birth, total (years) 52.6 64.4* Fertility rate, total (births per woman) 6.7 2.8* Population, ages -‐ 0 14 (% of total) 48.5 32.0 Urban population (% of total) 4.4 57.4 Enrolment in primary education, both sexes (number) 71,577 340,065** Enrolment in secondary general education, both sexes (number) 1,854 174,853** Physicians (per 100,000 people) 6.4^ 33.6*** Tarmac roads (km) 7 6,616 Notes: ^1970; ^^1971; *2014; **2013; ***2010 Notes:Source: ^1970; ^^1971; World *2014; **2013; Bank; Hartland ***2010 -‐Thun berg, 1978; Econsult, Source: World Bank; Hartland-Thunberg, 1978; Econsult

Over the fifty years of independence, the population has not just become healthier and Over the fifty years of independence, the population has not just fell into this category. The population growth rate has fallen become healthierbetter-‐ educated, and better-educated, but its but its demographic demographic from character a peak of almost has 4% a changed year in the as well. In 1966 1970s, to Botswana under 2% characterwas has changed almost as well. In entirely 1966, Botswana rural, was almost with currently. only Although 4% death of rates have the fallen population and life expectancy living in urban areas; by 2015, entirely rural,this with had only 4% risen of the population to living 57% in urban (or has even increased, as the main high driver of as 65%, depending on how an declining urban population area growth is areas; by 2015, this had risen to 57% (or even as high as 65%, has been a falling birth rate as the total fertility rate (births dependingdefined). on how an urbanThe area popula is defined).tion The is population also aging; is in per woman) 1966, has dropped almost sharply, half from 6.7 (49%) in 1966 to 2.8 of in the population was also aging;aged in 1966, 14 almost or half (49%) below, of the population whereas was by 2015 less 2014. than Total one-‐third population (32% has) fell increased into from this 575,000 to category. 2.3 The aged 14 orpopula below, whereastion by growth 2015 less than rate one-third has (32%) fallen million. from a peak of almost 4% a year in the 1970s to under 2% currently. Although death page rates 14 have fallen and life expectancy has increased, the main driver of declining population growth has been a falling birth rate as the total fertility rate (births per woman) has dropped sharply, from 6.7 in 1966 to 2.8 in 2014. Total p opulation has increased from 613,000 to 2.3 million. www.econsult.co.bw

SPECIAL FEATURE

The character of the economy has also been transformed. In As is well known, the economy was transformed by mining, 1966, Botswana was predominantly a farming nation, with which grew from virtually nothing in 1966 to over half (51%) agriculture accounting for 39% of GDP (and beef production of GDP at its peak in 1988/89, although it has since dropped perhaps a further 5%). But agriculture has largely stagnated to only 20% in 2015. This has been largely driven by diamond since then; over the period since Independence, the sector mining, although copper-nickel mining has also played a grew on average by 2.1% a year – far below the overall significant role. Interestingly, in 1966 it was anticipated that economic growth rate, and hence its share of GDP has fallen mining would come play an important role in the economy of to only 2.4% in 2015. This stagnation can be seen in terms newly-independent Botswana. The first National Development of crop yields; cereal yields per hectare averaged 354 kg per Plan (NDP 1), published in 1967, placed a great deal of hectare in the five years to 1966, and were virtually unchanged emphasis on the development of copper-nickel, diamonds, coal at 362 kg nearly fifty years later. Cattle numbers and off-take and soda ash as a key driver of economic growth. At that stage rates have also stagnated. And while meat & other livestock the viability of mining deposits was still uncertain; however, products made up over 90% of goods exports in 1966, by 2015 NDP 1 noted that “further feasibility studies are continuing they accounted for only 3% of the total. and there is optimism that these will reveal that mining can be established on a scale that will make a dramatic impact on Botswana’s economy”. However, the main emphasis was on developing the Selebi-Phikwe copper-nickel deposits Figures 2a and 2b: Structure of GDP and Exports, 1966 rather than diamonds. Despite these hopes for mining, it was nevertheless felt that “for many years to come, agriculture GDP, 1966 will remain the most important industry in Botswana”. In the event, mining overtook agricultureExports, as the 1966 largest sector of the Other agric. economy inproducts 1978/9. 3% Business & financial serv. Figure 3: Structure of GDP, 1966-2015 7% Govern- Other animal ment products 13% 4% Agri-culture 100% 39% 90% Live animals 80% 8% Transp. & 70% Meat & meat comms. 60% Hides & skins products 8% 50% 8% 77% 40% Trade 30% Manu- 18% 20% facturing 8% 10% 0% Con- Water & 2011 2011

struction electricity 1966 1995 1997 1999 2001 2003 2005 2007 2009 2013 2015

6% 1% 1968/69 1973/74 1975/76 1977/78 1979/80 1981/82 1983/84 1985/86 1987/88 1989/90 1991/92 1993/94

GDP, 1966 Exports, 1966 Mining Agric Manuf, constr. etc. Services Govt. Other agric. Source: Econsult; Statistics Botswana; Hartland-Thunberg, 1978 products 3% Business & Although there are no data on poverty rates in the early financial years of independence, it is evident that poverty has declined serv. 7% Govern- Other animal significantly. The first nationwide household income and ment products expenditure survey was only carried out in 1985/86, with 13% 4% Agri-culture the result that 59% of Batswana lived in households with 39% Live animals incomes below the poverty datum line (PDL). The headcount 8% poverty rate declined subsequently to 47% in 1993/94, 30% Transp. & Meat & meat comms. in 2002/3 and 19% in 2009/10. Hides & skins products 8% 8% 77% The First Transformation Trade Manu- The process by which Botswana was transformed from one 18% facturing of the poorest countries in the world to an upper middle- 8% income economy, with high levels of social provision and Con- Water & struction electricity economic infrastructure, is of course due in large part to the 6% 1% growth of the diamond industry. However, this was not the Source: Republic of Botswana, 1967; Hartland-Thunberg, 1978 first contributor to the process of achieving macroeconomic

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sustainability (containing the twin fiscal and balance of It is also clear that much of transformation of the economy payments deficits) and reducing aid dependence. The first occurred in the first 25 years of the period since Independence, significant development was the renegotiation of the Southern and that in the second 25 years, momentum has slowed. As African Customs Union (SACU) Agreement. This was treated Figure 4 shows, average annual GDP growth rates over five as a high priority by the new Botswana government, and the year periods were very high – in double digits – from 1966 to renegotiated SACU revenue-sharing agreement, which came 1990, but since that time growth has dropped to much lower into effect in 1969, was much more favourable to Botswana, levels around 4% a year – not bad, but hardly transformative. Lesotho and Swaziland than the old (1910) agreement had In that respect, the “diamond” engine of growth has run out been. The revenues received under the new agreement made a of steam. huge contribution to transforming the government budget and balance of payments during the 1970s. Figure 4: Average annual real GDP growth rates, The diamond industry took off during the 1970s. However it 5 year periods was only in 1983/4 that mineral revenues exceeded SACU revenues in the government budget. In the same year, the government budget shifted from structural deficit to structural 20 surplus. This was driven by both the rapid increase in diamond 18 production, which far surpassed initial expectations, and 16 14 the favourable taxation and revenue arrangements that the 12 government negotiated. Botswana was also fortunate that 10 the diamond deposits were both very large and also highly 8 profitable to exploit. 6 Average annual % growth Average 4 Also important in the early years of independence were the 2 governance and public finance management systems that were 0 put in place. These systems were designed for an environment where financial resources were very scarce, and had to be used prudently and productively. Fortunately, these systems endured, Source: Econsult; Statistics Botswana; Hartland-Thunberg, 1978 even when financial resources eventually became plentiful.

The growth of diamond production and exports, and the It is an interesting thought experiment to consider what governance systems that were in place, underpinned Botswana’s Botswana might have looked like without diamonds, especially dramatic economic success over the fifty years of independence. given that the anticipated benefits of copper-nickel mining In that sense, Botswana’s economic development story can be were never fully realised. Would Botswana resemble Lesotho, characterised as “well-managed good luck”. Both institutions with a similar population size, an environment that that is also and the natural resource endowment were essential to the not very hospitable to agriculture, and the same relationship success story. This is no mean achievement – many countries with SACU – and an income level per capita that is now only that are well-endowed with natural resources have not been one-sixth that of Botswana? well managed, and have suffered as a result. The Second Transformation? Nevertheless, it is important to recognise that Botswana’s Looking ahead to the next fifty years, what is in store? There is upper middle income status, with GDP per capita around no immediate threat to Botswana’s current “business model” $7,000 a year, is still largely generated on the back of the – unless of course synthetic diamonds destroy the market - as diamond industry – in a sense, we are “eating diamonds”. diamond mining and exports should continue at something Although the mining sector does not contribute as much to GDP like current levels for the next couple of decades. However, as it once did, the crucial point is that it still dominates exports, it would be a mistake to assume that “business as usual” is and hence is the source of most of the foreign exchange that a viable approach to the future growth of the Botswana keeps the economy functioning. economy, for several reasons. First, even if diamond production continues at current levels for many years, this represents an With the declining contribution of mining to overall economic output plateau, which by definition entails zero growth. So output, the structure of GDP is now dominated by services, diamond mining is unlikely to drive economic growth in future, which account for 47% of the total. And outside of tourism, as opposed to providing a foundation for current economic services are not generally exported, unlike minerals, which are activity and income levels. Second, as mines get deeper and almost all exported. Diversification of the economy has largely more difficult to exploit, costs of production go up and hence involved the growth of non-exporting activities, which is why profits – and the sector’s contribution to GDP and government the diversification of exports has proceeded much more slowly revenues – will gradually decline. And third, the population than the diversification of GDP. is growing, so constant diamond production actually entails declining production (and income) per capita.

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There are also various economic (and social) stresses apparent cannot do everything for everybody, which sometimes seems to that require something other than “business as usual”. Poverty be the expectation today. Policymaking must be rational, based rates have come down, but are still too high. Unemployment is on evidence, and implemented consistently and transparently high, because the rate of job creation is far too slow. Inequality in the national interest. Regulatory reform has to take place, is far too high, and the majority of households struggle to promoting less, but better and more targeted, regulation. The afford decent housing. Too many people are dependent upon fundamental approach must be outward looking, embracing government for their monthly incomes, mostly through various global integration, vigorously promoting and supporting firms social safety net schemes, and this is unlikely to be sustainable. that export goods and services, attracting inward foreign What all this means is that a second transformation of the investment, welcoming foreign firms and individuals who Botswana economy is needed to meet the challenges of the wish to invest in Botswana, work in Botswana, and trade next fifty years of independence. “Eating diamonds” will not with Botswana. The current tendency of putting up barriers provide the basis for Botswana to move from upper middle- to such regional and global integration will not lead Botswana income status to high-income status; indeed, it may not even towards high-income status. provide the basis for maintaining current income levels. The hard truth is that Botswana did not, in general, reach upper middle-income status by being productive, competitive or efficient – although there are some pockets of economic activity that demonstrate all of those things. We reached it by References/Sources: consuming, and investing wisely, the proceeds of the natural resources under our soil. However, moving to a higher income Acemoglu, D., S. Johnson & J. Robinson (2003) level, and dealing with the problems of unemployment, poverty, “An African Success Story: Botswana”, in D. Rodrik inequality, dependence on government and low household (ed.) In Search of Prosperity: Analytic Narratives on incomes requires a fundamental change, so that productivity, Economic Growth. Princeton: Princeton University efficiency and competitiveness become the basis for growth. Press, 80-119. This will be demonstrated in a diversification of exports, as Bank of Botswana (1987) “Public Finance in Botswana firms produce goods and services that the rest of the Botswana: A Historical Overview”, in Selected world wishes to buy, and a much more prominent role for the Papers on the Botswana Economy. Gaborone: private sector in creating jobs and driving growth. Bank of Botswana

A successful “second transformation” means that in 50 years Hartland-Thunberg, P. (1978) Botswana: An African the economy, and indeed society more broadly, will look Growth Economy. Boulder: Westview Press quite different to that of today. It is likely that urbanisation Harvey, C. & S. Lewis (1990) Policy Choice will continue steadily, and will settle with more than 80% of and Development Performance in Botswana. the population living in urban areas – similar to that of high- Basingstoke: Macmillan income countries today. The country will be deeply integrated into global and regional markets for goods, services, capital Jefferis, K. (1998) “Botswana and Diamond- and labour. There will be extensive FDI in Botswana, and local Dependent Development”, in W. Edge & M. firms will be active investors around the region and around the Lekorwe, (eds.) Botswana Politics and Society. world. Migration will be a two-way street, and many Batswana Pretoria: J L van Schaik will live and work in other countries. The private sector will Leith, J. (2005) Why Botswana Prospered. be larger, and government relatively smaller, than at present. Montreal: McGill-Queens University Press Citizens will be empowered, but by competing successfully, not by being protected from competition. Botswana will have Republic of Botswana (1967) National dealt successfully with the challenges posed by global warming Development Plan, 1968-73 and climate change, and will be a responsible global citizen World Bank, World Development Indicators by contributing to broader initiatives towards environmental http://data.worldbank.org/products/wdi sustainability.

Moving towards this vision will require many changes, and some of them will be difficult, uncomfortable, or a challenge to vested interests. The fact that “business as usual” is not an option going forward also means that “policy as usual” is also PO Box 45016, Gaborone, Botswana not an option. Government has to change its approach towards tel [+267] 390 0575 the private sector, towards facilitation rather than control. The fax [+267] 390 0585 private sector must drive productivity growth, and look for external markets rather than depend on government contracts. email [email protected] [email protected] There has to be greater efficiency in government spending, and www.econsult.co.bw a prioritisation of claims on government resources; government

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