www.econsult.co.bw compiled by KEITH JEFFERIS Sethunya Sejoe ECONOMIC REVIEW third quarter july - september 2017 in this issue ...

COMMENTARY KEY NEWS MACRO- SPECIAL ECONOMIC HIGHLIGHTS ECONOMIC FEATURES 1 VARIABLES 3 6 DATA 11 12

COMMENTARY

Some positive developments, but offset by concerns about exports and budget deficits

Introduction As usual there was a mixed bag of economic developments and data releases in the third quarter of 2017, with some positive developments balanced by persistent or emerging concerns. A fall in inflation and lower unemployment were encouraging, as were higher credit growth and re- duced arrears on bank lending. A sharp decline in exports, however, could be indicative of deeper problems, as are projections of substantial budget deficits ahead.

Economic Growth and Diamond had been largely cleared and production Production could be increased modestly in line with Annual GDP growth fell to 3.1% in Q2, improved market conditions. However, the down from 3.9% in the previous quarter, global diamond market is still quite volatile, but this was pretty much in line with ex- and sales have faded somewhat in Q3. pectations, and growth should pick up later in the year. Part of the decline is due to Inflation and Banking the continued impact of the BCL closure Inflation dropped to 3.2% in Q3, a wel- in October 2016, which will work its way come development, reflecting lower South out of the GDP growth numbers by Q4. African inflation as well as a lack of domes- However, this has been partially offset by tic inflationary pressures. We believe that a welcome pick up in diamond production. this low rate of inflation will be sustained, Debswana’s production had been held and it could even fall below the lower end back for some time following the diamond of the Bank of Botswana’s 3-6 percent in- market weakness in 2015, leading to some flation objective range. Subsequently, the production cuts as well as stockpiling of BoB cut the Bank Rate by 50 basis points diamonds. Better sales in 2016 and early to 5.0%. 2017, however, meant that this stockpile

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In the banking sector, the concerns about tight liquidity of it was due to lower export volumes. This is extremely that we raised in the previous review turned out to have worrying, given the fundamental role of export-led growth been driven by incorrect data on banking sector liquidity to the Botswana economy. It will be important to observe published by the BoB. Once the data had been corrected, this closely and see if the trend continues, or if data adjust- liquidity was revealed to be much healthier than previously ments cause it to disappear. thought, so the immediate concerns have receded. Further- more, bank credit growth has picked up from previous very Government Budget low levels, especially bank lending to the private sector. The Ministry of Finance and Economic Development (MFED) This is an encouraging sign regarding business conditions, released the 2017/18 Budget Strategy Paper in September. especially when taken together with evidence of declining This showed the budget outcome for the most recent com- levels of arrears on bank lending to both businesses and pleted fiscal year (2016/17) as well as the revised budget households. for 2017/18 and projected budget for the coming financial year, 2018/19. Unemployment New data from Statistics Botswana show that unemploy- The good news is that the 2016/17 budget outcome was ment in 2015/16 was 17.6%, lower than the previous better than had been anticipated, with a relatively small figure of 19.8% in 2013, and certainly lower than most budget deficit of P535 million, or only 0.3% of GDP – in people expected. We discuss this in more detail in the Fea- other words, very close to a balanced budget. The posi- ture on page 12. Our assessment is the reported rate is tive outcome was mainly due to higher than expected min- probably correct, although driven more by people leaving eral revenues (given the recovery in the diamond market the labour force than a rapid rate of job creation. in 2016), as well as dividend payments from the Bank of Government BudgetBotswana, which together offset disappointing collections Foreign trade of VAT and non-mineral income tax.

Tracking of developments with regard to foreign trade and The Ministry of Finance and Economic Development (MFED) released the Nevertheless, the budget position is expected to deteriorate Unemploymentthe balance of payments is has been hindered by problems 2017/18 Budget Strategy Paper in September. This showed the budget outcome with the reporting of data on imports. Since BURS intro- for the most recent completed fiscal year (2016/17)sharply in the current and forthcoming financial as well as the revised years, with duced a new Customs Management System in January big deficits expected due to higher spending. The deficits New data from Statistics Botswana show that unemployment in 2015/16 was budget for 2017/18 and projected budget for the coming financial year, 2018/19. this year, Statistics Botswana has been unable to accu- will need to be financed by a drawdown of government 17.6%, lower than the previous figure of 19.8% in 2013, and certainly lower than The good news is that the 2016/17 budget outcome was better than had been savings (currently around P30 billion) and/or an increase in most people expected. rately capture dataWe discuss this in more detail from BURS, and as in the Fea a resultture on page the pubXX-. anticipated, with a relatively small budget deficit of P535 million, or only 0.3% of Our assessment is the reported rate is probably correct, althoulished data are significantly under-recording gh driven more by imports. We GDP government– in other words, very close to a balanced budget. The positive o borrowing. While there is no immediate probutcome was - Foreign tradepeople leaving the labour force than a rapid rate of job crea tion. understand that this issue is being addressed and should mainly due to lem in financinghigher than expected mineral revenues (given the recovery in th the projected deficits, which are manage- e be resolved before our next review. diamond market in 2016), as well as dividend payments from the able for a year or two, they are not sustainable in the longerBank of Tracking of developments with regard to foreign trade and the balance of Botswanaterm, as, which tog they wouldether offset disappoint collections of VAT and non quickly deplete the financial buffers -mineral payments is has been hindered by problems with Reportedly, data on exports have notthe reporting of data on been affected in the income taxthat government. has built up over several decades in order imports. Since BURS introduced a new Customs Management System in January this year, same Statiway.stics Botswana has been unable to accurately capture data from Nevertheless, the published data show that Nevertheless, the budget position is expected to deteriorate sharply in the to cope with fluctuations in revenues and adjustment away BURS, and as a result the published data are significantly underexports in the first half of 2017 were down by-recording a quarter current and forthcoming financial yearfrom mineral-led growth. Hence,s, with big deficits expected due to ministries will be under higher imports. compared, We understand that t to the first his issue is being addressed and should be half of 2016. The decline occurred spending. severe pressureThe deficits wil to cutl need to be financed by a drawdown of government back some of their spending propos- resolved before our next review. across almost all categories of exports. In part, this was savings (currently around P30 billion) and/or an increase in goals in order to bring overall expenditure back in linevernment with Reportedlydue to exchange, data on exports have not been affected in the same way. rate changes – the pula strengthened by borrowing. While there is no immediate problem in financing therevenues which are expected to decline in the medium term projected Nevertheless, the published data show that exports in the first half of 2017 were around 6% against the US dollar over the period – but most deficits, (as a shareand are manageable for a year or two, they are not of GDP). sustainable in the down by a quarter compared to the first half of 2016. The decline occurred longer term, as they would quickly deplete the financial buffers that government across almost all categories of exports. In part this was due to exchange rate changes – the pula strengthened by around 6% against the US dollar over the has built up over several decades in order to cope with fluctuations in revenues period – but most of it was due to lower export volumes. This is extremely and adjustment away from mineral-led growth. Hence ministries will be under severe pressure to cut back some of their spending proposals in order to bring worrying, given the fundamental role of exportFigure 1: Change in Exports, -H1led growth to the Bo 2016 – H1 2017tswana Figure 2: Government Budget, 2016/17 – 2018/19 economy. It will be important to observe this closely and see if the trend overall expenditure back in line with revenues, which are expected to decline in Figure 1: Change in Exports, H1 2016 – H1 2017 continues, or if data adjustments cause it to disappear. the medium term (as a share of GDP). Figure 2: Government Budget, 2016/17 – 2018/19

80 20% 70 0% 60 -20% 50

-40% 40 30 -60% P billion 20 -80% 10

-100% 0 -10 2016/2017 2017/2018 2018/2019

Revenue Spending Budget balance

Source: Source:Calculations based on Calculations based on Botswana Botswana International Merchandise Trade StatisticsInternational Merchandise Trade Statistics Source: MFED Budget Strategy Paper, 2018/19 Source: MFED Budget Strategy Paper, 2018/19

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KEY ECONOMIC VARIABLES

Annual GDP Growth Sectoral GDP Growth 30% Annual GDP Growth Sectoral GDP Growth Annual GDP Growth WaterSectoral & Elec. GDP Growth20.3% 20% 30% AnnualAnnual GDPGDP GrowthGrowth Water Sectoral& Elec.Trade GDPGDP GrowthGrowth20.3%12.1% 10%30% 30%20% WaterWaterTrans. && & Elec.TradeElec. Comm. 20.3%20.3%12.1% 20% 20%10%0% Fin.Trans. & Bus. & Comm.Trade Service 12.1%12.1% 10% -10%10%0% Fin.Trans. & Bus. Construction& Comm.Service 0% Fin. & Bus. Service -20%-10%0% Fin. & Bus.Construction ServiceTotal VA -10% Soc. &Construction Pers. Services -10%-30%-20% ConstructionTotal VA Total VA -20% Soc. & Pers.Government TotalServices VA -20%-40%-30% Soc. & Pers. Services -30% Soc. & Pers.Government Services Agriculture -30% -50%-40% Government -40%2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Government AgricultureManuf -40%-50% Agriculture -50%2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 AgricultureManufMining -10.1% -50% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Manuf 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 ManufMining -4%-10.1% -2% 0% 2% 4% 6% 8% NMPS Mining GDP Mining -10.1% Mining -4% -10.1%-2% 0% 2% 4% 6% 8% NMPS Mining GDP -4% -2% 0% 2% 4% 6% 8% NMPS Mining GDP -4% -2% 0% 2% 4% 6% 8% Overall economicNMPS growthMining declinedGDP further Notwithstanding lower overall economic Overall economic growth declined further Notwithstanding lower overall economic duringOverall the economic second growthquarter declinedof 2017. furtherAnnual Notwithstandinggrowth, several lower sectors overall record economiced higher Overallduring theeconomic second growthquarter declinedof 2017. Annualfurther Notwithstandinggrowth, several lowersectors overall record edeconomic higher realduringOverall GDP economicthe growth second growth in declined quarterQ2 was further of3.1%, during2017. thedown Annualsecond from growth,annualNotwithstanding severalgrowth lower overall sectorsrates economic than record growth, in severaledthe highersectorsprevious duringrealquarter GDP ofthe 2017. growth second Annual realin quarterGDPQ2 growthwas inof3.1%, Q2 2017. was down3.1%, Annual down from growth,annualrecorded highergrowthseveral annual growthratessectors rates than than record inin the theprevioused previous quarter.higher 3.9%real GDP in Q1 growth 2017 in and Q2 4.3%was 3.1%, in Q4 down 2016 from. The annualquarter. growth These rates thaninclude in theTransport previous & real3.9%from GDP 3.9% in Q1 ingrowth Q1 2017 2017 inand and Q24.3% 4.3%was in Q4 3.1%,2016.in Q4 The down2016 slowing .from ofThe annualquarter.These include growth TransportThese rates & Communications,include than in FinanceTransportthe &previous Business & slow3.9%economicing in growthofQ1 economic 2017 is attributable and growth 4.3%to reduced in is non-miningQ4 attributable 2016 private. The to quarter.CommunicationServices, and TheseAgriculture, s, which include Financegrew by 5.3%,Transport 4.4%,& andBusiness 1.3% & 3.9%slowing in Q1of economic 2017 and growth4.3% in is Q4attributable 2016. The to quarter.Communication Theses, includeFinance Transport& Business & reducedslowsectoring growth, ofn on economicwhich-mining fell from growth7.9%private to 6.4% is sectorattributable during the growth,same to CommunicationServices,y-o-y respectively. and Sectorss, Agriculture whereFinance growth rates, &which fell includeBusiness grewWater by slowreduceding of n economicon-mining growthprivate is sectorattributable growth, to CommunicationServices, and s,Agriculture Finance, which& Businessgrew by whichreducedperiod. Miningfell nfrom recordedon-mining 7.9% year-on-year toprivate 6.4% growth ofduringsector minus 10.1% thegrowth, in Q2same Services,5.3%& Electricity,, 4.4%, andTrade, Manufacturing,Agricultureand 1.3% Construction,, ywhich-o-y andrespectivelygrew Social &by . reducedwhich2017, little fell changedn fromon-mining from7.9% minus to private10.3% 6.4% y-o-y during sectorgrowth in theQ1growth, 2017. same Services,5.3%Personal, Services.4.4%, and andAgriculture 1.3% y, -owhich-y respectively grew by. period.which fell Mining from 7.9%recorded to 6.4% year during-on-year the growthsame 5.3%Sectors, 4.4%, where and 1.3%growth y -orates-y respectively fell include. whichperiod.Although fell miningMining from continued 7.9%recorded to tocontract, 6.4% year this during -largelyon-year reflected the growth same the 5.3%Sectors, 4.4%, where and growth 1.3% yrates-o-y respectivelyfell include. ofperiod. minus Mining 10.1% recorded in Q2 year2017,-on little-year changedgrowth SectorsWater &where Electricity growth, Traderates, fellManufacturing, include period.ofcontinued minus Mining impact 10.1% of therecorded BCLin closure,Q2 year2017,even though-on little- diamondyear changed growthmining SectorsWater & whereElectricity growth, Trade rates, Manufacturing, fell include fromofoutput minus minus rose by 10.1% a healthy10.3% 8.2%in y Q2y-o-y.-o- y2017, growth little in changedQ1 2017. WaterConstruction, & Electricity and, Trade Social, Manufacturing, & Personal offrom minus minus 10.1% 10.3% in yQ2-o- y2017, growth little in Q1changed 2017. WaterConstruction, & Electricity and, TradeSocial, Manufacturing,& Personal Althoughfrom minus mining 10.3% continued y-o-y growth to contract,in Q1 2017. this Construction,Services. and Social & Personal fromAlthough minus mining 10.3% continued y-o-y growth to contract,in Q1 2017. this Construction,Services. and Social & Personal largelAlthoughy reflected mining thecontinued continued to contract,impact ofthis the Services. Althoughlargely reflected mining thecontinued continued to contract,impact of thisthe Services. BCLlargel closure,y reflected even the thoughcontinued diamond impact ofmining the largelBCL yclosure, reflected even the continuedthough diamond impact miningof the outputBCL closure, rose byAnnual evena healthy Credit though Growth8.2% diamond y-o-y. mining Arrears on Bank Lending BCLoutputoutput closure, rose by even a healthy though 8.2% diamond yy--oo--y.y. mining output rose byAnnual a healthy Credit 8.2% Growthy-o-y. Arrears on Bank Lending 45% Annual Credit Growth Arrears on Bank Lending 45% Annual Credit Growth 10% Arrears on Bank Lending 45% Annual Credit Growth 10% 40% 10%9% Arrears on Bank Lending 45%40% 9% 40% 10%9% 35% 8% 40%35% 8%9%8% 35% 7% 35%30% 8%7% 30%30% 7% 6%6% 30%25% 6%7% 25%25% 5% 5%6%5% 25%20%20% 4% 20% 4%5%4% 20%15%15% 3% 15% 3%4%3%

% of credit to sector 2% 15%10% % of credit to sector 2%

% of credit to sector 10% % of credit to sector 3%

% of credit to sector 10% 2% % of credit to sector 1% 10%5%5% % of credit to sector 1%2%1% % of credit to sector 5% 0%1%0%0% 5%0%0%0% 2010 2011 2012 2013 2014 2015 2016 2017 0% 0% 2010 2011 2012 2013 2014 20152015 20162016 20172017 2010 2011 2012 2013 2014 2015 2016 2017 BusinessBusiness HouseholdsHouseholds TotalTotal Total FirmsFirms HouseholdsHouseholdsHouseholds Business Households Total Total Firms Households Business Households Total AnnualAnnualAnnual bankbank credit growthgrowth increasedincreasedincreased fromfromfrom TotalTotalTotal arrearsarrears arrears asas as aa proportionaproportion proportion of of outstanding ofoutstanding outstanding AnnualAnnual bank bank credit growthcredit increased growth from 3.4%increased in April 2017 from to TotalbankbankbankTotal arrears creditarrearscredit credit as fellafell proportionasfell duringduring aduring proportion of outstanding thethe the second second secondbank of creditoutstanding quarter quarter fell quarter during of of of 3.4%3.4%3.4%4.7% in inin July AprilApril 2017. The2017 increase toto came4.7%4.7% as a in inresult July JulyJuly of higher 2017. 2017.2017. growth TheThe The the second quarter of 2017. Arrears decreased from 8.3% in Q1 3.4%increaseincreaseincreasein lending in Aprilto camecame firms, 2017 from as 9.0% aato resultresult 4.7%to 9.8% of of induring higherhigherJuly the 2017. period. growthgrowth growth The The inin in bank2017.2017.2017.2017 creditto Arrears Arrears 7.4%Arrears infell Q2 de2017,duringde decreasedcreased withcreased thethe decline fromsecondfrom from apparent 8.3%8.3% quarter8.3% across inin Q1allin Q1of Q1 increaselendinglendinglendinggrowth of tobanktotocame firms,firms,credit as to householdsfromafrom result 9.0%9.0% slightly of higher toto decreasedto 9.8%9.8%9.8% growth to during during5.1%during in 2017.201720172017sectors. toto ArrearsArrears to 7.4%7.4% 7.4% on inlendinginde inQ2 Q2creased Q2to 2017. households2017. 2017. Total fromTotal fell Total to arrears6.8% 8.3%arrears arrears in Q2 in 2017as asQ1 a asa a lendingthethethein July period.period.period. 2017 to from firms, The5.3% in from Aprilgrowthgrowth 2017. 9.0% Theofof decrease tobbbank ankank9.8% in credithouseholdcreditcredit during tototo 2017proportionproportionproportionfrom 7.7%to 7.4% in Q1 of 2017,of in of Q2 outstandingandoutstandingoutstanding on2017. lending Total to businesses bank bankarrearsbank decreased credit creditascredit a lending is attributable to slower growth in mortgage lending. to 8.6% from 9.2% during the same period. There was also a thehouseholdshouseholdshouseholds period. Theslightly growth decreaseddecreased of bank tototo credit 5.1%5.1%5.1% to ininin proportiondecreaseddecreaseddecreased ac acofacross rossrossoutstanding thethe the board;board; board; bank arrearsarrears arrears credit onon on Moreover, commercial banks have been exercising caution in decreaseddecrease in arrears ac onross lending the to government board; and arrears parastatals inon householdsJulyJulyJulylending, 201720172017 given recent fromslightly concerns 5.3% decreasedabout inrisingin April Aprilnon-performing to 2017.2017. 2017.5.1% loans TheThe The in lendinglendinglendingJune 2017. to to to householdshouseholds households fellfell fell toto to6.8%6.8% 6.8% inin Q2inQ2 Q2 lending to households fell to 6.8% in Q2 Julydecreasedecreasedecrease(NPLs). 2017 in infrom household 5.3% lendinglendingin April is is is 2017.attributable attributableattributable The 201720172017 fromfrom from 7.77.7 7.7%% % inin in Q1Q1 Q1 201 201 20177, ,and 7and, and on on onlending lending lending 2017to businesses from 7.7 %de creasedin Q1 201 to7 8.6, and% fromon lending 9.2% decreasetototo slowerslowerslower in householdgrowth inin lending mortgagemortgagemortgage is attributable lending.lending.lending. toto businesses businesses de decreasedcreased to to8.6 8.6% %from from 9.2 9.2% % toduringduring businesses thethe samesame de creased period.period. TheretoThere 8.6 % was wasfrom alsoalso 9.2 %a a toMoreover,Moreover,Moreover, slower commercialgrowth in mortgagebanksbanks havehavehave lending. beenbeenbeen during the same period. There was also a Moreover, commercial banks have been duringdecreasedecrease the sameinin arrears arrearsperiod. Thereonon lendinglendingwas also to toa exercisingexercisingexercising caution inin lendinglending,, , givengivengiven recentrecentrecent decrease in arrears on lending to exercisingconcerns aboutcaution rising in lendingnon-performing, given recentloans decreasegovernmentgovernment inand and parastatals arrearsparastatals on in in June Junelending 2017. 2017. to concernsconcerns about rising nonnon--performingperforming loansloanspage 3government and parastatals in June 2017. concerns(NPLs). about rising non-performing loans government and parastatals in June 2017. (NPLs).(NPLs). (NPLs). www.econsult.co.bw Inflation and Forecast Interest Rates 16%KEY ECONOMIC VARIABLES 14 12 14% Inflation and Forecast Interest Rates 1410 12%16% Inflation and Forecast 128 Interest Rates 10%14% % 10 12% Inflation and Forecast 6 Interest Rates 8%16% Inflation and Forecast 14 Interest Rates 8 16%10% 144 6%14% % 12 1262 14%8% 10 4%12% 4 100 12%6% 8 10% 2% % 82 10%4% % 6 0% 8% 60 8%2% 4 6% 4 Bank Prime 0% 2 6% BoB Upper BoB Lower BoBC91 BoBC14 4% 2 0 Bank Prime 4% Actual Forecast 2% BoB Upper BoB Lower 0 BoBC91 BoBC14 The2% headine inflation rate in September 2017 The Bank of Botswana’s Monetary Policy Actual Forecast was0% 3.2%, lower than the 3.5% inflation rate Committee (MPC) maintained its monetary 0%The headine inflation rate in September 2017 The Bank ofBank Botswana’s MonetaryPrime Policy recorded in June. Core inflation (trimmed policy stance and held the Bank Rate was 3.2%, BoBlower Upper than the 3.5%BoB inflation Lower rate Committee (MPC)BoBC91Bank maintainedBoBC14 Primeits monetary mean) was 2.7% in September, while the constant at 5.5% in September 2017, due to recorded BoBinActual UpperJune. Core inflationBoBForecast Lower (trimmed policy stanceBoBC91 and held the BoBC14Bank Rate a positive price stability and inflation outlook. alternativeThemean) headine was Actualmeasure inflation2.7% in rate September,of in SeptembercoreForecast while inflation 2017 the Theconstant Bank at of5.5% Botswana’s in September Monetary 2017, duePolicy to (excludingThewasalternativeThe headine headine3.2%, inflationadministered lower inflationmeasure rate than in Septemberrate the prices)inof 3.5% 2017Septembercore was inflationwas 3.2%, inflation 3.0%. lower2017 rate TheCommitteeHowever,a Thepositive Bank of price Botswana’sof(MPC)money Botswana’sstability maintained Monetarymarket and Policy Monetaryinflation itsinterestCommittee monetary outlook Policy (MPC)rates . Inflationwasrecorded(excludingthan 3.2%, the has 3.5% inlower been inflationadministered June. thancoming rate Core recordedthe below 3.5%prices) inflationin June. inflationforecasts, Corewas (trimmed inflation 3.0%. rate in CommitteepolicycontinuedHowever,maintained stance its monetarymoneyto(MPC) increaseand policy maintainedmarketheld stance during the andinterest held itsBank thethe monetary Bank quarterratesRate Rate , (trimmed mean) was 2.7% in September, while the alternative constant at 5.5% in September 2017, due to a positive price partrecordedmean)Inflationmeasure due ofwas to hasincore the June.inflation2.7%been significant coming(excludinginCore September, administeredinflationbelowdecline forecasts, prices)while(trimmedin South was the in policyconstantwithcontinuedstability the stanceand at14 inflation to5.5%-day increase and outlook. BoBCin September heldHowever, rateduring therisingmoney 2017the Bankmarket from ,quarter due interest 1.34%Rate to , Africanmean)alternativepart3.0%. dueInflationwasinflation to has2.7% themeasure been significantincomingin recentSeptember, belowof forecasts, declinecoremonths. in while partininflation due South Ourtothe constantainwith positive ratesQ 2the continued 2017 14at price- day5.5% toto increase stabilityBoBC1.42% in duringSeptember rate andin the Q rising quarter,inflation3 and 2017 withfrom the outlookthe, 1.34% due 14-day91- dayto . inflationalternative(excludingAfricanthe significant forecasts inflation declineadministeredmeasure in South in Africanhave recent ofprices) inflation been core months.in recentwas inflation revisedmonths. 3.0%. Our aHowever,BoBCin positive BoBCQ2 rate 2017rate rising price money risingto from 1.42%stability 1.34% frommarket inin Q2and 1.31%Q 20173 inflationand interestto to1.42% the 1.40% inoutlook91 Q3rates- dayand over . downwards(excludingInflationinflationOur inflation has ,forecasts administeredforecasts andbeen have wecoming been have e revisedxpectprices) below downwards,been inflationforecasts,was andrevised3.0%. we toin However,continuedtheBoBCthe same91-day rate BoBC torisingmoneyperiod. increaserate fromrising Thismarket from 1.31%during 1.31%means tointerest tothe 1.40% that quarter over moneyoverrates the , partdownwardsexpect due inflation to to, the declineand significant furtherwe ande xpectfall decline below theinflation lowerin South limit to withthesame thesame period. 14 This-period.day means BoBC thatThis moneyrate means marketrising rates fromthat have money1.34% risen by declineInflationof the Bankfurther has of Botswana’sbeen and coming fall inflation below objectivebelow the range forecasts, lower of 3-6% limit in in continuedmarket0.4%-0.6% rates overto the haveincrease past year risen while during policyby 0.4%rates the have- 0.6 quarterremained% over , ofpart Africanthedeclineearly due Bank2018. furthertoinflation ofthe Botswana’s andsignificant in fall recent below inflationdecline themonths. lowerobjectivein South Ourlimit withinthemarket unchanged.Q 2the past2017 rates14 The- dayyearto havecommercial 1.42% BoBC whrisen ilebank inrate Qby Primepolicy3 rising 0.4%and Lending the-from0.6rates Rate%91 1.34% -overdaywashave rangeAfricaninflationof the of 3Bank inflation-6%forecasts inof earlyBotswana’s in 2018recenthave. inflation beenmonths. objectiverevised Our inBoBCremainedthe unchangedQ 2past 2017rate at unchanged.7.0%.risingyear to 1.42% fromwhile in1.31% The policyQ3 commercial andto rates1.40% the 91 haveover- daybank inflationdownwardsrange of 3forecasts-6%, and in early wehave 2018expect . been inflation revised to BoBCthePrimeremained same rateLending unchanged. period.rising fromRateThis The 1.31% meanswas commercial to unchangedthat 1.40% money bank over at downwardsdecline further, and and we fall belowexpect the inflation lower limitto themarketPrime same ratesLending period. have Rate risenThis wasbymeans 0.4%unchanged -that0.6% money over at Exchange Rates 7.0%. Foreign Exchange Reserves declineof the Bankfurther of andBotswana’s fall below inflation the lower objective limit marketthe7.0%. past rates year have wh risenile policyby 0.4% rates-0.6 %have over Exchange Rates Foreign Exchange Reserves range of 3-6% in early 2018. theremained past unchanged.year while The policy commercial rates bankhave of the Bank of Botswana’sExchange Ratesinflation objective 13 Foreign Exchange Reserves Prime13 Lending Rate was unchanged at range of 3-6% in early 2018. remained unchanged. The commercial bank90 90 6.0 1.45 Prime7.0%.12 Lending Rate was unchanged at 6.0 1.45 12 80 Exchange Rates 1.40 7.0%. Foreign Exchange Reserves 80 1.40 11 7.0 1311 7.0 1.35 Exchange Rates 1.35 Foreign Exchange Reserves 9070 70 10 8.0 6.08.0 1.301.451.30 1213 90 60 9 8060 1.251.40 USD billion 9 1.25 USD billion 1211 9.06.0 7.09.0 1.45 Pula billion 1.201.351.20 705080 50Pula billion 1.40 101188 Pula per USD Pula per USD 7.0

8.0 1.30 Rand per Pula 10.010.0 1.151.15 Rand per Pula 1.35 604070 977 40 1.101.251.10 USD billion 10 8.011.09.0 1.30

11.0 Pula billion 1.201.05 6 503060 1.05 896 30

1.25 USD billion Pula per USD

9.010.012.0 1.151.00 Rand per Pula 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

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KEY ECONOMIC VARIABLES

De Beers Diamond Sales services. Bank Deposits & Excess Liquidity DeDe Beers Beers Diamond Diamond SalesSales Bank DepositsDeposits & & Excess Excess 900 services. 900 services. LiquidityLiquidity 800800 DeDe Beers Beers Diamond Diamond Sales Sales BankBank Deposits Deposits & & Excess Excess 900900 60,000 30% 700700 60,000 LiquidityLiquidity 30% 800800 600600 60,000 30% 700700 60,00040,000 30%20% 500500 40,000 20% 600 600400 400 US $ million 500500 40,00040,000 20%20% US $ million 300 20,000 10% 300 20,000 10% 400 400200 Deposits (P million) Deposits (P US $ million

200US $ million 300 million) Deposits (P 20,00020,000 10%10% 300100 0 0% 100 0 0% Bank Liquidity (% of total assets) 200200 Bank Liquidity (% of total assets) Deposits (P million) Deposits (P

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During During auction the the quarter, quarter, sales De inDe excessinexcess April liquidity2017. liquidity was was 2.6% 2.6% of of banking banking assets assets JulyBeer’sBeer’s and held September.held two Stocktwo sightholder sightholder Markets auction auction sales sales in in inin April April 2017. 2017. Diamond Exports JulyJuly150 and and September. September.StockStock Markets Markets 20,000 DiamondDiamond Exports Exports 150 140 StockStock Markets Markets 20,000 DiamondDiamond Exports Exports 140150 150 20,00015,00020,000 130 140140 15,000 130120 15,00010,00015,000 130130 120110 10,000 120120 110 10,0005,00010,000 100 Million Pula 110110 5,000 10090 Million Pula 5,0005,0000 Million Pula 100100 Million Pula 9080 Index, Jan 2010 = 100 0 9090 8070 -5,0000 0 Index, Jan 2010 = 100 8080 Index, Jan 2010 = 100 Index, Jan 2010 = 100 70 -5,000 7070 -5,000-5,000 BSE DCI (BWP) BSE DCI (USD) MSCI EM Re-exports Polished Rough The BSEBotswana DCI (BWP) StockBSE DCIExchange (USD) MSCI(BSE)’s EM The globalRe-exports demand Polishedfor diamonds Rough was BSEBSE DCI DCI (BWP) (BWP) BSEBSE DCI DCI (USD) (USD) MSCIMSCI EM EM Re-exportsRe-exports PolishedPolished RoughRough TheDomestic Botswana Companies Stock Index Exchange (DCI) fell(BSE)’s in the The generally global stable demand during thefor firstdiamonds half of 2017 was. 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Tperformance heperformance MSCI Emergingcontrasts contrasts purposes)33.0%purposes) respectively. .Botswana Botswana roughwhile rough and polishedand re re-exports-exports had withand 4.4%global respectively. markets, which continue to recorded negative growths of 6.2% and withMarketswith globalglobal Index markets, markets,and the whichMSCIwhich Worldcontinuecontinue Index toto recordedgrowthrecorded of 20.8%. negativenegative growthsgrowths ofof 6.2%6.2% andand performperformroseperform by 7.0%very veryvery andwell wellwell 4..4% . .T The heTrespectively.he MSCIMSCIMSCI Emerging Emerging 33.0%33.0% respectivelyrespectivelyrespectively whilewhilewhile polishedpolishedpolished hadhad MarketsMarketsMarkets IndexIndex Index andand and thethe the MSCIMSCI MSCI WorldWorld World I ndexIndex growthgrowth ofof of 20.8%.20.8%. 20.8%. page 5 roseroserose by by by7.0% 7.0% 7.0% and and and 4 4.4% .4%4.4% respectively.respectively. respectively.

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NEWS HIGHLIGHTS

5th July Botswana widens net Botswana is strengthening efforts to fight against money laundering on multinational tax and tax avoidance schemes such as transfer pricing, base erosion and dodgers. (Mmegi) profit shifting. Botswana is the 99th country to join the Base Erosion and Profit Shifting (BEPS) inclusive framework. BEPS is a group of countries pledging to implement measures designed by the OECD and G20 countries to prevent multinational tax avoidance and improving resolution to tax imputes involving multinationals. Botswana will comply with four standards, which are countering harmful tax practices, preventing treaty abuse, dispute resolution and country-by-country reporting under transfer pricing documentation.

14th July ODC sales rise 9% to Okavango Diamond Company (ODC)’s revenues increased by nine P3.1 billion. (Mmegi) percent to P3.1 billion in the first half of the year. The company sold 1.8 million carats of diamonds from the five tenders held during the period. ODC sells 15% of Debswana’s production and holds ten auction tenders every year.

20th July Botswana can achieve The International Monetary Fund’s (IMF) latest Technical Assistance more from PPPs - IMF. report on public investment management has revealed that Public (Mmegi) Private Partnerships (PPPs) are not yet significant in Botswana even though they are on the rise. The IMF notes that although the PPP policy of 2009 is comprehensive, it does not explicitly apply to parastatals. The IMF is also concerned that the current framework does not explicitly identify the potential fiscal risks of PPPs. It recommends that procurement with PPPs through the Public Procurement and Asset Disposal Board (PPADB) should include the Ministry of Finance and Economic Development’s (MFED) PPP unit. It also recommends strengthening the MFED’s role in monitoring and accessing PPP projects and reporting data on PPPs. Moreover, the legal and regulation framework for PPPs should be made clear.

20th July De Beers sees De Beers reported an increase in rough diamond production and sales production and sales during the second quarter, noting stable trading conditions. According volume jump. (Rapaport to the company, output increased by 36% year on year to 8.7 million News) carats in Q2 2017 across all De Beers mining divisions. Production at Debswana increased by 14% to 5.9 million carats during the same quarter, with H1 2017 production rising to 16.1 million carats. Higher production was spurred by stronger sales volume during the first half and the rise in average rough prices, reflecting strong demand during the first half of the year.

21st July Botswana has The International Monetary Fund (IMF) in its technical assistance report high spending on on public investment management notes that Botswana has a high infrastructure but level of public investment in infrastructure projects, but has poor project quality still poor – IMF. management, which contributes to low quality infrastructure delivered. (Mmegi) Botswana has a large public investment efficiency gap when compared to efficient countries with comparable per capita income. The efficiency gap for Botswana is 37%, higher than the 27% average for emerging market economies and the world. Hence, one third of Botswana’s public investment did not result in maximum level or quality of infrastructure assets delivered.

23rd July WUC wants P800 The Water Utilities Corporation (WUC) has stated that it is owed about million from thirsty P800 million by customers, weighing in on the corporation’s ability to people. (Sunday deliver on its mandate. As a result, the WUC intends to embark on a Standard) debt collection strategy which entails disconnecting all consumers with unpaid bills.

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NEWS HIGHLIGHTS

25th July Botswana coal mine The Morupule Coal Mine (MCM) estimates that it would incur losses stalls as farmers reject of P200 million per month as a result of the deadlock between farmers compensation deal. and the Ngwato Land Board (NLB) over compensation values for land (Reuters) in the mine’s new mining lease area. The dispute has arisen as some farmers who hold land rights to the area are requesting compensation believed to be higher than the market value. According MCM, the delay will cause the mine and its partners significant losses, with half of the losses being borne by government. The MCM mine is expected to produce 1.3 million tonnes of coal each year and supply to the planned Morupule B power station Units 5 and 6.

25th July Botswana hopes to Botswana Government may be able to resolve a dispute with Norilsk strike deal with Norilsk Nickel over a failed deal in which the BCL mine was to buy the Russian soon over Nkomati firm’s 50% stake in the Nkomati mine. Due diligence and valuation mine. (Reuters) exercises are being carried out to establish the value of the Nkomati assets as a basis for negotiating a commercially acceptable solution between BCL mine and Norilsk Nickel, then followed by negotiations between the parties involved.

27th July Government invests The Government has invested a total of P701 million in the national P700 million to improve backbone and local internet access networks through Botswana Fibre internet access. Networks (BoFiNet) between 2004 and 2017. Most of the investment (Mmegi) was to increase fibre backbone coverage to areas which had no coverage, as well as providing broadband fibre to businesses and government across the country.

30th July No new offers for BCL The Minister of Mineral Resources, Green Technology and Energy mine. (Daily News) Security, Mr Kebonang has informed parliament that no firm offers to purchase the BCL mine have been received, even from companies that had previously submitted expressions of interest. According to the Minister, the BCL mine was placed under final liquidation in 15 June 2017 when no offers where made on the mine. Moreover, the Minister has stated that Tati nickel mining company and BCL investments will continue to be under provisional liquidation until 14 December 2017.

30th July BMC abattoirs retain According to the British Retail Consortium (BRC) Global Standard “AA” classification. for Food Safety, the Botswana Meat Commission (BMC) abattoirs (Sunday Standard) performed well during the 2017 audit. Francistown BMC abattoir retained their AA classification while Lobatse BMC abattoir improved in its classification from “BRC Grade A” to “BRC Grade AA”. This achievement ensures BMC access to lucrative and reputable global markets as the BRC Global Standards guarantees the standardization of quality, safety and operational criteria.

1st August BBS profit drops on The Botswana Building Society (BBS) reported a fall in profit during the subdued housing year ended 31 March 2017 amid a challenging economic environment market. (Mmegi) characterised by a subdued housing market and squeezed household incomes. Profits declined by 13% from P54.9 million in the 2015/16 financial year to P47.9 million in 2016/2017 financial year. Fees and commission income recorded a 10% decrease from P25.1 million to P22.5 million during 2015/16 and 2016/17 FYs respectively. Assets recorded a decrease of 11% to P3.65 billion. BBS is currently undergoing demutualisation and transitioning to a commercial bank. The bank hopes to position itself in the market and increase its product range from just mortgage lending.

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NEWS HIGHLIGHTS

1st August EU gives Botswana Botswana has received P131 million from the European Union (EU) to P131million. address gaps in the education sector. The EU support to the Government (The Patriot) will reduce the gap between private and public school education, and assist its education reforms. Progress relating to rationalisation of the education sector, teacher training, access and pretension of children in schools has been noted. It is hoped that in the future there would be less difference between public and private schools in terms of service delivery, and an improvement in efficiency in the public education sector.

4th August CA loses P114 million The Competition Authority (CA) has lost with costs a Court of Appeal bid-rigging case again. case in which two food-supplying companies were accused of colluding (Mmegi) to fix prices in a multi-million-pula tender for the supply of sugar beans to schools across the country. Creative Business Solutions and Rabbit Group were alleged to have colluded to divide tenders worth P114 million between themselves.

4th August Lucara lowers FY Lucara Diamonds, which operates the Karowe mine, has lowered its full production on sales year production guidance to between 265 000 carats and 285 000 guidance. carats as a result of lower mined ore volumes in the second quarter. (Mining Weekly) This compares with the previously targeted 290 000 carats to 310 000 carats. The company has experienced equipment availability issues in the second quarter resulting in lower than planned mine ore volumes. However, Lucara is working with the contractor to improve performance for the remaining year to achieve productivity targets.

6th August Debswana re-opens Debswana Diamond Company has proposed to re-open the Damtshaa Damtshaa mine as diamond mine in 2018, as the outlook for global demand for diamonds demand for diamonds is positive. The mine was put under care and maintenance in 2015 slightly grows. to scale down production when demand for diamonds was weak. (Sunday Standard) The company hopes to match anticipated levels of demand for rough diamonds.

13th August IMF revises Botswana’s The International Monetary Fund (IMF) has revised Botswana’s 2017 2017 growth forecast and 2018 economic growth forecast due to rising diamond demand, as diamond demand investment in the water and power sector and reforms to attract rises. (BITC) investment. Economic growth forecasts have been revised upwards to 4.5% and 4.8% for 2017 and 2018 respectively, from 4.1% and 4.2% respectively. According to the IMF, the forecast assumes a gradual pace of reforms to improve the efficiency of the public sector and foster private sector activities.

13th August IMF encourages The IMF is urging the Government to move forward with a new Tax Botswana to implement Administration Act. According to the IMF, domestic revenue mobilisation new tax law. is crucial to provide Botswana with added funding for development (Sunday Standard) spending and help protect financial buffers. The country has a narrow revenue base and there is potential to expand it to more sustainable and reliable sources away from the volatile mineral and customs revenues. Improved tax administration would help to increase the efficiency of tax collection.

17th August Overall unemployment The recent publication by Statistics Botswana, Botswana Multi-topic rate estimated at Household Survey 2015/16 revealed a reduction in the overall level of 17.6%. unemployment rate in Botswana. Unemployment rate is estimated at (Statistics Botswana) 17.7% for the population aged 15 years and above, and 17.6% for the population aged 18 years and above. This compares to the 19.8% unemployment rate estimated in 2013.

17th August Gem Diamonds mulls Gem Diamonds is considering an offer for its Ghaghoo mine in Botswana Ghaghoo sale. after discontinuing the operation earlier in the year due to a slump in (Rapaport News) prices. Ghaghoo mine was opened in 2014 and was put on care and maintenance in February this year with the intention to re-open the mine once the conditions in diamond market improved.

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NEWS HIGHLIGHTS

21st August Mowana mine new Leboam Holdings, new operators of Mowana mine, has announced operators report “Break- that the company achieved financial breakeven in June 2017. Since even point”. acquiring the mine, the company has been under pressure to prove the (Sunday Standard) Mowana mine’s worth, especially given that the mine had been closed twice before.

21st August Botswana Innovation De Beers Group and Stanford Graduate School announced a three year Hub to host USD3 partnership to empower young entrepreneurs and established business million development owners in Botswana, Namibia and South Africa for USD3 million. programme. Botswana Innovation Hub (BIH) will host this partnership at the Science (ITWeb Africa) and Technology park and the programme is expected to commence in 2018.

25th August Banks are not bankrupt The Bank of Botswana has argued against reports that the financial – BoB. sector might be headed for a possible liquidity crisis. In its Q2 2017 (Botswana Guardian) Economic Review, Econsult Botswana had observed a fall in liquidity in the banking sector during the beginning of 2017. Excess liquidity had declined to 2.6% in April 2017 attributable to stagnant deposit growth. The BoB noted that banks in Botswana are in good health.

4th September Impairments cost FNBB. The First National Bank of Botswana’s (FNBB) profits fell for the (The Patriot) financial year ended 30 June 2017, due to rising impairments driven mainly by the closure of BCL mines. FNBB reported a 1% decrease in profit after tax from P503.9 million in FY 2016 to P500.5 million in FY 2017. Impairment costs grew by 2.3%, attributable to the liquidation of the BCL mine in September 2016. Assets for the bank grew by 8% to P23.6 billion from P21.9 billion in FY 2016, as advances increased by 4% during the period.

4th September Botswana – Fiscal Although Botswana’s fiscal account is forecast to be negative over the deficits do not augur for next five years, Business Monitor International (BMI) does not expect crisis. (BMI Review) the country to face the risk of a fiscal crisis. During the three years, the Government plans to accelerate spending amid weak customs excise and mineral revenues. According to the BMI, there are no fiscal risks as the economy will experience small deficits, more diversified revenue sources and has a low public debt. BMI forecasts Botswana’s fiscal deficit to remain below 2.0% of GDP, which is low by Sub-Saharan African standards, and real GDP growth of 4.6% and 4.5% in 2017 and 2018 respectively.

15th Government seeks Botswana is amending the law to give the country the first option September first right to ‘historic’ to buy ‘unusual’ diamond finds such as the historic Lesedi La Rona diamond finds. (Mmegi) discovered at Karowe Mine two years ago. The amendment of the draft Bill of the Precious and Semi-Precious Stones Act has a new clause that compels producers that comes into possession of unusual rough or uncut diamonds to notify the Minister following which the Government shall have the right of first refusal to acquire the stone at a market related price.

15th BCL moves to liquidate A request previously put forward to the shareholders of Pula Steel September Pula Steel. (Mmegi) to inject funds into to the company has failed, resulting in the BCL provisional liquidator filing for the steel making company to be put under provisional liquidation. Pula Steel was placed under judicial management in February 2017. The decision to apply to provisional liquidation comes when the company has no funds to keep it operation. The company is owned 67% by BCL, 22% by the Verma Family, with the other shares held by the Citizen Entrepreneurial Development Agency (CEDA) as well as a local company, Wealth Generations.

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NEWS HIGHLIGHTS

20th Moody's: Botswana's According to Moody's Investors Service’s report, Botswana's (A2 September credit profile reflects stable) credit profile balances the government's strong balance sheet, strong balance sheet net external creditor position and low debt burden against the country's and low debt. (CPI small economy, which relies heavily on the diamond industry and public Financial) sector. the report states that Botswana’s key strengths are government’s large fiscal reserves and very low debt levels which enables the country to apply fiscal buffers to commodity price shocks. Moody’s also note that mining dominance and the limited manufacturing sector hamper Botswana’s competitiveness and job creation, adding that progress is needed to diversify the economy and implement private sector reforms.

21st Tlou submits plans for Tlou Energy has submitted a proposal to the Ministry of Mineral September Botswana power plant. Resources, Green Technology and Energy Security to develop up to (Mining Weekly) 100 MW of coalbed methane (CBM) fuelled pilot power plants. Tlou Energy anticipates that if their submission is successful the gas fields will connect to the regional grid enabling the company to export power across the Southern African region. Tlou Energy has recently been awarded a mining licence to produce gas at its CBM project near Mmashoro village. The license is for 25 years, commencing August 2017. The license is the first of its kind in Botswana and is a major milestone to the production of natural gas.

25th Lesedi la Rona rough Lucara Diamond Corp has announced the sale of the 1,109 carat Lesedi la September diamond has been sold. Rona rough diamond to Graff Diamonds, for USD53 million. This follows (Lucara) the failure of the diamond to reach its reserve price at the Sotheby’s auction in June 2016. Graff Diamonds has also previously purchased the 373.72 carat diamond, discovered at the Karowe diamond mine in 2016. The diamond is believed to be a part of the Lesedi la Rona.

27th Matambo forecast P8 The Minister of Finance and Economic Development (MFED) has September billion budget deficit for forecast a budget deficit of P8.1 billion or 4% of GDP for the financial 2018. (Mmegi) year 2018-2019, owing largely to slow growth in revenues and higher budgetary requirements by ministries. Total revenues and grants are estimated at P58.8 billion while total expenditures and net lending at P66.9 billion. The estimated budget deficit is very wide and the minister hopes to reduce it below 4% of GDP as the Budget is finalised. The budget deficit will be financed through borrowings and drawing down from accumulated government savings.

27th Botswana to name Botswana Oil (BOL) plans to announce the preferred bidder for its September developer of USD4 proposed USD4 billion coal-to-liquids (CTL) plant, in December 2017. billion plant by According to BOL, the facility will have the capacity to meet about 80% December. (Bloomberg) of the country’s fuel demand which is estimated at 1.2 billion litres per year. Botswana hopes to be able to produce fuel domestically, making use of its coal deposits and reducing reliance on imports, as well as diversifying the economy. At the close of the tender, BOL had received 11 bids for the project.

page 10 www.econsult.co.bw

MACRO-ECONOMIC DATA

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

Annual Economic Growth GDP % 4.5 11.3 4.1 -1.7 4.3 3.9 3.1 .. Mining % -5.8 24.2 0.5 -19.6 -3.7 -10.3 -10.1 .. Non-mining private sector % 7.7 10.1 4.9 1.4 7.2 7.9 6.4 .. GDP current prices P mn 109,870 125,158 145,868 145,924 169,688 43,647 43,005 .. GDP 2006 prices P mn 75,515 84,081 87,569 86,081 89,775 22,466 22,886 ..

Money & Prices Inflation % 7.4 4.1 3.8 3.1 3.0 3.5 3.5 3.2 Prime lending rate % 11.0 9.0 9.0 7.5 7.0 7.0 7.0 7.0 BoBC 14-day % 4.6 3.1 3.1 0.97 0.84 1.26 1.34 1.42

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

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

Financial Sector Deposits in banks P mn 47,216 48,512 51,492 59,961 62,438 60,120 62,380 .. Bank credit P mn 34,555 39,763 45,116 48,307 51,316 51,141 52,555 .. BSE index 7,510.2 9,053.4 9,501.6 10,602.3 9,727.7 9,225 9,244 8,930.4

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

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

2015/16 2016/17 2017/18 2018/19 Govt Budget 2013/14 2014/15 Outturn Revised Revised Proposed Revenues P mn 48,951 55,904 47,420 56,828 57,187 58,811 Spending P mn 41,730 50,564 54,411 57,364 62,425 66,873 Balance P mn 7,222 5,340 -6,991 -536 -5,238 -8,062 Public debt & guarantees P mn 30,791 33,399 34,058 34,827 34,788 .. Govt deposits at BoB P mn 31,745 41,680 33,916 29,819 .. .. GDP P mn 131,241 147,930 148,853 173,834 186,363 201,543

Revenues %GDP 37.3% 37.8% 31.9% 32.7% 30.7% 29.2% Spending %GDP 31.8% 34.2% 36.6% 33.0% 33.5% 33.2% Balance %GDP 5.5% 3.6% -4.7% -0.3% -2.8% -4.0%

PublicPublicPublic debt debtdebt & && guarantees guaranteesguarantees %GDP%GDP%GDP 23.5%23.5%23.5% 22.6%22.6%22.6% 22.9%22.9%22.9% 20.0%20.0%20.0% 18.7%18.7%18.7% ...... GovtGovtGovt deposits depositsdeposits at atat BoB BoBBoB %GDP%GDP%GDP 24.2%24.2%24.2% 28.2%28.2%28.2% 22.8%22.8%22.8% 17.2%17.2%17.2% ......

Sources:Sources:Sources: Bank BankBank of ofof Botswana; Botswana;Botswana; MFED; MFED;MFED; Statistics StatisticsStatistics Botswana; Botswana;Botswana; Department DepartmentDepartment of ofof Mines; Mines;Mines; Registrar RegistrarRegistrar of ofof Companies; Companies;Companies; BSE; BSE;BSE; Econsult EconsultEconsult Sources: Bank of Botswana; MFDP; Statistics Botswana; Department of Mines; Registrar of Companies; BSE; Econsult Notes:Notes:Notes: Notes:(a)(a)(a) 2013 20132013 figures figuresfigures include includeinclude production productionproduction from fromfrom Boteti BotetiBoteti Diamonds DiamondsDiamonds (Karowe (Karowe(Karowe mine) mine)mine) and andand Debswana DebswanaDebswana (a) 2013 figures include production from Boteti Diamonds (Karowe mine) and Debswana (b)(b)(b) (b)2016 2016 20162016 figures figuresfigures include includeinclude production productionproduction production from fromfrom from Gem GemGem GemDiamonds DiamondsDiamonds Diamonds (Ghagoo) (Ghagoo)(Ghagoo) (Ghagoo) and andand Lerala LeralaLerala and mines minesmines Lerala as asas wellmines wellwell as asas Boteti as BotetiBoteti well and andand as Debswana DebswanaDebswanaBoteti and Debswana (c) Copper and Nickel production for Q3 2016 are for July and August only (d)(c)(c) N(c) Copper umbers CopperCopper and andandin NickelItalics NickelNickel production reflectproductionproduction revisions for forfor Q3 Q3Q3 2016 20162016from are areare the for forfor previousJuly JulyJuly and andand August AugustreviewAugust only onlyonly (d)(d)(d) Numbers NumbersNumbers in inin Italics ItalicsItalics reflect reflectreflect revisions revisionsrevisions from fromfrom the thethe previous previousprevious review reviewreview page 11 www.econsult.co.bw

SPECIAL FEATURES

Unemployment

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SPECIAL FEATURES

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www.econsult.co.bw

SPECIAL FEATURES

The Evolution of Botswana’s Parastatals – Part 1

Introduction Types of Parastatals Botswana’s parastatals (or state-owned enterprises) play Depending on exactly how one defines parastatals, there a key role in the economy, and have been one of the main are 60 in Botswana as at September 2017. They can take channels through which government has driven economic different forms, including: development. Parastatals have been created for a variety of reasons – to fill gaps where the private sector was not Statutory entities – established by Act of Parliament present; to provide public utilities and national infrastruc- ture; to carry out regulatory functions; and to undertake Companies limited by share capital – public or private (Pty); development activities. we include as parastatals, any companies where the gov- ernment owns a majority stake (over 50% of the shares)1. Unlike many countries Botswana has not generally created a large number of parastatals for ideological reasons – i.e., Companies limited by guarantee – where government con- businesses have not been nationalised. Nevertheless, para- trols the organisation through appointment of board and statals are some of the largest enterprises in the economy, management, and provides direction (and perhaps finance) are major employers, and make a significant contribution to its activities. to GDP. All of the entities that parastatals that we include in this Historically, Botswana’s (relatively few) parastatals were analysis are independent entities, so we do not include seen as playing a generally positive role in the economy, agencies that may be have a degree of autonomy but that and not acting as a drain on public funds as they often are are legally part of government2. in other countries, due to inefficiencies and financial losses. But more recently, concerns have been raised about the Parastatals may be established for a variety of different rea- role and functions of parastatals. sons. They may be involved in commercial activities (selling goods and services), have a development function, or be Officially, Botswana has had a privatisation policy, meaning primarily regulatory. Many have a mixture of these func- that ownership stakes in parastatals will be sold off to the tions. We divide them into six categories, depending on private sector, dating back to 2000. However, this has not their main functions, namely: really been implemented – there has only been one, partial privatisation (a restricted, minority stake in Botswana Tele- i. Commercial, where the entity earns most or all of its communications Ltd). By contrast, many new parastatals revenues from the sale of nonfinancial goods and ser- have been formed in recent years. vices.

Furthermore, instead of contributing positively to govern- ii. Commercial financial, where the entity earns most or ment finances, through profits and dividends, parastatals all its revenue from the provision or sale of financial ser- as a whole have been a drain on the budget, many of them vices. making large losses and needing huge subventions from the budget to keep them afloat. There is also evidence that iii. Regulatory, where the entity is primarily engaged in some parastatals are badly run, overstaffed, poorly man- regulatory activities. aged, and subject to unnecessary political interference. Oversight, by government or the public - their eventual iv. Developmental, where the entity is primarily engaged in owners – is weak. developmental or promotional activities.

In this piece, we examine how the parastatal sector has v. Educational, where the entity is earns most or all of its evolved over the years, and consider whether they are dis- revenue from the provision of educational services. charging their responsibilities with regard to public report- ing and transparency. vi. Other, were the entity does not fall in any category list- ed above.

1This means that we do not include Debswana, the Diamond Trading Company or Botswana Ash as parastatals (GoB directly owns 50% of the shares). We also do not include (for convenience) subsidiaries of the Botswana Development Corporation (BDC).

2Nor do we include the Botswana Institute for Development Policy Analysis (BIDPA), which is often classed by government as a parastatal, but is in fact an independent trust.

page 14 www.econsult.co.bw

SPECIAL FEATURES

Table 1: Classification of Parastatals by Function Commercial (18)

−− Water Utilities Corporation (WUC) −− Botswana Power Corporation (BPC) −− Botswana Housing Corporation (BHC) −− Botswana Vaccine Institute (BVI) −− Botswana Agricultural Marketing Board (BAMB) −− Banyana (Pty) Ltd −− Botswana Meat Commission (BMC) −− Morupule Coal Mine (MCM) −− Minerals Development Company Botswana (MDCB) −− Okavango Diamond Company (ODC) −− Botswana Telecommunications Limited (BTCL) −− Air Botswana (AB) −− Botswana Post (Bots Post) −− Botswana Railways (BR) −− BCL Ltd −− Botswana Oil (BOL) −− Botswana Fibre Networks (BoFINET) −− Botswana Couriers & Logistics (BC&L) Commercial – Financial (6)

−− Botswana Savings Bank (BSB) −− Motor Vehicle Accident Fund (MVAF) −− Botswana Development Corporation (BDC) −− National Development Bank (NDB) −− Citizen Entrepreneurial Development Agency (CEDA) −− Botswana Stock Exchange (BSE)

Regulatory (16)

−− Botswana Accountancy Oversight Authority (BAOA) −− Civil Aviation Authority of Botswana (CAAB) −− Botswana Bureau of Standards (BOBS) −− Companies and Intellectual Property Authority (CIPA) −− Botswana Communications Regulatory Authority (BOCRA) −− Competition Authority (CA) −− Botswana Examinations Council (BEC) −− Copyright Society of Botswana (COSBOTS) −− Botswana Energy Regulatory Authority (BERA) −− Gambling Authority (GA) −− Botswana Institute of Chartered Accountants (BICA) −− Public Enterprises Evaluation and Privatization Agency (PEEPA) −− Botswana Geoscience Institute (BGSI) −− Public Procurement & Asset Disposal Board (PPDAB) −− Botswana Qualification Authority (BQA) −− Non-Bank Financial Institutions Regulatory Authority (NBFIRA)

Developmental (11)

−− Botswana Innovation Hub (BIH) −− Human Resources Development Council (HRDC) −− Botswana National Sports Council (BNSC) −− Local Enterprise Authority (LEA) −− Botswana Tourism Organisation (BTO) −− National Food Technology Research Centre (NFTRC) −− Botswana National Productivity Centre (BNPC) −− Selebi-Phikwe Economic Diversification Unit (SPEDU) −− Botswana Investment & Trade Centre (BITC) −− Special Economic Zones Authority (SEZA) −− Botswana Institute for Technology Research and Innovation (BITRI)

Education (5)

−− Botswana University of Agriculture and Natural Resources −− University of Botswana (UB) (BUAN) −− Botswana College of Distance and Open Learning (BOCODOL) −− Botswana International University of Science and Technology −− Botswana Accountancy College (BAC) (BIUST)

Other (4)

−− Bank of Botswana (BOB) −− Statistics Botswana (StB) −− Legal Aid Botswana (LAB) −− Botswana Unified Revenue Service (BURS)

No longer existing (7)

−− Rural Industries Promotions Company (RIPCO) Rolled into BITRI −− Botswana Technology Centre (BoTEC) Rolled into BITRI −− International Financial Services Centre (IFSC) Rolled into BITC −− Botswana Export Development and Investment Authority (BEDIA) Rolled into BITC −− Tertiary Education Council (TEC) Transformed into HRDC −− Botswana Telecommunications Authority (BTA) Transformed into BOCRA −− Botswana Training Authority (BoTA) Transformed into BQA

Source: Econsult, based on websites, annual reports etc. Legally, the majority of parastatals (44) are statutory entities, while 12 are share companies and four are companies limited by guarantee. page 15 www.econsult.co.bw

SPECIAL FEATURES

Timeline

The table below is a timeline of the establishment of parastatals since 1963, showing the parastatals established in a given year. The parastatals in RED are commercial financial, GREEN are commercial, PURPLE are other, BROWN are educational, BLUE are developmental and BLACK are regulatory parastatals.

1. Entities marked with (*) no longer exist but have since been closed or amalgamated. 2. For entities marked with (^), the year shown represents the year in which they became majority owned by government, not necessarily the year in which they were established. 3. Some entities existed as government departments prior to their establishment as independent bodies; the year shown refers to the latter. 4. The year of establishment refers to the year when operations commenced, which is not necessarily the same as the year of legal establishment.

TableTable 2:2 Timeline: Timeline o of Establishmentf establishment of parastatals of Parastatals Year Parastatals Established 1963 NDB 1964 1965 BMC BNSC 1966 1967 1968 1969 1970 BDC WUC BPC 1971 BHC 1972 1973 1974 BAMB RIPCO* 1975 BOB 1976 1977 1978 1979 BVI BoTEC * 1980 BTCL 1981 1982 UB BotsPost 1983 1984 1985 1986 MVAF 1987 BR 1988 AB BOCODOL 1989 1990 1991 1992 BSB 1993 BNPC BCL ^ 1994 BSE 1995 BOBS 1996 BAC BTA * 1997 BEDIA * 1998 Banyana 1999 NFTRC 2000 BOTA * 2001 PPADB CEDA BC&L 2002 PEEPA BEC 2003 IFSC * 2004 LEA BURS 2005 BIUST 2006 NBIFRA 2007 2008 2009 CA BTO 2010 COSBOTS 2011 CIPA BICA 2012 SPEDU BAOA BITRI StB ODC BIH BITC 2013 BQA HRDC BOL BOCRA BoFINET 2014 MDCB 2015 BGSI LAB 2016 BUAN MCM ^ GA SEZA 2017 BERA Source: Econsult, based on websites, annual reports etc. Source: Econsult, based on websites, annual reports etc. page 16 www.econsult.co.bw

SPECIAL FEATURES

The country’s oldest parastatal is NDB, established prior loaded anywhere in the world. Somewhat less ideal than to Independence in 1966. Around or soon after Indepen- this is a situation where the institution will make a soft dence a number of parastatals were established to under- copy available by email on request. Some institutions pub- take key functions related to the provision of infrastructure lish hard copies only, but these are typically only available (BPC, WUC, BHC), support for agriculture (BMC, BAMB), if one is prepared to go to the institution and collect, and development finance (BDC), and the introduction of Bo- sometimes cannot even be taken away. tswana’s own currency (BoB). We ranked the 60 parastatals by scoring points for avail- Clearly the pace of establishment of parastatals has picked ability of annual reports and of a functioning website. The up in recent years; in the five years from 2012 to 2016, 19 scoring was as follows: new parastatals were established, the same number as in the previous 15 years. Annual reports: soft copies available for each of the last five years, with the most recent ranked higher (2016/17 – 10 At first sight, this might appear to be inconsistent with points; 2015/16 – 8 points; 2014/15 – 6 points; 2013/14 the thrust of various policy pronouncements that have pro- – 4 points; 2012/13 – 2 points). The maximum possible posed reducing the number of parastatals through priva- score is therefore 30 points. No points were awarded for tisation or amalgamation of parastatals with overlapping malfunctioning website links. Points were awarded if soft mandates. However, in many cases the establishment of copies were sent by email on request. If hard copies were new parastatals follows the transfer of a regulatory func- easily available to us (either sent or available for collection tion out of government (e.g. the establishment of NBFIRA), in Gaborone), half the points were awarded. If an entity which is often a more effective way to operate (although did not provide annual reports on request in Gaborone or there is also the danger of regulatory overload and lack they were not available on the website, no points were of cost control when these regulators are funded by fees awarded3. charged to regulated entities). The cut off point for 2016/17 annual reports was that they There has been some consolidation, with BoTEC and RIP- should be available within six months of the end of their CO merged to become BITRI, and the IFSC and BEDIA financial year, which is the standard applied to listed com- merged into BITC. Privatisation has been glacially slow, panies by the Botswana Stock Exchange. So, for compa- however, with no full privatisations and only one partial nies with a financial year ending on March 31st, which is privatisation (BTCL) through the restricted sale of a minor- typical as this is the government financial year, the cut off ity share in the business by government. Privatisation is for the most recent annual report was the 30th September mainly relevant to commercial parastatals, rather than reg- 2017. ulatory or development parastatals, and commercial para- statals make up less than half (24) of the total (60). But Websites: a functioning website was awarded 20 points. even so, the number of commercial parastatals has been Websites were not graded by quality, to reduce subjectiv- rising, with the establishment or takeover of new ones, ity. rather than declining through privatisation. The results are shown below. Only four parastatals gained Efficiency and Transparency the maximum 50 points – BoB, BHC, BTCL and the BSE. Parastatals are public entities and are therefore indirectly They all had functioning websites and fully up to date an- or directly accountable to the public. There are various ac- nual reports or accounts. In joint fifth place were BICA and countability channels, some legally mandated, some ad- LEA. A large number of parastatals scored 40 points, in opted by choice. Below, we consider the transparency of equal 8th place; this score largely reflects the failure to parastatals according to two simple criteria: publish up to date annual reports for the most recent fi- 1. Does the entity have a functioning website? nancial year (i.e. within 6 months of their financial year 2. Does the entity publish its annual report and/or annual end). A large number of parastatals scored only 20 points, accounts in a form that is readily available to the pub- ranked 40th, which generally reflected a functioning web- lic? site but a complete lack of available accounts or annual reports. A few scored zero, with neither annual reports nor With regard to the availability of annual reports, the ideal a functioning website. In most cases this reflected their situation is that a soft copy is available on the relevant being relatively new (e.g. SEZA, BERA, BGSI), or on the website, with a working link that enables it to be down- way out (BCL)4.

3We note that the trend internationally is to treat only information available on a website as counting as “available to the public”, i.e. excluding hard copies or “sent on request”. See for instance, the ranking of budget transparency by the Open Budget Survey (www.internationalbudget.org)

4Although BCL is in provisional liquidation and no longer functioning, we include it here as technically it still exists, and is (was) one of the most important parastatals. Even prior to its closure, it did not make its accounts available

page 17 www.econsult.co.bw

SPECIAL FEATURES

Table 3: Ranking of parastatal transparency and efficiency

Rank Parastatals Points

1= BoB, BHC, BTCL, BSE 50 5= BICA, LEA 48 7 BVI 41 8= BAMB, BDC, BOBS, BOCRA, BPC, BQA, BSB, BURS, CA, NBFIRA, WUC 40 19= BAOA, BIH, BITC, BIUST 38 23= BotsPost, HRDC 36 25= BITRI, NDB, STATSBOTS 34 28= BEC, BOL 32 30 MVAF 30 31= BoFINET, GA, PPADB, UB 28 35 COSBOTS 26 36= BNPC, CIPA 24 38 BTO 23 39 AB 22 40 BAC, BC&L, BMC, BNSC, BOCODOL, BR, BUAN, CAAB, CEDA, LAB, NFTRC, ODC 20 52 SPEDU 12 53 PEEPA 10 54= Banyana, BCL, BERA, BGSI, MCM, MDCB, SEZA 0 Source: Econsult, based on websites, annual reports etc.

There was a particularly disappointing result from PEEPA, reason why a parastatal cannot publish its report and ac- the entity charged with evaluating the performance of pub- counts within six months of the end of its financial year. lic enterprises. PEEPA does not have a functioning website, Banks, for instance, are required by the regulator (BoB) to and as far as we can make out, has not published anything publish their accounts within three months of their finan- relating to discharging this part of its mandate. Indeed, if it cial year and, as noted above, companies listed on the BSE had, this article might have been unnecessary. Also bounc- have to do so within six months. ing around the bottom of the rankings is SPEDU, for which – as an investment promotion agency – not having a func- But there are clearly some parastatals that are not serious tioning website is a serious failure. It is also striking that about being held accountable to the public. They may per- the Ministry of Minerals, Energy and Green Technology haps meet their requirements to reporting to their sponsor- needs to do more to foster transparency amongst most of ing ministries (but we do not know, as neither the parastat- the parastatals it is responsible for. als nor government nor PEEPA provides this information), but they could and should do much better as custodians of Conclusion assets that ultimately belong to the people of Botswana. The results of this analysis show a wide range of perfor- As a first step, all parastatals will be required to share their mance across parastatals in terms of efficiency (speed of reports and accounts with BAOA, under the Financial Re- publishing annual reports and accounts) and transparency. porting Act, 2010. Although we have not done a formal analysis of how para- statals performance has change over time, the front-run- In a subsequent review we will examine parastatal perfor- ners include both those who have consistently maintained mance in more detail, looking at financial performance and good performance over the years (BoB, BSE), others whose just how much the taxpayer is contributing to meet the performance has improved dramatically (BHC, BTCL), and costs of the ever-expanding range of parastatals, and of new entities with a commitment to transparency (BICA). inefficient performance. We will also make some sugges- Many parastatals have performed reasonably, but with a tions as to which parastatals should ready themselves for bit more effort could do a lot better – we do not see any privatisation.

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

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