Botswana Botswana at a Glance: 2003-04

Country Report July 2003

Botswana Botswana at a glance: 2003-04

OVERVIEW The political scene will remain very stable. The ruling Botswana Democratic Party (BDP) will maintain its firm grip on power throughout the forecast period and is expected to win an easy victory in the legislative election, which is due by October 2004. Neither the BDP nor the president, Festus Mogae, will be threatened by any challenge from the main opposition parties, the Botswana National Front and the Botswana Congress Party. Rapid growth in the mining sector will increase real GDP growth to 7.4% in national accounts year 2003/04 (July-June). This rate of growth will not be sustained in 2004/05, but increased services activity will support real GDP growth of 3.4%. In line with the rand, the pula will appreciate to an average of P5.64:US$1 in 2003 before depreciating to an average of P6.76:US$1 in 2004. The expected increase in real GDP growth in 2003 will exceed the increase in the current-account surplus (in US dollar terms); consequently, we expect the current-account surplus to narrow to 8.7% of GDP in 2003. In 2004 the surplus will widen to 11.1% of GDP. In both years the widening of the current-account surplus (in US dollar terms) will be driven by an increase in the trade surplus.

Key changes from last month Political outlook • Factionalism within the BDP has developed further, with the party chairman, Ponatshego Kedikilwe, now appearing to suggest that he will challenge Mr Mogae for the BDP party presidency in 2004. Economic policy outlook • In June the Citizen Entrepreneurial Development Agency said that since its inception in February 2001, about P400m (US$78.4m) of funding has been provided for nearly 1,000 projects. Such positive spin was intended to help counter the generally negative publicity it has received since it was set up. Economic forecast • Annual inflation rose to 11.8% in May, from 11.4% in April. Although this was still below the 12.2% recorded in February, the increase will have disappointed the Bank of Botswana, which has set an inflation target range of 4-6%.

July 2003

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Contents

3 Summary

4 Political structure

5 Economic structure 5 Annual indicators 6 Quarterly indicators

7 Outlook for 2003-04 7 Political outlook 8 Economic policy outlook 9 Economic forecast

12 The political scene

17 Economic policy

19 The domestic economy 19 Economic trends 20 Agriculture 20 Mining 20 Manufacturing 21 Communications and infrastructure 22 Financial and other services

23 Foreign trade and payments

List of tables 9 Botswana: international assumptions summary 12 Botswana: forecast summary 18 Botswana: government bond issues, March to May 2003 23 Botswana: balance of payments

List of figures

12 Botswana: gross domestic product 12 Botswana: consumer price inflation 19 Botswana: inflation, 2003

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Botswana 3

Summary July 2003

Outlook for 2003-04 The political scene will remain very stable and the ruling Botswana Democratic Party (BDP) will maintain its firm grip on power throughout the forecast period. It is expected to win an easy victory in the next legislative election, which is due by October 2004. The government will continue to pursue largely prudent economic policies over 2003-04, framed by the Ninth National Development Plan (April 2003-March 2009). Owing mainly to growth in the mining sector, we forecast that real GDP will grow by 7.4% in national accounts year 2003/04 (July-June). In 2004/05 as growth slows in the mining sector, real GDP growth will decline to 3.4%, although it will be supported by faster growth in services. We expect average inflation to rise to 9.5% in 2003!which is outside the target range of the Bank of Botswana (the central bank). Inflation will fall to 5% in 2004, helped by lower inflation in South Africa. Partly because of changes in the value of the rand, we forecast that the average exchange rate will appreciate to P5.64:US$1 in 2003 before falling to P6.76:US$1 in 2004. The expected increase in real GDP growth in 2003 will exceed the increase in the current-account surplus (in US dollar terms); thus, we expect the current-account surplus to narrow to 8.7% of GDP in 2003. In 2004 the surplus will widen to 11.1% of GDP. In both years the widening of the current-account surplus (in US dollar terms) will be because of an increase in the trade surplus.

The political scene Factionalism within the ruling BDP has re-emerged. A challenge to Mr Mogae in 2004 has now become possible. The race for primaries has heated up owing to BDP constituency rivalries. Opposition unity talks have floundered. The Botswana National Front remains divided. Mr Mogae has said that he is HIV negative. Political and economic problems with Zimbabwe have continued.

Economic policy The government has considered a report on public salary structures. The first round of pula-denominated bonds has been issued. The government has said that it intends to table several bills that will affect businesses operations. The problems of the Citizen Entrepreneurial Development Agency have continued.

The domestic economy Recent increased inflation data have disappointed the government. Growth in commercial bank credit has declined. The president has declared a drought. Output at Jwaneng diamond mine has increased. Five airlines have expressed an interest in Air Botswana. Botswana Telecommunications Corporation has been ordered to halt its restructuring.

Foreign trade and payments The Bank of Botswana (the central bank) has revised its 2002 balance-of- payments data. Negotiations with the US on a free-trade agreement have continued.

Editors: Angus Downie (editor); Paul Gamble (consulting editor) Editorial closing date: June 27th 2003 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule

Country Report July 2003 www.eiu.com © The Economist Intelligence Unit Limited 2003 4 Botswana

Political structure

Official name Republic of Botswana

Form of state Unitary republic

Legal system Roman-Dutch law; cases in rural areas are heard by customary courts

National legislature National Assembly consisting of 40 members elected by universal suffrage (an additional 17 constituencies are to be created for the next election), the president, the attorney-general and four members appointed by the president. A 15-member House of Chiefs advises on tribal matters

National elections October 1999 (legislative); next legislative election due by October 2004

Head of state President, chosen by the National Assembly

National government The president, his appointed vice-president and cabinet (reshuffled in September 2002)

Main political parties Botswana Democratic Party (BDP; the ruling party); Botswana National Front (BNF); Botswana Congress Party (BCP); Botswana People’s Party (BPP); New Democratic Front (NDF); Botswana Alliance Movement (BAM)

President Festus Mogae Vice-president Ian Khama

Key ministers Agriculture Johnnie Swartz Communications, science & technology Boyce Sebetela Education George Kgoroba Finance & development planning Baledzi Gaolathe Foreign affairs & international co-operation Mompati Merafhe Health Joy Phumaphi Labour & home affairs Thebe Mogani Lands & housing Margaret Nasha Local government Michael Tshipinare Mineral resources, energy & water affairs Boometswe Mokgothu Presidential affairs & public administration Daniel Kwelagobe Trade & industry Jacob Nkate Wildlife & tourism Pelonomi Venson Works & transport Tebelebo Seretse

Central bank governor Linah Mohohlo

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Economic structure

Annual indicators 1998a 1999a 2000a 2001a 2002b GDP at market prices (P bn)c 21.5 24.9 28.7 32.0 35.8 GDP (US$ bn)c 5.1 5.4 5.6 5.5 5.7 Real GDP growth (%)c 4.1 8.1 6.9 2.3 4.2 Consumer price inflation (av; %) 6.5 7.8 8.5 6.6 8.1a Population (m) 1.6 1.6 1.7 1.7d 1.7 Exports of goods fob (US$ m) 2,061 2,671 2,712 2,324 2,443 Imports of goods fob (US$ m) -1,983 -1,997 -1,780 -1,507 -1,704 Current-account balance (US$ m) 170 517 575 817 629 Foreign-exchange reserves excl gold (US$ bn) 5.9 6.3 6.3 5.9a 5.5a Total external debt (US$ m) 520.0 486.7 423.4 369.9 381.5 Debt-service ratio, paid (%) 2.6 2.1 2.0 1.7 1.9 Exchange rate (av) P:US$ 4.23 4.62 5.10 5.84a 6.33a a Actual. b Economist Intelligence Unit estimates. c National accounts year beginning July 1st. d Final result of 2001 census.

Origins of gross domestic product 2000 % of total Components of gross domestic product 2000 % of total Agriculture 2.5 Private consumption 29.7 Mining 36.5 Public consumption 31.6 Manufacturing 4.1 Gross fixed capital formation 22.8 Construction, water & electricity 8.0 Change in stocks -7.1 Services (incl government) 43.7 Exports of goods & services 56.2 Misc 5.2 Imports of goods & services -33.2

Principal exports fob 2000 US$ m Principal imports cif 2000 US$ m Diamonds 2,231 Machinery & electrical goods 462 Vehicles 53 Food, beverages & tobacco 293 Copper & nickel 163 Vehicles & transport equipment 258 Textiles 48 Chemical & rubber products 203 Meat & meat products 52 Metal & metal products 151

Main destinations of exports 2000 % of total Main origins of imports 2000 % of total EFTA 87 SACU 74 SACU 7 EFTA 17 Zimbabwe 4 Zimbabwe 4

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Quarterly indicators

2001 2002 2003 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr Central government finance (P m) Revenue & grants 3,158.6 3,222.4 3,000.3 3,325.7 3,416.9 3,390.0 3,904.6 n/a Expenditure & net lending 2,967.3 3,250.3 3,499.3 3,975.5 3,772.0 3,569.5 3,715.1 n/a Balance 191.2 -27.9 -499.0 -649.8 -355.2 -179.4 189.5 n/a Prices Consumer prices (1995=100) 158.4 160.7 162.4 164.2 168.3 176.1 180.0 183.4 Consumer prices (% change, year on year) 6.9 6.1 5.8 5.8 6.3 9.6 10.8 11.7 Financial indicators Exchange rate P:US$ (av) 5.64 5.78 6.45 6.81 6.34 6.24 5.92 5.33 Exchange rate P:US$ (end-period) 5.67 6.00 6.98 6.77 6.23 6.31 5.47 5.16 Bank rate (end-period; %) 14.25 14.25 14.25 14.25 14.25 14.25 15.25 15.25 Lending rate (av; %) 15.75 15.75 15.75 15.75 15.75 15.75 16.6 16.75 M1 (end-period; P m) 2,269 2,302 2,351 2,490 2,635 2,726 2,524 n/a M1 (% change, year on year) 27.2 25.2 23.9 36.9 16.1 18.4 7.4 n/a M2 (end-period; P m) 8,579 8,991 9,617 9,931 10,057 10,366 9,508 n/a M2 (% change, year on year) 18.0 18.5 31.2 28.0 17.2 15.3 -1.1 n/a Stockmarket index (end-period; 1989=100)a 2,036.0 2,214.2 2,455.4 2,633.9 2,533.0 2,479.6 2,496.8 2,293.5 Foreign trade (P m) Exports fob 3,684 3,197 3,313 3,836 n/a n/a n/a n/a Diamonds 2,250 2,628 2,834 2,598 3,466 2,754 3,656 2,574 Imports cif -2,771 -2,708 -2,713 -2,843 n/a n/a n/a n/a Trade balance 913 489 600 993 n/a n/a n/a n/a Foreign reserves (US$ m) Reserves excl gold (end-period) 6,228 6,143 5,897 5,819 5,751 5,449 5,474 n/a a Domestic companies index. Sources: IMF, International Financial Statistics; Bank of Botswana, Botswana Financial Statistics.

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Outlook for 2003-04

Political outlook

Domestic politics The political scene will remain very stable and the ruling Botswana Democratic Party (BDP) will maintain its firm grip on power throughout the forecast period. It is expected to win an easy victory in the next legislative election, which is due by October 2004. Neither the BDP, nor the president, Festus Mogae, will be threatened by any challenge from the two main opposition parties, the Botswana National Front (BNF) and the Botswana Congress Party (BCP). Internal party disagreements will affect all parties in the run-up to the election. The BDP will suffer from renewed factionalism between the vice-president, Ian Khama, who has said that he will stand for the post of BDP party chairman at the BDP national congress in July 2003, and the incumbent, Ponatshego Kedikilwe, who will not step down willingly. Mr Khama has the strong support of Mr Mogae, who has previously clashed with Mr Kedikilwe. Mr Khama appears to have the upper hand, but Mr Kedikilwe will continue to gain support based on his arguments about the dangers of dynastic and autocratic politics (Mr Khama is the son of the first president, Seretse Khama). The loser will see his fief strongly damaged prior to the BDP’s special congress in April 2004, which will elect the BDP party president, who will, by default, become the party’s presidential candidate in the 2004 legislative election (the president is chosen by the party that gains the largest share of the vote in the legislative election). Compromise seems unlikely, but technical reasons may be found for postponing the congress. The BDP’s choice of candidates for the 57 parliamentary constituencies!they will not be decided until November 2003! will generate fierce, internecine contests in the primary elections, leading to further disunity within the party. Despite this and the Khama-Kedikilwe dispute, the BDP will be assisted by the favourable redrawing of constituency boundaries, disunity among the opposition and its control of state powers. The opposition will be unable to take advantage of the BDP’s disunity. The BNF will struggle with problems surrounding the party leadership!none of whom are in parliament!and will contest the party’s small number of safe constituencies. Although the opposition parties agree about the need for unity if the BDP is to be defeated, practical steps to achieve this have floundered!the BCP has said that it will contest every constituency. Some bilateral pacts have been agreed, but these will be of only limited impact without effective co- operation between the BCP, the BNF and the newly-formed New Democratic Front (NDF). This is unlikely as the BCP and NDF were formed as breakaways from the BNF.

International relations The situation in Zimbabwe will continue to affect Botswana. At a formal level, relations have cooled; privately, the government will remain exasperated by continued allegations from semi-official sources in Zimbabwe that it is assisting efforts to bring down the regime of the president, Robert Mugabe. Botswana may increasingly add its weight to regional initiatives to resolve the economic and social crisis (although these are unlikely to have any effect). Relations with

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other regional neighbours will remain good. Botswana’s international standing, which is already high owing to its efforts in the fight against HIV/AIDS, will be helped by the president’s declaration of his (negative) HIV status following a recent test.

Economic policy outlook

Policy trends The government will continue to pursue largely prudent economic policies over 2003-04. However, the election is influencing the political agenda and will affect policy formulation and implementation. The Ninth National Development Plan (NDP9; April 2003-March 2009) has assumed the policy framework of the outgoing NDP8, and in part mirrors the goals in the long-term policy document, Vision 2016. The main policy objectives of NDP9, which will only be partly successful owing to capacity constraints and over-optimistic goals, are: economic diversification; employment creation and poverty alleviation; maintaining macroeconomic stability and financial discipline; and the development of the country’s human resources (which includes the fight against HIV/AIDS). Diversification of the economy away from diamond mining is crucial. However, the plethora of government agencies trying to attract foreign investment and the cumbersome procedures being employed to tackle the scarcity of skilled labour, will remain problems in the outlook period. The partial privatisation of Air Botswana is due before the end of the year, but the timetable for further privatisations remains unclear!battles for influence between the Public Enterprises Evaluation and Privatisation Agency (PEEPA), parastatals and parent ministries will continue, further slowing down the already drawn out privatisation programme. The government successfully launched three bonds, with maturities of five, 12 and two years in late March, late April and late May, respectively. The main purpose of the bond issues was not to raise revenue, but to help develop local capital market liquidity.

Fiscal policy The finance minister, Baledzi Gaolathe, presented the budget for fiscal year 2003/04 (April-March) to parliament on February 3rd. The budget projects that in 2003/04 revenue and grants will rise to P17.54bn, 22% above the official revised estimate for 2002/03. Expenditure and net lending are expected to increase to P17.33bn, from P16.64bn in 2002/03. The 2003/04 budget therefore shows a small surplus of P206m, or around 0.5% of GDP (based on a projected 16% increase in mineral revenue). The government hopes that higher mineral revenue will result in buoyant revenue growth. However, the forecast increase in diamond production to record levels in 2003 will not be accompanied by higher prices. It is, therefore, doubtful that mineral revenue will meet expectations, given the poor GDP growth in OECD economies, but there should be an increase in revenue from value-added tax (VAT) in its first full year of operation (it was introduced in July 2002). In addition, a new Southern African Customs Union (SACU) agreement reached in 2002 will help to increase revenue in late 2003/04 and beyond. The government is under some pressure with regards to spending. Although no public-sector pay rise was awarded in the budget, the government could alter this decision. In addition, following the president’s declaration of a drought in May, a provision of P282m (US$56m) has

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been made for drought-relief programmes. The Economist Intelligence Unit therefore expects a fiscal surplus of 0.2% of GDP in 2003/04. In 2004/05 spending will be under similar pressures to those experienced in the current fiscal year and, owing to the legislative election in 2004, public-sector wages are likely to increase. Expenditure under NDP9, although expansionary, will be controlled. As mineral revenue will rise in line with increased output and the expectation of higher prices in 2004, and income and corporate taxes will rise in line with real GDP growth, we expect a small fiscal surplus of 0.5% of GDP in 2004/05.

Monetary policy The Bank of Botswana (the central bank) will keep monetary policy tight in 2003-04!the bank rate stands at 15.25%!in an effort to curtail the growth of commercial bank credit and, in turn, reduce domestic demand and lower inflation. Downward sloping yield curves in both the money and bond markets point to expectations of lower inflation and interest rate cuts. But the central bank will seek to further its commitment to lower inflation, a resolve that will be strengthened by the improved prospects for lower inflation in South Africa. Despite encouraging signs that credit growth to the private sector, which is an intermediate target in the monetary policy framework, has declined, the central bank will want to be sure that this is more than a temporary slowdown as there are indications that appetite for credit among consumers remains strong and the government is likely to relax fiscal policy in the run-up to the 2004 election. Although the benchmark bank rate may be reduced later in 2003, the central bank may use the opportunity of falling inflation to push real interest rates higher, thus squeezing inflation further.

Economic forecast

International assumptions Botswana: international assumptions summary (% unless otherwise indicated) 2001 2002 2003 2004 Real GDP growth World 2.1 2.9 3.0 3.7 US 0.3 2.4 2.2 3.1 South Africa 2.8 3.0 2.7 3.5 Exchange rates ¥:US$ 121.5 125.4 116.2 115.5 US$:€ 0.896 0.945 1.150 1.183 Rand:US$ 8.63 10.52 8.29 9.52 Financial indicators US$ 3-month commercial paper rate 3.61 1.70 1.04 1.75 € 3-month interbank rate 4.26 3.33 2.18 2.06 Commodity prices Oil (Brent; US$/b) 24.5 25.0 25.5 18.3 Nickel (US$/lb) 2.7 3.1 3.5 3.7 Food, feedstuffs & beverages (% change in US$ terms) -1.9 12.7 2.1 1.8 Industrial raw materials (% change in US$ terms) -9.7 2.2 10.2 3.5 Note. Regional GDP growth rates weighted using purchasing power parity exchange rates. The world economy is in the middle of its second serious slowdown in two years. We expect the world economy to remain extremely sluggish until late

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2003. From then on the situation will start to improve!but only gradually. We do not expect US growth!which is critical for Botswana’s diamond exports, as the US accounts for over 50% of world retail diamond sales!to return to trend until the first half of 2004, and growth in the euro area will lag behind this. This pattern of a slow, weak economic recovery suggests that annual average world GDP growth in 2003 will be disappointing, at just 3%. World GDP growth will average a healthier 3.7% in 2004. In South Africa, Botswana’s main market for non-traditional exports, real growth of 2.7% is expected in 2003, rising to 3.5% in 2004. Economic growth We estimate that real GDP grew by 4.2% in national accounts year 2002/03 (July-June), owing mainly to growth in the mining sector, private and government consumption, and despite the effect of monetary tightening on the latter. Debswana!the diamond mining company jointly owned by the government and De Beers!announced on March 7th that its output would increase by 11% in 2003 (benefiting for the first time from fully automated sorting) to 30m carats. Because of this, we are forecasting that real GDP will grow by 7.4% in 2003/04. In 2004/05 as growth in the mining sector slows (the 11% growth in diamond production is unsustainable), real GDP growth will fall to 3.4%, although it will be supported by faster growth in services. Mining activity (led by diamond output) is the engine of growth. Even if the global economic recovery wavers in 2003, leading to weaker diamond demand, we assume that production will not decline and that unsold diamonds will be stockpiled. Output from the new Mupane gold mine is expected to begin in 2004, which will help somewhat to offset slower growth in diamond production. The services sector is expected to become the main source of growth in 2004, as diversification efforts proceed with varying results. The government will continue to promote financial services and more foreign firms are expected to enter Botswana. Botswana hopes to benefit from the growing tourist industry in South Africa, although the problems in Zimbabwe will limit this. The rapid growth of telecommunications may slow as the market for mobile phone services reaches saturation and the problems at Botswana Telecommunications Corporation continue. Drought and recurrent outbreaks of foot-and-mouth disease will continue to hamper the agricultural sector, which will remain small. Textile manufacturers will benefit from duty-free access to the US under the Africa Growth and Opportunity Act.

Inflation The central bank’s retention of its 4-6% inflation target in 2003, although it missed this target in 2002, suggests that the bank believes that underlying inflation is much closer to the target when VAT is excluded. But inflation has remained stubbornly high so far in 2003. Annual inflation rose to 11.8% in May from 11.4% in April. The increase was due to price rises across most categories. Annual inflation will fall sharply from the middle of this year, when the impact of the introduction of VAT in July 2002 drops out of the annual calculation. The effect of the new telephone charges introduced in November 2002 will also drop out of the calculation in October. Food price inflation will also subside, although only gradually, as food shortages will remain. We expect average inflation to rise to 9.5% in 2003!outside the central bank’s target range! owing to sustained price rises across most consumer categories. Food prices

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will rise in early 2004 (before the harvest begins in March), if shortages are worse than last year, which will cause inflation to rise. No public-sector pay award is envisaged in 2003/04, but we expect one in 2004/05 as it is an election year. This, plus election-related spending, will add to inflationary pressure. On the other hand, a number of factors will offset this!the expected appreciation of the pula against the rand will reduce imported inflation from South Africa, South African inflation will increasingly be brought under control and the central bank will maintain tight monetary policy. We therefore expect average inflation to fall to 5% in 2004.

Exchange rates Over the forecast period there will be no major changes to the basket mechanism that determines the value of the pula, the precise details of which will continue to remain confidential. The recalculation of South Africa’s inflation data for January 2002-March 2003 may affect the calculations of the real effective exchange rate, which is monitored as an indicator of competitiveness, but this is unlikely to result in any major readjustment to the currency weights. The strength of the rand during 2003 so far has been because of higher gold and platinum prices, along with higher interest-rate differentials with OECD economies. Now that the South African Reserve Bank has cut its repo rate by 150 basis point to 12% in June (partly because it now believes that inflation had been over-estimated), and because foreign-exchange reserves are low, the rand is expected to depreciate again. The prospects for the rand and the US dollar (which is expected to strengthen in 2004 as the US economy grows more rapidly and investment returns improve) will be reflected in the value of the pula, and we forecast that the average exchange rate will rise to P5.64:US$1 in 2003 before falling to P6.76:US$1 in 2004.

External sector The expected increase in real GDP growth in 2003 will exceed the increase in the current-account surplus (in US dollar terms); thus, we expect the current- account surplus to narrow to 8.7% of GDP in 2003. In 2004 the surplus will widen to 11.1% of GDP. In both years the widening of the current-account surplus (in US dollar terms) will be because of an increase in the trade surplus. Exports are forecast to increase to US$2.66bn in 2003 and US$2.71bn in 2004 (owing to increased diamond production). Consumer and government spending will support imports over the forecast period. In addition, food requirements will continue to be met mainly by imports in 2003-04. Total imports will increase to US$1.85bn in 2003, before falling to US$1.83bn in 2004, mainly because of lower food imports and fuel prices. The deficit on the services account will remain fairly steady in 2003-04, largely because the cost of importing goods into land-locked Botswana will offset any slight increase in tourism receipts. Movements on the income account in 2003-04 will depend in part on the state of the international financial markets, where foreign-exchange reserves and public pension funds are invested!such returns generate nearly all income credits (which are expected to pick up in 2004). If the expected rise in diamond production leads to higher profits for Debswana, transfers to De Beers, which owns 50% of Debswana, will help to increase income debits. Current transfers will not benefit from the new SACU revenue-sharing formula until 2004 at the earliest, owing to delays in setting up the secretariat. However, in 2004, higher payments from SACU!owing to Botswana’s large share of intra-

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SACU imports!will result in an increased surplus on the current-transfers account.

Botswana: forecast summary (% unless otherwise indicated) 2001a 2002b 2003c 2004c Real GDP growth 2.3 4.2 7.4 3.4 Industrial production growth -1.6 4.2 10.5 1.8 Gross fixed investment growth 6.1 2.5 3.5 1.0 Consumer price inflation (av) 6.6 8.1a 9.5 5.0 Consumer price inflation (year-end) 5.8 11.2a 6.5 4.9 Commercial bank prime rate (av) 15.8 16.0a 15.5 14.5 Government balance (% of GDP)d -3.0 -4.1 0.2 0.5 Exports of goods fob (US$ m) 2,324 2,443 2,663 2,709 Imports of goods fob (US$ m) -1,507 -1,704 -1,848 -1,831 Current-account balance (US$ m) 817 629 643 737 Current-account balance (% of GDP) 14.9 11.1 8.7 11.1 External debt (year-end; US$ m) 370 382 800 785 Exchange rate P:US$ (av) 5.84 6.33a 5.64 6.76 Exchange rate P:¥100 (av) 4.81 5.05a 4.85 5.86 Exchange rate P:€ (year-end) 6.15 5.73a 8.07 7.99 Exchange rate P:R (year-end) 0.68 0.60a 0.68 0.71 a Actual. b Economist Intelligence Unit estimates. c Economist Intelligence Unit forecasts. d Fiscal year.

The political scene

Divisions re-emerge in the In May the vice-president, Ian Khama, announced that he would be standing ruling party for the chairmanship of the ruling Botswana Democratic Party (BDP) at the party’s national congress in July 2003. Mr Khama explained his decision to challenge the incumbent, Ponatshego Kedikilwe, as being based on a desire to get increasingly involved in party affairs. However, Mr Khama!who only entered politics in 1999 upon retiring as commander of the Botswana Defence Force (BDF)!appears to have been spurred into action following a stormy meeting of the BDP’s central committee in March. At the meeting Mr Kedikilwe

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joined forces with the secretary-general, Daniel Kwelagobe, to try and use their control of party structures to frustrate the wishes of the president, Festus Mogae. (Mr Kwelagobe had said that the president’s control of government did not extend to authority in party affairs). Although Mr Mogae subsequently got his way over the specific issue of the eligibility of a BDP member to stand as a candidate for parliament (see below), this confrontation served to re-ignite factionalism in the party. A pro-Mogae group led by the foreign affairs minister, Mompati Merafhe, and the trade and industry minister, Jacob Nkate, argued that the president needed to be able to rely on the loyalty of the party, a view that was subsequently stressed by Mr Khama in a series of public addresses prior to his announcement of his challenge to Mr Kedikilwe. The situation was further inflamed when Mr Mogae rebuked Pelonomi Venson, the BDP’s deputy secretary-general (and wildlife and tourism minister), for apparently promoting the creation of a new position of party vice-president to which Mr Khama would automatically be appointed, as a means to thwart his challenge.

A challenge to Mr Mogae in Mr Kedikilwe has reacted angrily to Mr Khama’s challenge. He said that he had 2004 is now possible offered to stand aside as party chairman when Mr Khama had been appointed as vice-president in 1999, but that the situation was no longer the same. And he openly accused the president of promoting factionalism when Mr Mogae indicated his support for Mr Khama. (Despite being widely criticised for helping to divide the party, Mr Mogae subsequently reiterated his support, clearly identifying Mr Khama as his preferred successor to the presidency.) Most importantly, Mr Kedikilwe indicated that he might reconsider his decision not to challenge Mr Mogae at the BDP’s special congress in April 2004, which will elect the BDP’s party president, who will, by default, become the party’s presidential candidate in the October 2004 legislative election (the president is chosen by the party that gains the largest share of the vote in the legislative election). In April Mr Kedikilwe had openly stated that he was “not inclined” to mount such a challenge, which had been widely rumoured for some time, because of the tradition of preserving unity in the build-up to elections. However, because Mr Khama had decided to break with this tradition, Mr Kedikilwe no longer feels so constrained.

The Khama versus Kedikilwe Mr Kedikilwe’s control over the party apparatus gives him a major advantage. contest is finely balanced This may have been the reason why, at the last moment, Tebelelo Seretse, the minister of works and transport and a prominent supporter of Mr Khama, decided not to stand for the chair of the BDP women’s wing in May, as her likely defeat would have been seen as signalling weakness in the Khama camp. Acting in Mr Khama’s favour are his powers of patronage gained through his position as paramount chief of the Bamangwato tribe (which gives him influence over the central areas of the country, the BDP’s heartland), Mr Mogae’s close support and the fact that he is the son of the first president, Seretse Khama (who was held in high regard by most Batswana). When Mr Khama launched into a series of high-profile public appearances in June!officially on behalf of the party but clearly also to promote his candidacy for the party chairmanship!he was accompanied by senior party figures who had previously been regarded as supporters of Mr Kedikilwe, prompting

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speculation that they had changed sides. It was even rumoured that Mr Kwelagobe had thrown in his lot with the Khama camp, possibly because he was anxious to demonstrate his loyalty in the wake of his fallout with the president. Mr Kwelagobe was also under some pressure owing to the start of an inquiry to investigate his activities in his Molepolole constituency, where he has been accused of abusing his powers as secretary-general in order to influence the choice of candidates when the constituency is divided in two as a result of the rulings of the recent delimitation commission (April 2003, page 13). Mr Kedikilwe’s response to Mr Khama’s heightened profile was to characterise his own campaign as being dedicated to fighting for the rights of ordinary people!he has no family connections with tribal leaders!and he openly criticised the powers and freedoms that have been granted to the vice- president. Although the main protagonists claim that the chairmanship contest is good for democracy (Mr Mogae has said that he would welcome a challenge to his presidency in 2004), there is concern about the impact of the contest on party unity. Efforts have continued behind the scenes to try to persuade Mr Khama to withdraw!as he did in 2001 when his political base was less well established (October 2001, page 14)!in return for some agreement about his future accession to the presidency. There was also talk of postponing the congress on the technical grounds that party structures had not been fully established in all the seventeen newly created parliamentary constituencies.

BDP constituency rivalries Although the dates of the BDP primary elections are several months away!late heat up race for primaries November for parliamentary constituencies and early December for local council seats!the contest for selection as candidates continued to heat up following the announcement of the findings of the delimitation commission in February (April 2003, page 13). The first stage in the implementation of the new Bulela Ditswe system, under which all party members in the constituency can vote in the selection process, lasted from May 19th to June 20th, during which potential candidates registered. Following this, applicants will be vetted for their suitability, and the results are scheduled to be announced in late July. Tensions have arisen between party members agitating for the selection. • The manoeuvrings by Mr Kwelagobe to prevent the candidacy of Kabo Moraweng in the new seat in Molepolole (reportedly to pave the way for his ally, Gaotlhaetse Mathlabaphiri, a party insider who is currently the high commissioner in Namibia) led to a stand-off of the BDP central committee. Mr Moraweng’s request that he be allowed to stand as a candidate when he rejoined the BDP from the BNF!he left the party in the mid-1990s!was rejected, despite such treatment being granted to other such returnees. Mr Moraweng’s request eventually succeeded, following advice that his legal challenge was likely to be upheld, but further attempts may be made to stop him when his candidature application is vetted. • Margaret Nasha, the lands and housing minister, caused controversy by insisting that members of land boards could not also be politically active (land board membership is often seen as a consolation prize for party activists who have not been successful as election candidates). Several keen contests were expected, the most high profile being in Serowe South where two cabinet ministers, Mrs Seretse and Ms Venson, were both reported to be contesting and

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where, as Mr Kedikilwe was quick to point out, the influence of Mr Khama could be crucial in determining the outcome. Both women are longstanding rivals; Mrs Seretse triumphed in a previous primary election for the same constituency and Ms Venson, who is currently a specially elected MP appointed by the president, will be expected to secure a constituency if she hopes to remain in parliament. • Amid further rumours of high-profile figures preparing to enter the races, and complaints that newcomers were joining the party purely to stand as candidates (and thus gain the benefits of becoming an MP), the BDP adopted new rules forbidding people from announcing their candidatures prior to their applications being accepted. A request that civil servants who wished to stand as candidates should not have to resign their, in theory, apolitical positions, was rejected on the grounds that it would undermine the neutrality of the public service!although it subsequently appeared that an exception to this would be made in the case of Mr Mathlabaphiri.

Opposition unity talks Although the leader of the Botswana National Front (BNF), Otsweletse Moupo, flounder was quick to publicly embrace the concept of opposition unity (April 2003, page 15), the initially positive responses from other parties were quickly replaced by reports of failure to make progress. A major stumbling block has been that two of the opposition parties, the Botswana Congress Party (BCP) and the New Democratic Front (NDF) are both recent breakaways from the BNF and much ill feeling still remains. The NDF, which comprises supporters of the former BNF leader, Kenneth Koma, who were sidelined by Mr Moupo’s election as party leader in 2001 (January 2002, page 13), was only formed in early 2003 (April 2003, page 16). By its own admission, the NDF is not expected to mount any serious challenge at the next election (Mr Koma, its only MP, confirmed in June that he would not contest the election), but under the energetic leadership of a Gaborone-based lawyer, Dick Bayford, it is clearly a major irritant to the BNF, which refused to include the NDF in an invitation to unity talks. This was condemned by the BCP which, in turn, held bilateral discussions with the NDF!an ironic development given that the BCP was originally formed owing to dissatisfaction with the leadership of the BNF by Mr Koma. The BCP made it clear that speed was of the essence if any pre-election agreement was to be reached and the beginning in June of its programme of primary elections, which will be spread out as candidates are gradually identified, and its announced intention of fielding candidates in every constituency and council seat, while possibly a negotiating ploy, was a strong indication that it had given up on efforts to unite with other opposition parties. Limited pacts are agreed between some opposition parties

Some limited agreements between various opposition parties have been reached. The Botswana Congress Party (BCP) has made an electoral pact with the Botswana Progressive Union (BPU), which, although tiny, has some pockets of support in north-east Botswana, where the BCP is also believed to be doing well. Specifically, the co-operation is intended to improve the BCP’s prospects in the Nkange constituency where the BPU has some councillors. The Botswana National Front (BNF) has also announced an electoral pact with the Botswana Alliance Movement

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(BAM) but, although the BAM has been the most vocal proponent of opposition unity, this is unlikely to amount to much. The BAM has only limited support; in the 1999 legislative election it received less than 5% of the vote and much of this was from supporters of the Botswana People’s Party (BPP), which subsequently withdrew from an alliance. And in 2003 the BAM suffered the twin blows of its deputy leader defecting to the Botswana Democratic Party and having to re-register as a political party, after a legal dispute with the BPP had resulted in it being de-registered. Although the BNF and BPP also held discussions, the latter has indicated that it will not be part of any agreement that involves the BAM. The BNF is still not united Opposition unity has been further undermined by the internal disputes that have continued within the BNF, in particular over who will be chosen as candidates in the constituencies where the party is expected to do well. Much of the leadership is from the north of the country, whereas the party’s strongholds are in the south, particularly around Gaborone, the capital. A further problem is that few of the party’s MPs are close to the leadership! indeed most did not support Mr Moupo when he stood for election as party leader. Mr Moupo has decided to contest the election in his hometown of Selebi-Phikwe (in the east), but this is with the agreement of the central committee, which has otherwise given a general instruction for its members to relocate to the safer southern seats. The permanent secretary to the president is demoted

In April it was announced that Molosiwa Selepeng, the permanent secretary to the president, would become Botswana’s first high commissioner to Australia. Although the office of the president tried to portray the move as a redeployment, the move to a relatively junior diplomatic posting was widely interpreted as a demotion. It brings to a close a long-running saga, as Mr Selepeng had been a controversial figure since his appointment after the 1999 legislative election. He featured in high-profile cases of bureaucratic mix-ups, including the botched constitutional referendum in 2001 that resulted in the attorney-general taking legal action against the government (October 2002, page 15). He also had an uneasy relationship with the local media, who he antagonised through his heavy-handed approach in trying to curb what he saw as negative reporting of government policies. His move appears to have been decided upon following the controversy surrounding the appointment of Jeff Ramsey, a prominent local historian, to the post of senior private secretary to the president, Festus Mogae. Mr Selepeng’s error had been to originally deny the appointment, only for it to be subsequently confirmed. Mr Selepeng’s successor, effective from late June, is Eric Molale, previously the permanent secretary in the Ministry of Local Government. His appointment, rather than one of the existing staff in the office of the president, was taken as a sign that Mr Mogae is exercising his authority more decisively. Mr Mogae announces his HIV The first phase of clinical trials of an AIDS vaccine was scheduled to begin in status as vaccine trials begin Botswana in June. The Maiteko a Tshireletso (vaccine initiative) project is being undertaken as part of the Botswana-Harvard AIDS Institute partnership, which is also working on a study of the most effective combinations of anti-retroviral drugs (April 2003, page 17). In May, speaking at a national conference on progress made in achieving the objectives of Vision 2016, the government’s long-term policy strategy document (January 2003, page 18), Mr Mogae

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announced that he had tested negative for HIV. He is the third senior politician after the health minister, Joy Phumaphi, and Mrs Nasha to publicise their HIV status. Although this was widely welcomed, it may cause tension among some politicians, who have reacted angrily to media requests that all MPs should take and publish the results of an HIV test.

Problems with Zimbabwe Despite the ongoing conciliatory approach to its neighbour, Botswana has remain continued to be accused by the Zimbabwean government of interfering in its affairs. In May the Botswana Ministry of Foreign Affairs denied reports in the state-run Zimbabwe Herald newspaper alleging that Botswana was hosting a meeting between the US assistant secretary of state for African affairs, Walter Kansteiner, who was visiting the country, and the British foreign secretary, Jack Straw. This was followed by suggestions by a Zimbabwe African National Union-Patriotic Front official that Botswana had agreed that its Thebephatswa airbase could be used by US and British troops undertaking regime change in Zimbabwe. Bilateral relations continued to be inflamed by recurring complaints that Zimbabweans in Botswana were being roughly treated, including allegations of a “load and dump” strategy to deport illegal immigrants, while some Botswana MPs called for tougher immigration laws that specifically target Zimbabweans, a move that would violate Southern African Development Community (SADC) protocols.

Economic policy

Government considers report In late May the commission to review the structure of civil-service salaries, on public salary structures which had been set up in 2002 in response to unrest among groups of government workers led by teachers’ associations and the Botswana Unified Local Government Service Association (BULGSA; January 2003, page 21), reported to the president, Festus Mogae. While the report was being prepared, a series of comments from leading government figures, including the vice- president, Ian Khama, and the minister of finance and development planning, Baledzi Gaolathe, stressing financial constraints had led many to conclude that significant increases in salaries were unlikely. Linah Mohohlo, the governor of the Bank of Botswana (the central bank), was also accused of interfering in the commission’s review by praising the government’s earlier decision not to award civil servants a general cost of living increase in 2003 (April 2003, page 20). On receiving the report, Mr Mogae once again emphasised that it was a review of the structure rather than the level of salaries. However, the commission had raised expectations of salary increases, as was clear from comments by its chairman, Justice David de Villiers of the industrial court, who acknowledged that many of the submissions made were outside the commission’s terms of reference. For example, one proposal was for industrial class (semi- and un- skilled) government workers to receive a salary increase of over 70%.

The first round of pula- The first round of government, pula-denominated bond issues, which began in denominated bonds is issued March, was completed in May, with a total issue of P1.75bn (US$328m). Three bonds were issued with maturities ranging from two to twelve years. All were heavily oversubscribed, and there will be further issues of the three bonds later

in 2003 to bring the total issue to around P2.5bn. The coupons were 10.75% for the two-year bond and 10.25% for the longer maturities, compared with interest rates as high as 14% for short-term Bank of Botswana Certificates. Although there was some discounting in the auction price, this was offset by expectations of future falls in inflation together with the high level of demand among domestic investors, such as pension funds, for longer term, low-risk assets; and subsequent trading saw yields fall further. For two of the issues the central bank exercised its option to buy a portion so that it could help support secondary market activity (the bonds were launched with the aim of developing the local capital market and not to finance expected fiscal deficits). However, this has been very limited to date, a further reflection of the demand for the bonds among institutional investors.

Botswana: government bond issues, Mar to May 2003 Yield at trading Paper Auction date Maturity Issue (P m) Coupon Yield at issue (Jun 20th) BW001 May 31st 2 years 750 10.75% 13.00% 12.15% BW002 Mar 26th 5 years 500 10.25% 12.65% 11.05% BW003 Apr 30th 12 years 500 10.25% 11.50% 10.65% 90-day Bank of Botswana Certificate n/a 90 days n/a n/a n/a 13.60%

Source: Bank of Botswana.

New laws will affect business During the next sitting of parliament beginning in July, the government intends operations to table several bills that will affect businesses operations. • The trade bill, which aims to promote citizen economic empowerment, is thought to have more than 20 categories of “reserved” business (those saved for citizens only), and the trade and industry minister, Jacob Nkate, will have the power to “reserve” any type of business (including joint ventures with majority citizen ownership). The practice of “fronting”, under which licenses are obtained for others who would themselves be ineligible, will become illegal. Special licenses to make exceptions in otherwise reserved categories, and which can be granted at the discretion of Mr Nkate, may be used to introduce flexibility. There was some concern among business leaders that the trade bill might make it a legal requirement that all necessary work and residency permits are obtained prior to a business license being granted!the slow processing of these permits continues to be a major frustration for businesses. • Parliament will also consider a small business act, the main provision of which is the setting up of an autonomous body for the provision of skills training and technical support. Originally to be called the Local Enterprise Authority (LEA), there was last-minute pressure to change this to the Citizen Enterprise Authority (CEA), a reflection of continuing concerns that the government is doing too little to support citizen-run businesses. The name change was made despite worries that this would lead to confusion with the Citizen Entrepreneurial Development Agency (CEDA; April 2003, page 21). • The government has indicated that work to replace the foreign investment code, which was scrapped in the budget speech in February (April 2003, page 23), is expected to be completed by December. This work is being undertaken with assistance from the UN Development Programme.

CEDA’s image problems A press statement issued in June by CEDA reported that since its inception in continue February 2001 (April 2001, page 16), about P400m (US$78.4m) of funding has been provided for nearly 1,000 projects and 3,000 jobs have been created. Such positive spin on the agency’s operations was intended to help counter the generally negative publicity that it has received since it was set up. In May it was reported that funds available for lending in 2003 had already been exhausted, but this was denied by Thapelo Matsheka, the newly appointed chief executive officer of CEDA, who indicated that further funding of new projects had been suspended while internal procedures were being tightened up. This, in effect, confirmed concerns that expansion had been too rapid, including accusations that staff had stolen ideas for projects and that board members were abusing their powers by influencing funding decisions to help their own business activities. In June it was revealed that CEDA has started to take legal action against defaulters.

The domestic economy

Economic trends

Inflation figures are Annual inflation, as measured by the consumer price index (CPI), rose to 11.8% disappointing in May, from 11.4% in April. Although this was still below the 12.2% recorded in February, the increase will have disappointed the Bank of Botswana (the central bank), particularly as the increase in Botswana Housing Corporation (BHC) rentals in April 2002 had dropped out of the CPI’s annual calculation. There will be further upward pressure on inflation in June, when the next round of BHC rental increases come into effect. Annual inflation has remained above the 11.3% recorded in March, despite the slowdown in price increases for staple foods since the start of the year!inflation for cereal products fell from nearly 23% in January to 17% in May!owing to price increases in other food categories such as vegetables, and for other items, notably motor vehicles. The revisions to South African inflation data announced in May!which go back to early 2002! will not directly affect the Botswana CPI, as the component prices are directly measured in Botswana.

Growth in commercial bank Growth in commercial bank credit declined in the first few months of 2003, credit declines standing at 16% in April compared with nearly 20% at the start of the year. However, the central bank will have interpreted cautiously the signs that credit growth has been moving closer to its target range of 12.5%-14.5%. Although interest rate increases in late 2002 may have started to have some effect, the freeze on government salaries will also have had an impact that could be reversed by any increases arising from the review of civil-service salary structures (see Economic policy). Half-year results (November-April) announced by Letshego, a provider of micro-finance listed on the Botswana Stock Exchange, which show total loans growing at over 50%, suggest that demand for credit is still strong. The growth in lending by the Citizen Entrepreneurial Development Agency (CEDA) may also have diverted business away from commercial banks, which charge much higher interest rates along with high, albeit falling, transaction charges (April 2003, page 28).

Agriculture

President declares drought, In May the president, Festus Mogae, declared a state of drought across the sorghum farmers are angry country, and allocated funding of P270m (US$52.9m) for various drought-relief programmes. At the same time controversy broke out over the refusal by the Botswana Agricultural Marketing Board (BAMB) to buy the sorghum output of local farmers, preferring instead to source the supplies needed for its grain reserves from South Africa. Commercial farmers from the Pandamentanga area in the north of the country, some of whom are part of the Masedi project to develop commercial farming techniques for land conditions in Botswana, claimed that this broke a previous promise by the BAMB on which they had based the decision to plant sorghum rather than cotton, and that they now stood to lose heavily. The BAMB’s management countered that their decision to buy South African sorghum had been made some time ago and should have been known to the farmers, who have a representative on the board. Following appeals to the minister of agriculture, the government stepped in to provide additional funds to support the purchase of local produce.

Mining

Output at Jwaneng diamond In May Debswana (the diamond mining firm co-owned by the government and mine is to increase DeBeers) announced that the Aquarium diamond sorting project at the Jwaneng diamond mine, which had been delayed by technical problems, was finally coming on stream. This will fully automate the process of recovering rough diamonds from the mined ore and, by increasing recovery rates to nearly 100%, will help Debswana to meet its targets for increased output during 2003. In April a fire in the ore treatment plant at Jwaneng resulted in a 10-20% reduction in production for a few days, but the losses were expected to be made up during the year. The smelter at the BCL copper nickel mine reopened in March after being closed since early February in order to carry out emergency repairs. While it was shut, exports of copper nickel matte had ground to a halt.

Gallery Gold continues on In June, Gallery Gold, an Australian mining company that is listed on the track Botswana Stock Exchange, released the results of the feasibility study for the proposed development of its gold mine at Mupane, north of Francistown (April 2003, page 24). The results confirmed the extent of the previously estimated ore reserves and indicate that new discoveries will extend the life of the mine from seven up to 15 years. Using an assumed gold price of US$350/oz, the project has an internal rate of return of 21%. The project will be heavily reliant on debt financing and local financial institutions have been engaged in due diligence studies. The company indicated that once the necessary finance is in place and a mining license granted, development of the mine should begin during the third quarter of 2003 and mining operations start about 12 months later.

Manufacturing

Teemane Manufacturing may In late May Debswana announced that it was discussing the possible sale of its be sold to an Indian firm diamond polishing subsidiary, Teemane Manufacturing. The company, which is

based in Serowe in central Botswana, has been in operation for several years but has never been commercially viable, facing stiff competition from established polishing centres!particularly India, where labour costs are low. Debswana was faced either with continuing an unprofitable operation or carrying it as a developmental organisation. The potential buyer, an Indian firm, Diarough, has operations in Antwerp, southern China and India, and hopes that Teemane’s prospects can be improved through restructuring and access to an established marketing and distribution network. In April Diamond Manufacturers Botswana, the oldest of the three diamond polishing businesses in Botswana, announced ambitious plans to increase its output by developing a specific Botswana label for polished diamonds, which will link its marketing to tourism and may possibly extend to jewellery design and manufacturing. However, such a project would require a radical shake-up of Debswana’s existing marketing arrangements, under which all of its output is exported for sale through the London-based, De Beers-controlled, Diamond Trading Company. There has been no indication of such a proposal being seriously considered.

Closure of textile producer In May, Star Apparel, a Sri Lankan garment manufacturer, finally closed, putting embarrasses BEDIA several hundred people out of work. It had not been paying wages and was shut down following a court order to pay staff. At its peak, following its opening in 2001, it employed 600 workers. All of its products enjoyed duty-free status and quota-free entry to the US under the Africa Growth and Opportunity Act (AGOA). Its closure was an embarrassment for the Botswana Export Development and Investment Authority (BEDIA), which had persuaded the company to start operations in Botswana (based on persuasive incentives) and had spent several weeks trying to quash rumours that closure was imminent. This follows the earlier closure of a Francistown-based shoe company, similarly supported by BEDIA, and there has been speculation that two more closures are likely. BEDIA is currently undertaking a consultancy into the viability of the textile sector in Botswana, which, despite government support, has yet to become properly established. The consultancy’s findings may increase pressure on the government to introduce subsidies for water and electricity, the high cost of which in Botswana is widely cited as holding back industrial development. In April the chief executive of BEDIA, Mmasekgoa Masire-Mwamba, had stated publicly that more incentives are needed to attract exporters to Botswana.

Communications and infrastructure

Five airlines are interested in In June Air Botswana issued an information memorandum to five airlines that Air Botswana have expressed interest in buying a stake in the state-owned airline. The five were not identified, but were all reported to be African based, including three from South Africa. The deadline for replies has been set for early July and the announcement of successful pre-qualification bidders is to be made shortly after that. The proposed structure of the sale remains unclear, as the statement in the February budget speech that 45% would be sold to the strategic equity partner was contradicted by later official announcements that the share could be as high as 49%. The government will hold an equivalent share, some of

which!rumoured to be 20%!will subsequently be sold to the public via the stock exchange, while the balance will be reserved for airline staff. Nor was it clear how the activities of BEDIA, which has been trying to attract local investors to bid through a joint venture, will fit in with the process. The privatisation of Air Botswana has been actively planned since 1995, and is taking place independently of the recently formed Public Enterprises Evaluation and Privatisation Agency (PEEPA), raising concerns that it could set a precedent for future privatisations. PEEPA has already issued warnings that the privatisation programme must be properly co-ordinated (April 2003, page 22). In May Air Botswana announced new schedules, including a reduction in flights to Harare, a reflection of the troubles in Zimbabwe, but did not make any mention of the opening of a new route from Cape Town to Maun, which had been expected following vigorous lobbying by local tourist operators who want a direct link with South Africa’s major tourist hub.

BTC is ordered to halt In May the state-owned Botswana Telecommunications Corporation (BTC) lost restructuring a court case in which the manual workers’ union had demanded the right to represent its members in the negotiation of severance packages. The court also ordered that BTC could not proceed with its restructuring programme without consulting the union. The restructuring plan seeks to cut a third of almost 2,000 jobs in a bid to rescue the troubled company, which has built up large debts in the wake of technical problems with a new billing system and competition from mobile phone networks. The company had previously only been negotiating with the telecoms workers’ union, some of whose leaders have been accused of accepting lucrative jobs in the new structure.

Financial and other services

BSE investigates insider trading Botswana Insurance Holdings (BIHL), which is 56% owned by African Life, the South African financial services group, announced in June that four managers from two subsidiaries, Botswana Life Insurance (BLI) and Botswana Insurance Fund Managers (BIFM) have been suspended while under investigation by the Botswana Stock Exchange (BSE) for suspected insider trading. The allegations arose owing to concerns over the sale by BLI of a large holding in Letshego (a micro-finance provider) shortly after its listing on the BSE in September 2002. This caused a dramatic fall in the BSE’s Domestic Companies Index (DCI), which has yet to recover, despite the impressive results subsequently posted by the company. (The DCI has continued to lose ground, partly because investor interest has been fixed on the series of pula-denominated bond issues, and by late June was trading more than 11% down on the start of the year.) The charges do not appear to cast doubt on the legitimacy of the BLI share sale in itself, although investors may feel legitimately aggrieved that the intention to sell was not made known earlier. The BSE has acted quickly to investigate the affair and will emphasise the need for the regulations at the exchange to be revised, a point that has been made by both government officials and the BSE itself.

Members of the IFSC board The profile of the International Finances Services Centre (IFSC) was raised with are announced the announcement in early June that it is to have its own governing board!it

had previously operated as a division of the Botswana Development Corporation. The chairman, Quill Hermans, is a former governor of the central bank and is currently chairman of the commercial bank, First National Bank of Botswana. Apart from Mr Hermans, the remainder of the external members of the board are drawn from the government or parastatals. The government has recently been keen to promote the IFSC as slow progress in developing the centre is one reason for the delays in constructing the proposed financial services centre building. There have been some rumours that the project might be shelved altogether.

Foreign trade and payments

Central bank revises 2002 In its annual report for 2002, the Bank of Botswana (the central bank) issued balance-of-payments data revised balance-of-payments data for the year. Compared with the earlier figures produced at the time of the budget speech in February (April 2003, page 23) the main changes are a sharply reduced overall surplus (P336m!US$53.1m! compared with an original estimate of P1,396m) and a much higher deficit on the financial account (P3,322m compared with P1,303m). The main reason for the changes is the increase in outward financial flows associated with investments made by the new public officers’ pension fund, the full extent of which, including the impact on official foreign-exchange reserves and hence on the overall balance, only became apparent at the very end of the year.

Botswana: balance of payments (P m) 2001 2002 (original) 2002 (revised) Trade balance 4,149 4,078 4,078 Services (net) -1,010 -620 -620 Income (net) -801 -1,929 -1,741 Current transfers (net) 1,153 1,436 1,436 Current-account balance 3,492 2,966 3,153 Capital-account balance 34 99 99 Financial-account balance -2,976 -1,303 -3,322 Net errors & omissions 474 -367 405 Overall balance 1,023 1,396 336

Source: Bank of Botswana.

Negotiations with the US on a Negotiations between the US and the Southern African Customs Union (SACU) FTA are under way to establish a free trade agreement (FTA) finally got under way in the South African capital, Pretoria, in early June. Although all the parties concerned have expressed a commitment to establishing a FTA, there were some signs of tension within the SACU camp as South African businesses openly expressed concerns that the agreement could be delayed by the need to accommodate the interests of the four smaller members (Botswana, Namibia, Lesotho and Swaziland). At a pre-meeting in Washington in March the US had stressed the need for an FTA to include sufficient investor protection measures to counter the negative perceptions of doing business in Africa that are still prevalent among American businesses.