Figure 1: Real GDP growth (S)

Figures for 2010 are estimates; for 2011 and later are projections.

Figures for budget balance refer to fiscal year April (n)/ March (n+1).
Figures for 2010 are estimates; for 2011 and later are projections.

The global economic slump hit demand for Botswana’s main export, diamonds, and led to a severe decline in government revenue, threatening to stall the hard-earned progress towards achieving the aspirations of its Vision 20162 programme. Total government revenue declined by 8.8% in fiscal year 2009/10, with revenue from mineral taxes and royalties falling 32.9% in 2008/09. For fiscal 2010/11, total revenue including grants is estimated to fall to 34.9% of GDP from 35.2% in the previous year to September 2010, reflecting reduced customs revenue. Receipts from the Southern African Customs Union (SACU) revenue pool are expected to fall by 24% in fiscal 2010/11, resulting largely from overpayments from the pool in previous years. Despite the decline in revenue, the overall budget deficit is projected to narrow – from 11.1% of GDP in fiscal 2009/10 to 6.9% in fiscal 2010/11 and then to levels around 6% in fiscal 2011/12. Financing of the budget deficit and moving towards a balanced budget in 2012/13 will be achieved through the draw-down of savings, sales of government bonds and external borrowing.

Botswana’s public expenditure is geared towards provision of social services and infrastructure development in support of economic diversification. Spending on education accounts for around 25% of the budget and health 7%. Capital spending accounts for some 30% of the total budget, focusing on priority projects to promote the economic diversification drive. Major infrastructure projects commissioned prior to the global financial crisis were airport expansion, road construction, power generation and dams.3 Such capital spending will fall as the projects near completion. Public debt service is minimal given Botswana’s tradition of budget surpluses before the global economic slump. However, the recent sharp increase in public debt from 2.6% of GDP in 2008/09 to around 19% in 2010/11 will certainly see expenditure on external debt service increasing in the long run.

Table 4: Public finances (percentage of GDP)

Fiscal year July (n-1)/June (n).
Figures for 2010 are estimates; for 2011 and later are projections.

The Bank of Botswana’s monetary policy objective is to keep inflation within its 3-6% target range. Although the medium-term outlook for inflation is positive, the impact of a two percentage points increase in VAT may delay achievement of the inflation target. After declining to 5.8% in December 2009, inflation rose to 7.8% in May 2010 as the government hiked controlled prices, for example for electricity, and raised VAT. Although inflation averaged 7% in 2010, it is expected to ease back into the central bank’s target range in early 2011 – assuming there is no substantial increase in administered prices and government levies. The inflation rate should also be helped by continued moderate inflation in South Africa, the main source of Botswana’s imports. Recent sharp rises in global oil and food prices, however, make for some uncertainty on the forecasts.

The Bank of Botswana cut its prime lending rate from 15.5% in September 2008 to 9.5% in December 2010 to help boost the economy. Easier credit stimulated private sector investment, as reflected in the increase in loans and advances to public and private enterprises by 20% over the period 2008-10. The Bank of Botswana continues to maintain low interest rates, in line with other SACU members, to bolster domestic investment. Overall, the prevailing monetary policy stance seems to be consistent with achievement of the 3-6% inflation objective.

Botswana’s competitiveness improved slightly as the Pula depreciated 7.4% against the South African rand but appreciated by 3.6% against the US dollar in 2010. Given the decline in inflation and the economic recovery, the real effective exchange rate is expected to remain relatively stable, with only a marginal depreciation in 2011 and 2012.4

The current account balance showed substantial improvement following the recovery in mining exports in 2010 and the overall increase in non-mining exports. Consequently, foreign exchange reserves improved to around 17 months of imports of goods and services by December 2010, against 11 months towards the end of 2009. The recovery in exports driven by a rebound in demand for diamonds should improve foreign exchange earnings and consequently the current account balance.

Table 5: Current account (percentage of GDP)

Figures for 2010 are estimates; for 2011 and later are projections.

Botswana compares favourably on a variety of competitiveness indicators, key for private sector investment. In the World Bank’s 2011 Ease of Doing Business report Botswana was ranked 52 out of 183 countries, the third highest in Africa after Mauritius at 17 and South Africa at 34. Botswana could rank much higher had it not been for the costs of being a land-locked country.5In terms of governance, Botswana leads in most aspects of combating corruption. The country was ranked 33 out of 178 countries in the Transparency International 2010 Corruption Perception index, ahead of all its sub-Saharan African peers. According to the Mo Ibrahim Foundation’s Index of African Governance, Botswana was ranked third out of 53 African countries in 2010 behind Mauritius and the Seychelles. Moreover, in the 2010 Global Peace Index, Botswana is among the world’s peaceful countries, ranking 33 out of 149, just behind Singapore, France and Great Britain.

The government has established special programmes to develop the productive capacity of the private sector. The Citizen Economic Empowerment (CEE) programme is among such initiatives that aim at creating and promoting an educated and healthy nation. It also aims to create economic opportunities for the private sector through large projects and building up capacity. The programme is implemented by two major non-governmental bodies – the Citizen Entrepreneurial Development Agency (CEDA) and Local Enterprise Authority (LEA), which offer funds, training and mentoring services to individuals wishing to venture into businesses. The government’s move to outsource most of its services from local groups is also aimed at stimulating local production and promotion of small and medium-sized enterprises.

The financial sector is a key element for growth and diversification of Botswana’s economy. The financial sector proved resilient to the global financial crisis because of the robust supervisory standards set down by the Bank of Botswana. No bailouts were required.

The Botswana banking sector is well developed. By end 2010, there were eight commercial banks, with ABN Amro Bank establishing a presence in 2010 to service the diamond industry, building on its traditional role in the industry. Botswana non-banking financial institutions are also making headway, following the establishment of a regulator – The Non-Banking Financial Institutions Regulatory Authority (NBFIRA) in 2008.  By end-2009, there were 103 pension funds with total assets valued at 32.4 billion pula (BWP) or some 39% of GDP.6 Pension funds in Botswana are, however, constrained by limited domestic investment opportunities, leading to over 60% of its financial resources being invested offshore. The insurance industry is also significant, generating gross premiums of around 3.15% of GDP by end-2009.

The Botswana International Financial Service Centre (IFSC) established in 2003, promotes cross-border investments in the financial sector. The IFSC aims to make Botswana a world class hub for cross-border financial and business services. The IFSC attracted 45 companies by 2010 with cumulative capital of over BWP 6 billion and employing around 600 workers in specialised professions. Besides existing preferential treatment in processing of employment permits for its foreign employees, further changes in 2010 made it quicker to process residence permits for the IFSC’s accredited companies.7

The Botswana Stock Exchange (BSE), formally established in 1989, is an important part of the country’s financial services sector. The BSE is one of the best performing stock exchanges in southern Africa with average aggregate returns of 24% in the past 10 years and is the third largest in terms of market capitalisation.8  In 2010, the BSE introduced trading of an Exchange Trade Fund – a basket of shares that trade as a single security. It is hoped this initiative will boost liquidity on the BSE, which is currently very low. Market gains reflect the performance of the banking sector, which accounts for more than 60% of BSE listed shares.

Botswana’s central policy objective, as identified by National Development Plan 10 (2009-16), is to diversify the economy away from mining, a move seen as even more important following the global financial crisis and economic slump. To this end, the government has identified six areas for special attention – diamonds, transport and logistics, innovation, agriculture, education and health. The financial services and tourism sectors, led by the International Financial Services Centre (IFSC) and Tourism Commission, aim to transform Botswana into a global financial centre and a South African tourist destination.

Tourism has significant potential for foreign earnings in Botswana as over 17% of the land is reserved as parks characterised by unique attractions. Among these are the Okavango Delta – the largest inland delta in the world – and Chobe National Park, home to a large elephant population. Although the contribution of the tourism sector to the overall economy is low, at around 4.2% of GDP, the sector generates about 11,000 jobs. Initiatives underway to promote tourism include building up air services into the capital Gaberone and the upgrading of other airports around the country. A major challenge facing the tourism sector is lack of local experts.9

To move up the value-added ladder in the diamond industry, cutting and polishing factories have been established, with 16 factories and some 3 000 jobs created by September 2010. In the regions, for example Selebi-Phikwe, diversification is another strategy that looks beyond the closure of copper and nickel mining operations there.10 The aim is to develop resources in the region, focusing on agriculture, manufacturing and tourism by using the infrastructure put in place.

Agriculture is important for both food security, meeting about 40% of domestic demand, and exports. Significant attention is paid to livestock production, Botswana’s main agricultural export. The establishment of a new Foot and Mouth Disease (FMD) laboratory by the Botswana Vaccine Institute is among measures taken to guarantee quality and competitiveness of its beef exports. The current construction of three large dams will significantly boost water supply for agricultural production.11

 

The economic diversification drive also rests on the good performance of public enterprises, among which counts the Botswana Development Corporation (BDC), the leading investor and lender with a portfolio covering diverse sectors of the economy. According to its 2009 Annual Report, the BDC seems to have performed well and is currently implementing a number of projects, including glass and steel manufacturing which were expected to have created over 500 direct new jobs by end-2010. Privatisation of public enterprises has been slow since its inception in 2005 but has recently gained momentum with the naming of Botswana Telecommunication Corporation and the National Development Bank as the next candidates for sale. In an effort to promote Public-Private Partnership (PPP) for infrastructure development, the government is establishing a PPP co-ordinating unit with the Ministry of Finance.

Chinese embassy figures show imports from China rose steeply from USD 11.5 million in 2000 to USD 360 million in 2008 while Chinese investment in Botswana came to USD 73.6 million by 2009. In terms of technical assistance, more than 120 Chinese personnel work on land survey and project planning, while 12 medical teams comprising around 300 personnel have been seconded to Botswana to make up for a shortage of medical staff in the country. To contribute further to capacity building, China has sponsored over 300 government officials in various seminars and training courses and is currently funding a multi-purpose youth centre in Gaborone at a cost of around USD 10 million. By November 2010, there were 27 Chinese enterprises in Botswana engaged in construction, communications, power generation, water conservation, transportation, mine prospecting, textile fabrication and trade.

Botswana is a multi-party constitutional democracy, where elections since independence in 1966 have been freely and fairly contested, and held on schedule. The country has an Independent Electoral Commission whose mission is to facilitate the formation of democratically elected governments by delivering transparent, free and fair elections in accordance with the established legal framework in Botswana and internationally accepted principles and standards. In the event, opposition parties have made no headway against the Botswana Democratic Party (BDP) which has ruled the country since independence. The other major political parties are the Botswana National Front (BNF), Botswana Congress Party (BCP) and Botswana Movement for Democracy (BMD).

The BDP under President Ian Khama was returned to power in the last elections held in October 2009. The BDP has a commanding majority parliament with more than double the number of seats than the 17 held by the opposition combined.

The private sector accounts for some 56% of total employment, followed by the central government at 30%. Local government and semi-state bodies account for another 9% and 5%. Public and private sector employment recorded marginal growth of 3% and 1.8% in 2010 in the aftermath of the global slump.

MDG progress is encouraging.  According to Botswana’s second MDG progress report released in November 2010, significant progress has been made since 2004 following comprehensive public sector reform initiatives. Notable achievements include continued reduction in poverty levels, from 47% in 1993 to 30.6% in 2002 and around 23% by 2009. Botswana is likely to achieve the MDG universal primary education target by 2015, having recorded a high net enrolment rate of 85.8% and a low dropout rate of 6% in 2009. Gender parity has been achieved in primary and secondary education – in 2009, girls accounted for 48.8% and 51.9% of enrolment in primary and secondary education.12

Improved health care has impacted positively on the welfare of the Botswana population. Both infant mortality rates and the number of underweight children below the age of 5 dropped steadily between 1996 and 2008. The maternal mortality rate also declined substantially from 326 deaths per 100 000 live births in 1991 to 198 in 2008. Botswana has consistently improved its health service infrastructure and facilities, coupled with increased employment of qualified physicians and other medical personnel. The health infrastructure network comprises 31 hospitals, 243 clinics and 340 health centres. By 2009, more than 95% of the population had access to a health facility within a radius of eight kilometres. The proportion of the population with access to potable water and sanitation was 95.8% and 79.8% in 2007, with the prospect of further improvement following continued investment in social services.13

The HIV prevalence rate in Botswana is among the highest in the southern Africa region.  The Botswana AIDS Impact Survey III, conducted in 2008, found a national HIV prevalence rate of 17.6%, little changed from 17.1% in 2004. Female HIV prevalence is higher at 20.4% against 14.2% for males. The National AIDS Co-ordinating Agency and its partners are working on the second National Strategic Framework (NSF), which will cover the 2010-16 period. The first NSF programme was recognised internationally as a well co-ordinated, aggressive initiative to deal with the HIV/AIDS pandemic. Botswana faces higher spending to cope with increased demand for HIV testing, counselling and provision of anti-retroviral therapy services.