Botswana's minister of finance

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					                 cover story

             Economic Overview

The birthday boom
      Minister of Finance and Economic
      Planning, Baledzi Gaolathe, pictured
      here with fellow African finance
      ministers at an IMF meeting in
      Washington earlier this year.

       otswana’s minister of finance and eco-     healthy output from copper-nickel mines as       dropped to 1.3% from 3.2%, soda ash to
       nomic planning, Baledzi Gaolathe,          the international price booms in response to     1.4% from 1.5% but textiles – Botswana’s only
       declared recently in Gaborone: “We         demand from China. (See Mining overview).        manufacturing diversification success – in-
       must look to the future and keep to           Botswana’s current exports are dominated      creased to 4.7% from 1.4%. Vehicle assembly
our determination to have a better Botswana       by diamonds which over 2005 accounted for        export earnings also rose from 2.2% to 2.4%.
in the years to come. Things have been a bit      72% of the total P23.6bn revenue. Five years       Between 2004 and 2005, the pula, which
tough but the signs of better times are there!    previously, diamond exports had formed a         through a newly imposed exchange rate re-
We continue to have high international finan-     larger proportion of total exports (83%) but     gime is in a controlled slide against inter-
cial and development ratings. There is a lot to   had yielded less revenue to total exports of     national currencies, has boosted diamond
celebrate!”                                       P13.5bn.                                         revenues dramatically, up by 30% to P17bn,
   Botswana’s 40th birthday on 30 September          In response to increased world demand,        double the 15% gain over the previous five
marked the beginning of a new economic            copper-nickel exports grew by 9.8% in 2005,      years.
era. Whilst revenues from the four Debswana       up from 4.4% growth in 2004. In its first year     Botswana’s free trade agreement with South
mines remain the major ingredient of the          as an export commodity, gold contributed         Africa gives its manufacturers access to this
country’s economy, the icing on top is a gold     0.8% to the country’s earnings in 2005.          major regional market. The pula also man-
mine which came on stream in 2004 and the            Over 2001-2005, beef export earnings          aged to support an export-led diversification

20                                                                                                          African Business | October 2006
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                   cover story

             Economic Overview

drive as its lower value against the rand makes                                                                           for the last 10 years. However, it is now only
imports from Botswana attractive to South                                                                                 limping along in the shadows of the min-
Africans. The steady growth in exports, led by                                                                            ing boom. “We would like to have achieved
diamonds, has over the years enabled Botswa-                                                                              more,” Baledzi avers, adding “there has been
na to enjoy a continuous surplus on its current                                                                           some diversification, as measured by the con-
account – at around P2bn from 1996 to 2004                                                                                tributions to gross domestic product, but it
before soaring dramatically to P7bn in 2005.                                                                              has not been as good as we would have liked
   Botswana has also built up substantial for-                                                                            it to be. We are determined that during the
eign exchange reserves – standing at $7bn in                                                                              remainder of National Development Plan
April 2006.                                                                                                               Nine (to 2008/09) and beyond to scale up
   By avoiding extensive foreign borrowing, to-                                                                           our efforts”.
tal debt at the end of 2004/05 financial year was                                                                            Over the five years prior to 2001/02, the
P2.2bn – 11.2% of exports and 5% of GDP.                                                                                  contribution to GDP by the non-mining
   Interest rates in Botswana (16.5% prime and                                                                            sector of the economy was in steady decline.
15% bank rate) suffer from a stubbornly high                    South African visitors are the bedrock of Botswana’s      Tourism and manufacturing are major pillars
                                                                tourism sector, but increasing numbers of international
inflation. Monetary policy focuses on keep-                     tourists are enjoying the country’s many attractions.     of the diversification policy and the revival
ing inflation within a target range set by the                                                                            of a flagging agricultural sector is a political
Bank of Botswana of 4%-7% for 2006, with a                         Exchange rates are ‘managed’ to minimise               and economic priority; yet the contributions
medium term objective of 3%-6%, compara-                        currency appreciation as a result of grow-                provided by agriculture and manufacturing
ble with the inflation target of neighbouring                   ing mineral exports, which tends to under-                slid, as did that of the banking and business
South Africa.                                                   mine the competitiveness of non-mineral                   sector.
   Year-on-year inflation as at July 2006 was                   economic activities, thus deepening depend-                  There was a 30% increase in the non-min-
11.9%, but is expected to fall within to its                    ence on minerals. The ‘crawling peg’ ensures              ing sector over 2001/02 to 2003/04, but this
target range by mid-2007. If this does happen,                  the exchange rate is adjusted on a gradual                was largely fuelled by growth in general gov-
there will be a strong case for an interest rate                basis in order to prevent further competitive-            ernment; to a lesser extent by gains in bank-
reduction by late 2006 or early 2007. There are                 ness problems. This should remove the need                ing and general business and tourism-related
no exchange controls in Botswana. Profits can                   for any substantial devaluation and provide               air transport. These gains were partly reversed
be freely remitted and capital moved in and                     greater certainty in investment planning. The             over 2004/05 by losses in the tourism-related
out of the country without restriction.                         rate of crawl is related to the difference be-            industries and manufacturing.
   The pula has a ‘crawling peg’ exchange rate                  tween Botswana inflation and the average                     The now-booming mineral sector has,
and is tied to a basket of currencies compris-                  inflation rate of trading partners. At present it         however, had mixed fortunes over previous
ing approximately two thirds the South Afri-                    is implemented on a daily basis and amounts               years. Its gains during 1995/96 to 2000/01
can rand and one-third the Special Drawing                      to some 5% per year.                                      which took it to a 47% share of GDP from
Right (SDR – itself a currency basket com-                                                                                34% share of GDP, more than offset the losses
prised of the US dollar, euro, British pound                    Mining overshadows diversification                        of the non-mining economy; but to 2003/04
and Japanese yen). The longer-term trend is                     The policy to diversify the economy away                  its contribution had slid back to the 1995/96
of pula depreciation against the major inter-                   from an overwhelming reliance on mineral                  level which was not altogether compensated
national currencies.                                            revenues has been aggressively implemented                for by the gains in non-mining. Boosted by
                                                                                                                          the increase in mineral revenues it has started
                                                                                                                          to climb and over 2004/05 reached 38% of
  Accommodation                                                                                                              “More recently the mineral sector has done
  Mondior Summit Hotel’s easy elegance                                                                                    very well. We have sold more diamonds, cop-
  Having stayed there, African Business can highly recommend                                                              per-nickel prices have improved – the sector
  staying at the Mondior Summit Hotel which is in the heart of the
  city of Gaborone. The décor and styling is thoroughly modern                                                            has gained ground,” Gaolathe says. But it has
  but the ambience is of easy African elegance. It is ideal for both                                                      lost ground in terms of the proportion it con-
  tourists and the increasing number of international business
  travellers. The hotel is near government offices and the business
                                                                                                                          tributes to the GDP.
  district and within easy reach of shops and restaurants.                                                                   There is more cash – budgeted mineral
      The Mondior is equipped with a swimming pool, an art gallery                                                        revenue of P11.5bn in 2006/07 against P7bn
  and a museum and the restaurant attached to it offers some of
  the best cuisine in the city.                                                                                           five years ago – but its percentage share of
      Accommodation comprises a choice of studio, one bedroom                                                             overall revenue will have dropped to 45%
  and two bedroom suites with a lounge area, TV, kitchenette, fridge
  and microwave.                                                                                                          from 55%. The extra P4.4bn earned is ear-
      Conference and meeting facilities are available and the hotel                                                       marked to fund more development over the
  provides a free airport shuttle.
      As African Business can attest, the hospitality provided by the                                                      next 40 years, create jobs and to continue to
  management and staff was first rate.                                                                                     fight HIV/Aids.
  Interior, Mondior Summit: Easy African elegance.                                                                            By 2006/07 overall government spending
                                                                                                                            will have jumped over five years from P14bn

22                                                                                                                       African Business | September/August 2006
to P23bn – the 2006/07 budget figure. Over          TraNsPOrT
the short term there will be annual develop-
ment spending of at least P6bn.
   “We have budgeted P6bn for this year and          Air Botswana set for privatisation
we do not expect this figure to go down in the       Botswana’s national airline is set to be       the privatised airline is expected to play a key role
coming few years. The government is invest-          the first government owned entity to be        in developing tourism in Botswana, tourism CEO
ing more in the country,” Gaolathe says.             privatised. “The privatisation process         Myra Sekgororoane told African Business.
   “The revenue from mining is expected to           is on track and I am confident it will be         Although tourism is an engine of sustainable
                                                     completed by the end of the year,” chief       growth in Botswana, its own development
grow more slowly than in previous years but
                                                     executive Lance Brogden told African           planning is still in its infancy. The new minister
revenues from other sectors is coming up and         Business. There have been three bids for       is planning extensively – see African Business
there have been increases of up to 50%.”             the airline.                                   December 2005 – and a tourism board has
   Major amongst these sources of increased             “Government is open to receiving            been established. However, no development
revenue are the tariffs derived from the five-       proposals concerning ownership,                announcements are expected until early in 2007.
                                                     franchising, concessions, partnerships            “The board will essentially be a marketing
nation (Botswana, South Africa, Namibia, Le-         or any other proposed business model,”         organisation and work to establish joint business
sotho, Swaziland) Southern African Customs           Brogden said. A liberalised approach had       ventures between citizens and foreign investors,”
Union (SACU), but this is not sustainable in         been taken – no preset limits on equity, no    Sekgororoane said. Government is keen that
the longer-term.                                     fixed ideas on management – so as not to       citizens benefit more from tourism, an industry
                                                     inhibit or constrain potential interest.       controlled almost exclusively by foreigners. There
   Regularly improved payments from SACU
                                                        A meeting on 11 August gave bidders         will be emphasis on private sector involvement in
over the past five years have resulted in record     the opportunity to ask questions about the     the industry.
receipts of almost P5bn expected in 2006/07,         airline and the bidding process. The bidders      “The government’s decision to establish
up from around an average of P1.5m a year            had until 23 August to complete their          the Botswana Tourism Board
since 2000. But as tariffs are reduced to en-        due diligence exercises on Air Botswana.       as a separate institution was
                                                     Final bids had to be in by 30 August and       in recognition of the fact that
courage trade, there will be less revenue from       the three received were from: SA Airlink       functions such as marketing are
this source.                                         of South Africa, African World Airways, a      best done outside of government,”
   “At the end of the day, the SACU members,         privately owned air transport operator, and    Sekgororoane added.
like other countries in the World Trade Or-          Lobair, a consortium of local businessmen.
                                                        “The bids are now being evaluated.
ganisation, are under pressure to reduce tar-
                                                     Negotiations will then take place between
iffs which means that money in the customs           the government and the winning bidder,”
pool will be reduced,” Gaolathe explains.            Brogden said “Privatisation is essential
   Also, the 14-member Southern African De-          to ensure an efficient, effective and
velopment Community (SADC), of which                 sustainable aviation service for Botswana.
                                                     A modern, commercially operated
Botswana is a leading member, will be operat-        enterprise will be able to move quickly
ing a free trade area by 2012.                       within the complex and challenging aviation
Caution over spending                                   Also to have considerable private-sector       Above: Air Botswana: Ready for privatisation take-off.
                                                     input is a new tourism industry, in which         Inset: Air Bots’ CEO Lance Brogden.
Although with the increased revenue – Bot-
swana’s ‘birthday boom’ – finance minister
Gaolathe will be able to loosen the purse          1.5% of the workforce. However, it clearly          has rated Botswana’s foreign currency risks A
strings and help the nation celebrate the 40th     stimulates other activities: directly, the indus-   and local currency as A plus – but comment:
anniversary in style, he does not want to          try contributes a third of GDP, indirectly there    “The ratings are constrained by the narrow
change his cautious management of Botswa-          would be little produced without it. De Beers       economic base. This is of particular concern
na’s finances.                                     says that approximately 25% of jobs in Bot-         because of uncertainty over how the authori-
   “We will not allow any revenue or expendi-      swana are linked to the diamond industry.           ties will cope with limited potential for ad-
ture that might disrupt our planning. We plan         “Mining does lead to the import of capital       ditional diamond output.”
for expenditure of about 40% of GDP. We con-       equipment and the associated customs rev-              Botswana does not borrow from the In-
tinue to live within our means, we do not over-    enues; revenues from mining stimulate other         ternational Monetary Fund (IMF), nor have
load the country with debt,” he says. Over the     diversification, but the unemployment in our        there been any suggestions that it will un-
last 10 years the debt burden has not exceeded     country is a worrisome thing,” Gaolathe in-         dertake any IMF structural adjustment or
27% of exports; it is now close to 10%.            sists.                                              stabilisation programmes. However, while
   Gaolathe continues to be worried about             While lauding Botswana’s diamond-spar-           commending Botswana’s record of economic
what he considers Botswana’s stubbornly high       kling economic performance, rating agen-            management, the IMF points out potential
unemployment. “We know that in the region          cies Moody’s and Standard & Poor’s (S&P)            problems, which largely reflect the concerns
they talk of much bigger figures – up to 40%       are concerned over the lack of long-term            of the ratings agencies. “Economic growth
unemployed – but figures above 20% are not         sustainable development. Both maintain the          rates in the medium term are likely to be
comfortable for us,” he says.                      country’s investment grade credit ratings           somewhat slower than in the past, due to the
   Mining, particularly diamond mining, is         – Moody’s is A2 for foreign and A1 for do-          slowdown in diamond export growth,” it said
capital intensive and employs no more than         mestic currency government debt issues, S&P         in February 2006. g

African Business | September/August 2006                                                                                                                        23

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