2015 Botswana Economic Report

Contents
1.

Executive Summary

2.

Current state of the Economy

3.

Medium term challenges and prospects

4.

5.

3.1

Slow pace of economic diversification, and employment

3.2

Risks to Revenue sources

3.3

Price shocks and global financial instability

Policy Recommendations

4.1

Economic Diversification & Export Competitiveness

4.2

Increased Engagements to attract FDIs

4.3

Encourage private sector participation in infrastructure markets

4.4

Unemployment

Appendices and Sources of Information

10

5.1

Country Statistics

10

5.2

South African Customs Union

15

5.3

Notes

17

2015 Botswana Economic Report

Abbreviations
BoB

Bank of Botswana

BWP

Botswana Pula

EDD

Economic Diversification Drive

FDI

Foreign Direct Investment

FY

Financial year

GDP

Gross Domestic Product

HRD

Human Resource Development

REER

Real Effective Exchange Rate

SACU

South African Customs Union

YoY

Year on year

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2015 Botswana Economic Report

1. Executive Summary
2015 is proving to be a tough year for Botswanas economy. Continued global
uncertainty and the slow pace of global economic recovery is exposing inherent
vulnerabilities and slowing economic growth. The main issues facing the economy are
as follows:
A. Heavy reliance on falling non-renewable mineral exports and fluctuating
customs receipts to fund government expenditure.
B. Insufficient diversification towards a focus on export promotion.
C. High unemployment, inequality and poverty.
D. Unreliable utility services (power and water supply) affecting local businesses
and FDI growth.
This report focusses on supply-side policies to address the above issues. Policy
recommendations should broadly cover the following:
A. Target

diversification

initiatives

to

improve

the

countrys

export

competitiveness.
B. Increase investor engagement to attract FDI, a powerful source of funding for
the countrys capital formation.
C. More engagement of the private sector in the development of domestic utilities
and services.
D. Skills gap based initiatives to target HRD activities.

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2. Current state of the Economy

Successive quarterly GDP contractions (exhibit 2.1) in 2015 have forced the
government to cut its GDP growth forecast by half to 2.6%. The central bank has
lowered short term interest rates twice this year to 6% (exhibit 2.2) to boost
consumption. The diamond mining industry, which contributes between 1020% of
GDP and nearly 80% of exports (exhibit 2.3), has slumped as jewellery sales have
stagnated amid weak global demand (exhibit 2.4). Growth in the non-mining private
sector slowed, continuing its downward trajectory to 4.3% from nearly 10% in 2011.
Modest GDP growth rates are expected between 2015 and 2017 of 3.2%, 3.8% and
3.9% respectively. Falling global demand for diamonds, falling credit growth due to
higher household indebtedness, as well as severe water and electricity constraints will
contribute to this slowdown.
The inflation rate of around 3% (exhibit 2.5) has been steady since April 2015 and
within the Bank of Botswanas (BoB) lower control bands (3% - 6%) due to stable
domestic prices, low credit growth and falling fuel and commodity prices.
The current account recorded surpluses during the last 4 years, peaking at nearly 10% of
GDP in FY14 (exhibit 2.6). In August 2015, total exports fell 61.9% YoY. Due to falling
export revenue for rough diamonds (down 9% YoY in Q2 2015), the balance of trade
overall is expected to weaken during the coming years.
Since the crisis, the government budget has posted small surpluses in FY13 and FY14,
but is expected to post a deficit in FY15 which will be funded by its foreign currency
reserves. Foreign exchange reserves have risen to nearly BWP 86 billion by September
2015 (exhibit 2.7). Total expenditure stood at 36% of GDP in FY14 and is expected to
increase by 6% this year.
Government revenues are expected to increase by 8% in FY15, buoyed by higher
minerals revenues (up 17%), SACU receipts (up 2%) and domestic tax revenue (up
9%). Fiscal policy, however, sees an emphasis on expanding the domestic revenue base,
reducing heavy reliance on SACU transfers and diamond exports.
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2015 Botswana Economic Report

Botswana's debt to GDP ratio has remained within the statutory limit of 40 percent of
GDP. It has however been increasing over the past few years, with debt (including
guarantees) to GDP ratio estimated at 23.2 percent in FY14.
The real Effective Exchange Rate (REER) which measures the countrys
competitiveness, remained stable in the first quarter of 2015.

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3. Medium term challenges and prospects

Botswana has bucked the problems affecting most resource cursed economies in SubSaharan Africa through many decades of good governance & prudent macroeconomic
management. Its one of the few upper-middle income economies in Africa. However
the country is still prone to adverse shocks from external and internal sources that may
have destabilising consequences. Current challenges include slow progress towards
economic diversification, inadequate employment creation, risk to revenue sources and
performance of key global macro-economic indicators.
3.1 Slow pace of economic diversification, and employment
Botswanas diversification efforts havent been as effective as hoped, especially
considering the number of initiatives and resources expended for this purpose. For
example, the areas of notable diversification such as telecom and financial services tend
to require high-skill labour and investment in these areas has had little impact in
reducing employment in the low-skilled problematic segment. In contrast, sectors such
as agriculture and manufacturing, which require low skilled labour, continue to show
poor performance and a deteriorating contribution to economic growth, despite
extensive support from the government.
The country is still plagued by a persistent unemployment rate of around 20% (exhibit
3.1). Income inequality, measured by the Gini coefficient, is one of the highest in the
world and local residents and businesses still suffer from acute power and water
shortages.
3.2 Risks to Revenue sources
Government finance is heavily reliant on diamond export revenues and hence
unsustainable in the long term. Apart from being a non-renewable, mineral revenues in
general are subject to external shocks. Additionally, SACU receipts, which contribute
nearly 30% of revenues, are uncertain and can fluctuate widely. Thus, the reliance on
these two sources of revenue poses risk and uncertainty regarding the stability and
sustainability of government expenditure programmes.
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2015 Botswana Economic Report

On the other hand, to grow domestic tax revenues (income and consumption taxes), the
government needs to sustain economic performance, reduce unemployment and
improve wage levels. Current estimates predict only a moderate annual growth rate for
the economy.
3.3 Price shocks and global financial instability
As a small export driven economy, Botswana is prone to potentially destabilising
inflationary pressures from both international and domestic sources. A sharp increase in
the cost of fuel or food could easily threaten domestic prices levels. This could
potentially lead to an inflationary cost-price spiral and economic instability. Price
instability can also be triggered within the local economy through an overheating
financial sector, natural disasters such as drought, inappropriate fiscal measures
(including subsidies and over-taxation), and adverse labour market developments.
Given the small size of the economy, Botswanas growth prospects and macro-economic
stability is highly dependent on a prospering global and regional economy, notably that
of South Africa. Thus, there is a need to proactively monitor the external environment
and make adjustments especially in the areas of exchange rate, industrial and trade
policy.

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4. Policy Recommendations
Botswana needs to make key policy decisions to deal with the economys over-reliance
on two key sources of revenue mineral exports and SACU receipts. Given this
backdrop, our policy recommendations are focussed around supply side improvements.
Supply side policies usually require considerable effort, resources and time to make
sustainable economic contributions, but I hope that mineral revenues and significant
foreign exchange reserves in the short-run will provide sufficient cushion to drive these
policies to fruition.
4.1 Economic Diversification & Export Competitiveness
The Economic Diversification Drive (EDD) is an increasing emphasis by the
government on attracting investment outside the diamond mining industry. As a result
there is a strong initiative to produce locally, however, the small domestic sector (a
small and sparse population of just over 2 million) impedes domestic producers from
reaching economies of scale and expanding industrial capacity without building export
competitiveness. Additionally, the EDDs priority sectors for intervention are based on
empowerment and poverty-reduction rather than export promotion or strategic
investment. Improvements in this area will guarantee a source of government revenue
and fiscal sustainability.
The government should make attempts to better understand why a strong track record in
governance and economic growth has still not dealt with issues such as high levels of
poverty, inequality and unemployment, and use this to drive economic diversification
initiatives.
4.2 Increased Engagements to attract FDIs
FDI volumes remain very small in absolute terms and only amounted to 2-4% of GDP
for most of the last decade. This is far below international standards. However, given
sustained low interest rates in advanced economies, the country has recently seen an
uptick in FDI inflows (exhibit 4.1). While for larger wealthier countries FDI does not
closely influence total gross capital formation, small export-dependent countries such as
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Botswana should exploit FDI as a major source of capital investment. Until now,
government spending has financed most of the capital creation activities (such as
infrastructure), but a stronger emphasis must be placed on attracting FDI to finance
these projects.
To help attract FDIs, the government needs to strengthen the countrys economic
governance by bringing more clarity to the regulatory and legal framework for
investment. The World Banks 2016 Doing Business report still ranks Botswana very
low on key metrics such as Starting a Business and Enforcing Contracts which
show that there is considerable room for improvement.
4.3 Encourage private sector participation in infrastructure markets
Private participation in most infrastructure sub-sectors remain low and has to compete
with public enterprises. Most utilities and services still remain state-owned and are
closed to private investors. The financing gap across infrastructure sub-sectors
(especially electricity and water supply) cannot be met through the public purse alone.
Along with public-private partnerships, the government should open the utilities market
to private participation. There should be transparency and adequate regulation to
encourage investment and to regulate tariffs.
4.4 Unemployment
Persistent structural unemployment is the biggest impediment to growth. In order to
successfully diversify the economy, the country will need to rely heavily on a specific
and specialized skillset of the workforce. Even though the government provides free
education, low levels of education-enrolment and low quality education when compared
to international standards seem to be affecting unemployment rate.
I recommend that the government conduct a skills gap analysis to shape national
education and training systems. A deliberate sectoral approach in its HRD activities
would allow Botswana to develop a competitive human resource base in economic
activities where the country could have comparative advantages over other countries in
the region.
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2015 Botswana Economic Report

5. Appendices and Sources of Information

5.1 Country Statistics

Exhibit 2.1

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Exhibit 2.2

Principal Exports Composition - August 2015

Exhibit 2.3

Textile

8% 1% 4%
6%

1%

Meat & Meat

Products
Machinery and
Electrical Equipment
Diamonds

80%

Copper/Nickel
Other Goods

Exhibit 2.4

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2015 Botswana Economic Report

Exhibit 2.5

Exhibit 2.6

Exhibit 2.7

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Exhibit 3.1

Exhibit 4.1

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2015 Botswana Economic Report

5.2 South African Customs Union

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5.3 Notes
Doingbusiness.org, (2015). Doing Business in Botswana - World Bank Group. [Online]
Available at: http://www.doingbusiness.org/data/exploreeconomies/botswana/
[Accessed 1 Dec. 2015].
Botswana Systematic Country Diagnostic. (2015). [PDF] World Bank. Available at:
http://wwwwds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2015/03/30/000442
464_20150330081059/Rendered/PDF/953040CAS0SCD0010Box385454B00OUO090.
pdf [Accessed 1 Dec. 2015].
Botswana - National Summary Data Page - Q2 2015. (2015). [PDF] Available at:
http://www.bankofbotswana.bw/assets/uploaded/NSDP-Sept-2015.pdf [Accessed 1 Dec.
2015].
Botswana International Merchandise Trade Statistic - Aug 2015. (2015). [PDF]
Available at: http://www.cso.gov.bw/images/bimtsaug15.pdf [Accessed 1 Dec. 2015].
Ministry of Finance and Development Planning bulletin. (2015). 2nd quarter. [PDF]
Available at: http://www.finance.gov.bw/images/Quarterly-EconomicBulletin/FINALQEBQ2201518Sept2015.pdf [Accessed 1 Dec. 2015].
Independent Online, (2015). Diamonds arent forever: Botswanas boom fades International | IOL Business. [Online] Available at:
http://www.iol.co.za/business/international/diamonds-aren-t-forever-botswana-s-boomfades-1.1941708#.Vl1dCvnhCUk [Accessed 2 Dec. 2015].
Finance.gov.bw, (2015). SACU Matters - Ministry of Finance. [Online] Available at:
http://www.finance.gov.bw/index.php?
option=com_content&view=article&id=52&catid=15&Itemid=164 [Accessed 2 Dec.
2015].

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