During the second quarter of 2006, Botswana's economy showed some signs of recovery, though exports performed better than domestic sectors. Inflation peaked in April at 14.2% and is expected to continue declining through the year. Recent liberalization measures in telecoms were welcomed and privatization of state assets was announced. The mining sector benefited from higher commodity prices, though the performance of the non-mining economy remains weak. Long-term forecasts show the Pula reaching parity with the Rand in 5 years, and adopting a floating exchange rate remains challenging due to the structure of Botswana's foreign exchange market.

1. Bifm Economic Review 2nd Quarter 2006
Economic Review
the proportion of “satisfied” firms is still less year, notwithstanding some price falls in June
Summary of than half of the total. There is also a striking and generally increased price volatility (see
Economic contrast between exporting firms and those
focused on the domestic market, with 75%
figure 3). This has helped to support
continued prospecting and related activity,
Developments of exporting firms satisfied, as against only
39% of non-exporters, suggesting that
which raises the prospects of new mining
operations in the future. There are a number
Dr Keith Jefferis, domestic market conditions remain weak,
with inadequate growth in domestic demand.
of mining and related projects in the pipeline,
including a nickel refinery and mine expansion
Chairman of Other evidence provides a mixed picture.
at the LionOre/Tati Nickel mine near
Francistown; the Mmamabula coal mine and
Data on the growth of bank borrowing
Bifm Investment suggest an upturn in private business sector
export power station south of Mahalapye
being promoted by CIC Energy Corp; the
Committee activity, with credit to this sector in April
growing by 16.8% year-on-year, the highest
Dukwe copper mine, for which African
Copper have just completed a capital-raising
rate for 2 years. However, data on electricity
exercise; and two new diamond mines
consumption indicates a different picture,
D
(Diamonex in the Tuli Block and African
with the growth rate of non-mining electricity
Diamonds near Orapa, both at the advanced
consumption continuing a decline that started
feasibility study stage). Other possible projects
in early 2005 (see figure 2). To the extent
uring the second quarter of 2006 include zinc-lead-silver mining in Ngamiland
that data on electricity consumption provides
the economy showed some signs of and gas (coal bed methane) production in
a good indication of business activity, it also
recovery, although with a sharp contrast the Central District.
shows a sharp contrast between the mining
between export sectors and those focused and non-mining sectors of the economy, with Recent months have seen some positive
on the domestic market. After reaching the performance of the mining sector developments with regard to economic
a peak of 14.2%, inflation started to reflecting the business confidence results for reforms. A broad package of liberalisation
decline and should continue falling export firms noted above. measures in the telecoms sector was
through the rest of the year, raising the announced, which will finally permit internet
prospect of interest rate reductions in The performance of the mining sector has
telephony (VoIP), and remove Botswana
due course. Economic prospects were also been helped by higher copper and nickel
prices, which have risen sharply during the continue...
boosted by a welcome, if overdue,
package of liberalisation measures in the
telecoms sector, and the announcement
that Botswana Telecoms and Air Figure 1: Business Confidence Index
Botswana are set for privatisation.
Economic Activity
After a period of stagnation in the domestic
economy dating back to 2004, there are
some signs of recovery. Although there are
no new GDP data – the most recent data
only cover the period to June 2005 – other
indicators are moderately positive. The Bank
of Botswana’s semi-annual business
expectations survey shows an increase in the
proportion of firms rating current business
conditions satisfactory, up from 28% in
September 2005 to 43% for March 2006
(see figure 1). While the increase is welcome,
the improvement is off of a low base, and

2. 2 Economic Review
Figure 2: Electricity Consumption Growth Figure 3: Copper and Nickel Prices 2006
Telecoms monopolies over domestic fixed made, it is clear that more fundamental order to improve transparency and confidence
line voice communications and the problems remain with the CPI, as this is not in the quality of the CSO’s output, a
international gateway. Although long the first time that a significant mistake has permanent independent audit of CSO’s
overdue, these reforms are nonetheless been made (and later corrected) in the statistical calculations should be introduced.
welcome and should go a long way towards inflation calculations. As noted earlier, there Some of the CSO’s core activities could also
improving competition and efficiency in the is an urgent need for a new CPI basket, based be considered for privatisation.
sector, and should help to bring down prices on the 2002/03 Household Income and
Moving to the actual inflation numbers,
and raise competitiveness. The government Expenditure Survey (HIES), as the current
inflation fell from a revised 14.2% in April
has also announced that Botswana Telecoms basket is almost certainly causing measured
to 13.5% in May, indicating that inflation
is to be privatised once a strategic equity inflation to be biased upwards. When the
probably peaked in April as we had earlier
partner has been identified, and furthermore new basket is introduced, the old and new
predicted. We forecast that inflation will
that offers to buy Air Botswana are also being baskets should be run concurrently, enabling
decline slowly through the rest of the year,
evaluated. an accurate assessment of the extent of the
as the direct effects of the May 2005
bias in the current basket. Other unexplained
Inflation devaluation drop out of the calculation (see
technical discrepancies also regularly appear
figure 4). Inflation should end the year at
The 2006 inflation data from the Central in the inflation calculation, and these need
around 10% and reach around 8-9% early
Statistics Office (CSO) was revised in April. to be resolved with the introduction of the
in 2007, still above upper end of the Bank
As was pointed out in the Bifm Economic new basket.
of Botswana’s (BoB) inflation target. The high
Review for the first quarter of 2006, the
The cost of such statistical errors can be level and slow decline of inflation makes it
original inflation data was clearly wrong, due
extremely high. For instance, interest rates unlikely that there will be any rapid reduction
to the way in which the January 2006
on the government bonds issued in 2003 in interest rates, even though there is a strong
reintroduction of fees for government
were determined in relation to inflation rates argument that interest rates in Botswana
secondary schools was incorporated into the
that were subsequently corrected and revised remain too high.
inflation calculation. While the revised inflation
downwards, perhaps causing the government
data generally addresses this issue, the basis Exchange Rates
to pay higher interest on the bonds than it
for the CSO’s revisions was not clearly
needed to. Similarly, the likely upward bias Pula foreign exchange rates have been highly
explained, and there is reason to believe that
in current inflation rates due to an outdated volatile in May and June, due largely to the
even after the revisions, the weight of school
basket may be causing current interest rates instability of the rand against major
fees in the Consumer Price Index (CPI) basket
to be higher than they need be. Given that international currencies. This in turn reflects
remains excessive relative to their importance
all of this is very costly for the economy, it a number of factors, including general
in consumption patterns.
would be a wise (and profitable) investment weakness of emerging market currencies,
The new inflation numbers appear to be a for government to devote significant declines in commodity prices, and concerns
more accurate reflection of current inflation additional resources to the CSO to raise about the size of South Africa’s current
(significantly reducing the gap between core technical capacity and ensure that account deficit and uncertainty over its
and headline inflation, for instance). And international standards for economic and
while it is good that a correction has been other statistics are being met. In addition, in continue...

3. 3 Economic Review
Figure 4: Inflation – Actual and Forecast Figure 5: Pula Exchange Rates
continued financing by capital inflows. As Botswana’s current exchange rate policy and prerequisite for a move towards a floating
the rand has fallen against the US dollar, the the rate of crawl of the basket peg. exchange rate regime, whereby the exchange
pula has appreciated against the rand and rate is determined in the interbank foreign
When it was introduced, the crawling peg
depreciated against the dollar through the exchange market rather than by the BoB as
was the subject of rumour and speculation
operation of the pula basket mechanism (see at present. Such developments would be
that it would cause the Pula to reach parity
figure 5). General expectations are, however, encouraged by a further widening of the
with the rand in the near future, and that
that the rand will recover from present levels BoB’s trading band over time.
when this happened, Botswana would rejoin
and that much of the impact of recent
the Common (rand) Monetary Area (CMA). The adoption of a floating exchange rate
weakness will be reversed before the end of
Both of these are unlikely, however. Our would imply a diminution of the role of the
the year.
forecasts show that while the Pula is indeed BoB in fixing the exchange rate, and in turn
A year after the May 2005 devaluation, we likely to reach parity with the rand at some enable a more effective monetary policy (a
can assess whether its objective of achieving point in the future, this will take at least five fixed exchange rate imposes constraints on
improved competitiveness through a years (see figure 7). Recent developments domestic interest rates and the ability to
depreciation of the real effective exchange implement an independent monetary policy).
should have reminded market participants
rate (REER) has been achieved. As figure 6 and observers that movements in the Pula- In some ways a more flexible exchange rate
shows, there has been considerable real rand exchange rate are not only in one is desirable, and would be in keeping with
depreciation, and the level of the REER is direction. the exchange rate policy adopted by many
now close to the level that prevailed back in countries, in combination with an active
2001-01, and is not far above its average Whether reaching parity would prompt a
monetary policy framework, such as inflation
during the 1990s. Although there was some move to rejoin the CMA is an uncertain but
targeting.
initial erosion of competitiveness gains as important issue; however, it is a policy
inflation rose after the devaluation, it now decision, not simply a matter of convergence However, the question is, even if a floating
appears to have stabilised, thanks - at least of exchange rates. exchange rate were desirable, would it be
in part - to the crawling peg exchange rate feasible? In Botswana, the nature of the
Ascertaining likely exchange rate policy foreign exchange market suggests that
mechanism. The devaluation has therefore
developments is difficult, however, because adopting a floating exchange rate would be
achieved an improvement in international
policy points in different directions. Some difficult, due to the lumpiness of foreign
competitiveness, a development that is
moves suggest a desire to have a floating exchange inflows. Diamonds account for
reflected in the high level of business
exchange rate. Changes to the exchange some 75% of foreign exchange receipts, and
confidence among exporting firms noted
rate system at the time of the devaluation these revenues come in a small number of
earlier.
and the introduction of the crawling peg very large payments through the year. Demand
Looking further ahead, it is possible to make included widening of the buy/sell margins for foreign exchange for imports, by contrast,
longer term forecasts of Pula exchange rates at which the Bank of Botswana trades with is relatively smooth. Hence the foreign
with reference to expected developments in Authorised Dealers, indicating a desire to exchange market either has a large surplus
international exchange rates, combined with encourage the development of an interbank of foreign exchange (on “diamond days”)
assumptions about the continuation of foreign exchange market. This is in turn a continue...

4. 4 Economic Review
Figure 6: Pula Real Effective Exchange Rate (REER) Figure 7: Long-term Pula Exchange Rate Forecasts
or a large deficit (on all other days). A market- which implies fixed exchange rates, leading flows in region. There are also savings on
determined exchange rate would not work to a common currency amongst members, trade and transactions costs with a single
well in such an environment, as it would be as this is the envisaged outcome of currency, as well as the benefits to be gained
very volatile, and there would be a need to the macroeconomic convergence from union with a large, low inflation anchor
smooth foreign exchange flows by absorbing programme laid out in the SADC Finance currency, a role which the rand has played in
diamond-related inflows and providing and Investment Protocol. recent years. These benefits have persuaded
foreign exchange to the market over the Lesotho, Namibia and Swaziland that the
In some ways this is a logical outcome of the benefits of monetary union outweigh the
period between major diamond receipts.
ongoing regional economic integration process, costs, hence their continued membership of
Only BoB has this capacity, and as the
echoing the path followed by members of the the CMA.
dominant participant in the market it would
European Monetary Union (EMU). However, it
have an overwhelming influence on the price When the costs and benefits of a single
is questionable whether monetary union makes
at which foreign exchange is bought from regional currency are weighed up, the balance
sense for SADC as a whole, given the
or supplied to the market – in which case could favour monetary union, at least
differences in economic structure, income levels,
we would be back to the situation of BoB amongst some SADC members, if not in the
trade patterns, and vulnerability to economic
setting the exchange rate. The banks do not short term future, then perhaps in a decade,
shocks across members.
have the capacity to buy and hold such large and Botswana, like other countries will have
quantities of foreign exchange, given the It should also be noted that monetary union to make an assessment of whether joining a
size of their balance sheets and the need to involves forgoing independent monetary and regional currency might make sense. With
keep foreign exchange risk exposure to exchange rate policies, as well as accepting closer trade links with the region likely over
acceptable levels. This may change in the constraints on fiscal policies. As a result, time, the answer might well be yes. While a
future as the banking sector grows and its economies have to be highly flexible and full SADC monetary union as currently
ability to hold larger quantities of foreign adaptive, so as to be able to deal with envisaged would probably not work – there
exchange rises, and also as exports become adjustment to shocks without independent are too many disparate economies, some of
more diversified and the relative importance macroeconomic policies. which belong more appropriately in other
of diamond inflows declines. However, in regional economic groupings - a gradual
Nevertheless, the existing monetary union
the foreseeable future, a fully market- expansion of the current monetary union
in the region – the CMA –is considering
determined, floating exchange rate is unlikely based around the rand is more likely to
closer integration, with a single central bank
to be a viable option. sbe viable.
and a single currency to replace the rand,
At the other extreme from a floating Swazi lilangeni, Lesotho maloti and the
exchange rate lies the option of a Namibian dollar. Furthermore, other countries
permanently fixed exchange rate, perhaps in the region – notably Zambia and
through a link to the rand once parity has Mozambique - are seeking closer integration
been reached over the next 5-10 years. At with SACU, and monetary integration might Bifm Botswana Limited
Asset Management. Property Management.
one level a policy commitment has already make sense for them, especially as there is Private Equity. Corporate Advisory Services.
been made to this – not necessarily to parity evidence that exchange rate uncertainty is Private Bag BR 185, Broadhurst, Botswana
Tel: +(267) 395 1564. Fax: +(267) 390 0358.
with the rand, but to SADC monetary union, a major obstacle to cross border investment Website: www.bifm.co.bw