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Country Commercial Guides FY 2000: Botswana Report prepared by U.S. Embassy Gaborone, Botswana, released July 1999 Note*

CHAPTER II:   ECONOMIC TRENDS AND OUTLOOK

Economic developments during the past year have mostly been favorable, and this trend is expected to continue into 2000. Domestic output, as measured by Gross Domestic Product (GDP) recorded an impressive real growth of 8.3% during 1997/98. At the same time, however, the Asian financial crisis and related downturn in the international diamond market resulted in a less vibrant financial picture for the Botswana Government in 1999, culminating in its first deficit since 1990.

Growth continued to be broad based, as in the previous year, although the pattern of sectoral expansion changed somewhat. The mining sector, which accounts for nearly one-third of the GDP grew by 9.5% in 1997/98 compared to 5.8% in 1996/97 due to the strengthened performance in the soda ash and coal industries, as well as continued increased production from the country's diamond mines. This year, growth in GDP from the mining sector is expected to continue, as the Orapa diamond mine's expansion project becomes operational.

The overall growth of the economy was led by the non-mining sectors, which performed exceptionally well by recording real GDP growth of 7.7% for the 1997/98 period. Significant growth was realized in several sectors including water and electricity (9.8%), transport and communications (9.3%), trade, hotels and restaurants (8.4%), and manufacturing (4.7%). The non-mining sectors are again expected to record high growth rates in the 1998/99 period as the construction sector and other service sectors including transport and finance are expected to grow significantly.

Real per capita GDP, an indicator of the average standard of living, maintained its rate of expansion at 5.7%, with a population growth rate of around 2.4%.

Inflation was subdued in 1998 while consumer spending was relatively strong, providing a boost to local suppliers. The annual inflation rate continued its downward trend from 7.8% in December 1997 to 6.4% in December 1998. The inflation rate reached an all time low of 5.9% in October 1998. Low inflation rates are expected to continue for the foreseeable future.

The local currency unit, the Pula declined against the major world currencies in 1998 due to drops in the value of the South African Rand, the largest component of a basket of currencies to which it is tied. This followed a worldwide loss of confidence in emerging markets stemming from the East Asian financial crisis. In nominal terms, the Pula depreciated by 20.0% against the Deutsche Mark, 24.1% against the Japanese Yen, 14.5% against the U.S. Dollar, 15.7% against the British Pound and 19.9% against the French Franc. Against the currency of Botswana's major regional trading partner, South Africa, the Pula appreciated slightly. Most Pula depreciation against the major international currencies occurred in July and August when the Rand came under severe speculative pressure and fell sharply against the U.S. Dollar.

The overall balance of payments in 1998 is forecast to have fallen from a surplus of $503.8 million in 1997 to only $31.9 million. The weak performance of the external sector is mainly due to the poor performance of the current account which fell from a surplus of $572.5 million in 1997 to a deficit of $81.6 million in 1998. For the first time since the early 1980's, the merchandise trade balance is expected to be in deficit due to a 23% drop in diamond exports and a 28.6% increase in total imports fueled by the economy's continued expansion and the Pula's devaluation against major currencies. The financial account is also expected to register a deficit of $50 million due to the growth of equity investment offshore, following exchange control liberalization. This negative situation is likely temporary and will be rectified when diamond sales again increase and new domestic portfolio investment opportunities are developed to keep capital at home.

Because of the balance of payments surplus recorded over the years, Botswana has accumulated sizable foreign exchange reserves. At the end of November, 1998, foreign exchange reserves topped $5.9 billion up slightly from $5.7 billion the previous year, and sufficient to finance about 29 months of import cover.

Employment growth rates improved in 1998, although unemployment continues to pose a major challenge. Formal sector employment grew at 5.4% from 227,300 in March 1997 to 239,500 a year later, a vast improvement over growth rates of less than 2.3% since 1992. The most recent labor force survey shows unemployment holding steady around 21% in the first quarter of the 1996/97 national accounts year. While Botswana can boast of high literacy rates and virtual universal access to primary education, employment growth is limited by a lack of technical and managerial skills.

The Government of Botswana has used the country's mineral wealth to develop its people and infrastructure, producing a literate workforce as well as good roads, communications and utilities. Private sector participation in the country's growth is increasing, spurred on by government policies to liberalize the economy and privatize some government agencies.

Corporate tax rates of 25%, including a 15% concessional rate for manufacturers and providers of financial services, are among the lowest in the region.

The 1998/99 budget shortfall led to the country's first deficit since 1990 of about $325 million. The deficit was caused by a decline of 12% in diamond sales and a decline of 44% in revenue from the Bank of Botswana portfolio investments, both linked to the East Asian economic crisis. The revised 1999/2000 budget estimate initially predicted a shortfall of about $86.9 million with revised total revenues and grants increasing by 27% and total expenditures and net lending increasing by 13%. Significantly improved diamond sales in the first months of the fiscal year have led to a prediction that the government may show a small surplus.

Diamonds remain the story behind Botswana's impressive financial sheet, although the Government has introduced fiscal policies aimed at fostering economic diversification. By targeted international marketing of Botswana's exports, tourism, and investment opportunities, the Government of Botswana expects to lessen dependence on mineral revenues, generate more jobs, and contribute to poverty alleviation.

The Government of Botswana has been a leading advocate of economic integration among the 14 members of the Southern African Development Community (SADC). As a landlocked nation with a small population, Botswana's economic fate is closely entwined with that of its larger neighbors, particularly South Africa through which most of its imports and exports transit. The limitations of Botswana's small domestic market make access to SADC's large liberalized market of 200 million people essential in attracting foreign investment.

SADC member states are currently negotiating the details of a Trade Protocol, which was signed in August 1996 and ratified, thus far, by five of its members (including Botswana in 1998). The Trade Protocol will contribute to lowering trade barriers and extend dependable and secure market access for producers. Once implemented, the Protocol will have a significant impact on the economic and commercial prospects for the region. Ratification by the necessary two-thirds member states to bring the Trade Protocol into force is expected by year end 1999 with implementation expected shortly thereafter.