1. Bifm Economic Review 1st Quarter 2008
Economic Review
Summary impact of economic slowdown in the major
developed economies as a result of the
growth of 12%, is particularly significant,
as the sector had been struggling for several
of Economic credit crunch and the associated crisis in the
financial sector, which could affect export
years. Export data suggest that the textiles
sector has been growing rapidly, but apart
Developments performance. from this it is unfortunately not possible to
distinguish which particular component of
Economic Growth
Dr Keith Jefferis The economic growth data released along
the manufacturing sector has done well,
as the CSO classes 75% of manufacturing
with the 20087 Budget, covering the
Chairman of
output simply as “other manufacturing”
period July 2006 to June 2007, confirmed (i.e. not meat, beverages or textiles).
Bifm Investment earlier indications that there had been
a strong growth recovery in late 2006
Although economic growth has been
Committee
impressive, this has not translated into
and early 2007. Overall GDP growth rose
strong employment growth. Total formal
from (a revised) 0.6% in the previous year
sector employment rose by only 2.4%
I
(2005/6) to 6.2% in 2006/07. The growth
between March 2006 and March 2007,
recovery in the non-mining private sector
spread more or less equally across the
was particularly impressive; after several
ntroduction private sector and government. This result
years of a downward growth trend, growth
is disappointing, as the rapid growth of
In common with much of the rest of the picked up from (a revised) 5.7% to 9.7%.
the private sector noted above would be
world, Botswana experienced a mixed set
The recovery in growth was broad-based, expected to lead to much faster job growth.
of economic developments during the first
with transport and communications, trade, But there appears to be inconsistency
quarter of 2008. While the most recent manufacturing and construction the fastest between the employment data and the
growth data and related indicators show growing sectors, and all showing much GDP growth data, which could make one
that the economy performed strongly faster growth than in the previous year. (or both) of the data series unreliable.
through 2007, recent months have been Although this is only one year of data, these For instance, employment in the fastest
less positive. Inflation has risen sharply, growth results show that some economic growing economic sector – transport and
and shows signs of increasing further over diversification has taken place, which is communications – supposedly contracted
the next few months before beginning to in turn consistent with the picture that by 5.1%, even though the sector grew by
fall towards the end of the year. Botswana has been emerging recently of successful 20%, and employment in the non-mining
also faces uncertainty due to power supply export diversification. The revival of the private sector as a whole only grew by
problems in Southern Africa, and the manufacturing sector, which achieved 2.2%, even though output grew by 9.7%.
Figure 1: Economic Growth (%) Figure 2: Economic Growth by Sector (%)
Source: CSO, Econsult Source: CSO

2. 2 Economic Review
Hopefully the CSO will be able to improve
consistency between various different data Figure 3: Business Growth Indicators (Quarterly)
sources in future.
The published growth data only cover the
period to June 2007, so for the most recent
nine months we have to rely on other
economic indicators. These suggest that
the growth recovery has continued, with
data on the real growth of business credit,
electricity consumption and government
spending all indicating that growth
continued to be strong through the second
half of 2007.
Nevertheless there are a number of risks Source: BPC, BoB, Econsult
to growth going forward. The impact of
the problems facing the financial sectors is vulnerable to fluctuations in global would require eventual adjustment to lower
in developed economies is likely, even on economic growth. Furthermore, Botswana’s export earnings and government revenues.
the most optimistic forecasts, to lead to a exports are primarily to the major developed
A second risk to growth is the ongoing
period of slower global economic growth economies that are unlikely to grow rapidly.
power supply crisis in southern Africa. This
through 2008 and into 2009. The IMF has The United States is the largest market for
is discussed further in a feature later in
revised down its global growth forecast for two of Botswana’s three biggest exports
this Review.
2008 to 3.7%, with only a slight recovery (diamonds and textiles). Taking account of
to 3.8% in 2009. But what is striking is the ultimate destination of diamonds in the Inflation
the contrast between projected growth world market, nearly 70% of Botswana’s The first quarter of 2008 provided more
in the major developed economies (only exports go directly or indirectly to the USA, bad news on inflation, which rose sharply
1.3% in both 2008 and 2009) and that in Europe and Japan, which are all facing a from 8.2% at the end of 2007 to 9.8%
emerging and developing countries (6.7%). severe growth slowdown, if not recession. in March 2008. This was largely driven by
It is encouraging that developing countries Perhaps reflecting the impact of the slowing higher food and fuel prices; over the past
appear likely to sustain high growth even of growth in the USA, Botswana’s diamond 12 months, food prices rose by 18%, while
with a slowdown in the industrialised exports in the last three months of 2008 those for “operation of personal transport”
countries, an indication of the “decoupling” were 27% lower than in the same period (which is mostly petrol and diesel costs) rose
of growth that has been much talked about.
in 2006. While there is no immediate by 22.5%. These price increases, combined
For Africa, forecasts of continued growth of
problem from this – the foreign exchange with their high weights in the CPI basket,
well over 6% are particularly welcome.
reserves are maintained at high levels led transport and food costs together to
Botswana, however, is in a difficult situation. specifically to cope with such situations – contribute 6.8% to the overall inflation rate
As an export-dependent economy, Botswana a deep or prolonged recession in the US of 9.8% in the year to March. Underlying
Figure 4: Global Growth Forecast, 2008 (%) Figure 5: Inflation: Botswana vs. Trading Partners
Source: IMF Source: CSO, Econsult

3. 3 Economic Review
these price increases were higher prices these will eventually feed through to retail with many filing stations – such as the urban
in international markets; for instance the prices. Despite the substantial increases areas where the majority of the population
prices for the key food grains wheat, rice in petrol and diesel prices on April 15th, lives - this is likely to result in lower prices for
and maize were up 108%, 103% and 66% Botswana fuel prices still lag international consumers, and make a small contribution
respectively in the year to March, and the prices by a considerable margin, and further to keeping inflation in check.
price of crude oil was up 50% over the large price increases are likely.
same period. The likelihood of further increases in
While there is little that can be done about fuel and food prices means that inflation
The upsurge in inflation is not unique the rising cost of fuel imports, one policy
will probably keep rising for a few more
to Botswana, and inflation is generally response that could help would be to
months. Our current forecast is for inflation
rising around the world. South Africa has liberalise domestic fuel prices. At present,
experienced a similar increase in inflation, to rise from current levels to peak around
fuel prices are rigidly controlled by the
which of course feeds through to Botswana 12%, before declining from October
government, in an outdated system that
through import price rises. The only good onwards; however inflation is likely to
prevents competition from playing a role
news on inflation is that because it is being remain in double digits for the foreseeable
in making the industry more efficient and
experienced worldwide, there has been little bringing prices down. As an initial reform, it future. Of course this forecast is subject
change in Botswana’s relative position with would be a straightforward move to change to much uncertainty given the difficulties
regard to inflation, and hence there is little in predicting what is likely to happen to
the regulated fixed price into a maximum
impact on international competitiveness. fuel prices and the extent of second-round
price, thereby allowing fuel retailers to
Inflation prospects for the remainder of the charge lower prices if they wished to do so effects; much will depend on what happens
year are not particularly good, however. to attract more customers. This would enable to other regulated prices such as public
International oil prices keep on rising, and price competition to operate, and in areas transport fares and electricity tariffs.
Figure 6: Fuel and Crude Oil Prices Figure 7: Inflation
Source: DEA, US EIA, Econsult Source: CSO
Feature: take some time so see how much difference
the changes make in practice.
slightly in recent years following the
introduction of the crawling exchange
The New
rate peg, which allows the Botswana
The key features of the old monetary policy
inflation target to be slightly higher than
framework included:
Monetary • short-term (annual) inflation objective,
a
international inflation;
• he main monetary policy instrument
t
Policy Framework and a medium-term inflation objective,
based on expected inflation rates of
was short-term interest rates (Bank Rate/
BOBC rate);
major trading partners; the attainment • the intermediate target was the rate of
The Bank of Botswana (BoB) presented its
of the inflation objective would therefore growth of bank credit;
2008 Monetary Policy Statement (MPS) on
February 25th. The MPS introduced some result in the maintenance of inter- • monetary policy changes were determined
potentially far-reaching changes to the national competitiveness (by matching on the basis of the actual rate of inflation
monetary policy framework, although it will international inflation); this was changed vis a vis the objective, and the rate of

4. 4 Economic Review
credit growth vis a vis the intermediate way as in the past - will be a crucial countries all have floating exchange rates.
target, as well as the growth rate of determinant of policy; hence the quality In addition, fiscal policy is not managed
government spending and an assessment of the inflation forecast becomes crucial, so as to minimise its inflationary impact.
of real economic activity. and this in term depends on the quality Furthermore, there is no clear mandate for
of the Bank’s medium-term inflation BoB to pursue price stability above all other
The changes introduced in the 2008 MPS
forecasting model; objectives (whether a statutory objective or
include:
• hile short-term inflation modelling
w a statement of government policy), and BoB
• ropping the annual inflation objective,
d
and forecasting is quite easy, being cannot at present be held fully accountable
and henceforth focusing only on the
primarily momentum driven, medium- for achieving the target.
medium term objective;
term forecasting is much more difficult;
• ropping the intermediate credit growth
d Inflation targeting has generally been
it depends upon both high quality
target; quite successful in achieving low inflation
• onetary policy changes will be
m modelling (i.e. a model which can be
shown to perform well in forecasting on across a wide range of countries, although
determined on the basis of the deviation
the basis of historical data) and the ability the current environment of cost-driven
between forecast medium-term inflation
to accurately forecast a range of real increases in global inflation will provide
and the medium-term objective, i.e. policy
activity variables (e.g. the rate of future inflation targeting regimes with a severe
will be adjusted in order to bring the
economic growth, the level of capacity test. However, it has generally been adopted
medium-term inflation forecast in line
utilisation in the economy, productivity by medium or large economies, and there
with the inflation objective;
growth, government spending, and real is limited experience of its use in small
• here will be less focus on meeting short-
t
and nominal economic shocks); it also open economies such as Botswana where
term objectives for inflation and credit
depends on the quality of the statistical inflation is primarily imported and hence
growth.
data on which model is estimated; determined by external factors.
What are the implications of these changes? • he model should also be capable of
t As noted above, the 2008 monetary policy
The overall impact should be positive. The producing a range of forecasts under
previous focus on short-term objectives changes in Botswana can be seen as a
different scenarios, with different “halfway house” towards the adoption of
was problematic, in that monetary policy
probabilities attached;
changes work with a fairly long lag (typically full inflation targeting. Whether it works
• he credibility of monetary policy actions
t
12-24 months) and hence any changes depends crucially on the performance of the
would be enhanced if BoB publishes its
made in response to current inflation (in inflation forecasting model and its modelling
inflation forecasts, and in due course
relation to the annual target) would not of the monetary transmission mechanism,
details of the model itself.
have had an effect within the desired time which will become apparent over the next
frame. So moving towards a medium term The changes represent a partial move 2-3 years. However, the adoption of FFIT
target makes sense in terms of the time towards the adoption of inflation targeting. would depend on much more than this,
lags involved in the impact of monetary In particular, the adoption of a medium as it would require reform of the Bank of
policy. There have also been concerns term inflation target/objective, and the use Botswana Act, and an explicit commitment
over the usefulness of credit growth as of a model and medium-term forecasts to to the framework from government. It
an intermediate target, its responsiveness determine policy changes, are a common would also require a move towards much
to changes in monetary policy and its feature of inflation targeting regimes. greater exchange rate flexibility, with either
links to inflation - i.e. whether it actually However, there are key differences which a market-determined floating exchange
functioned as an intermediate target as mean that the new monetary policy rate, or at the very least an acceptance that
intended. The new framework should also in the event of conflict between exchange
framework is some way from being a fully-
enable a more measured monetary policy rate and inflation objectives, the latter
fledged inflation targeting (FFIT) regime.
response to short-term changes in inflation. would take precedence. A more flexible
One of the most crucial aspects of FFIT is
It is also more in keeping with international exchange rate policy would in turn require
that the inflation target must dominate
practice. a new mechanism for building up foreign
all other macroeconomic policy objectives,
For the changes in monetary policy to be including exchange rate or fiscal policy exchange reserves and saving mineral
effective, however, there are several key objectives. Botswana of course maintains revenues, and would also run the risk
requirements: a pegged exchange rate, determined by that the exchange rate would appreciate,
• he divergence between the medium-
t government, and BoB does not have control leading to competitiveness problems of the
term inflation forecast and the medium- over this important component of monetary kind that emerged prior to the devaluations
term inflation objective – set in the same policy and determinant of inflation. FFIT of 2004 and 2005.

5. 5 Economic Review
Feature: required, and is usually reached in winter)
reached around 500MW in 2007.
grow at almost 10% a year, while mining
demand includes the impact of anticipated
new projects, giving total demand growth
Power Supply
As Figure 9 shows, electricity demand and
of around 11% a year and a capacity
consumption are very closely related to
requirement of 750MW by 2011. The power
Issues the level of economic activity. In the non-
mining sector of the economy, growth of
1% translates to approximately a 1.6%
supply shortfall (the difference between
projected demand and anticipated supplies
from Morupule and Eskom) therefore rises
increase in electricity consumption. If this
One of the major economic developments from around 100MW in 2008 to some
relationship is maintained, a shortfall in
in the first quarter of 2008 has been the 500MW in 2011.
electricity supplies could have a major
emergence of serious electricity supply
negative impact on growth: a 10% cut in Various strategies are in place to meet
problems in South Africa and their spill-over
power supplies would lead to a fall of 6-7% this shortfall. Imports of up to 60MW
into Botswana, leading to serious supply
in non-mining GDP. from Cabora Bassa in Mozambique, via
interruptions in late January and early
Zimbabwe, are supplementing supplies
February. This reflects the reduced level of Over the next few years it is likely that the
(although they were not available during
firm supplies from South Africa under the electricity supply situation will become
the crisis period in January and February
new Eskom/Botswana Power Corporation much tighter, due to a combination of
due to problems with transmission links in
(BPC) contract from January 1, 2008 as well supply shortfalls and rising demand. There
Zimbabwe). There is also a tentative scheme
as the shared impact of load shedding in are a number of large mining projects,
to re-open the mothballed Bulawayo power
South Africa. The impact on Botswana has notably the Tati Nickel Activox refinery
station in Zimbabwe, using coal from
been considerable, with lost production, near Francistown, which will lead to
Botswana, which could provide Botswana
reduced productivity and additional costs sharply increased electricity demand over
with a further 45MW of power. However,
facing many businesses. Unlike South the period to 2012. Unless significant
this is progressing slowly, with no firm
Africa, however, there are no reports of demand-management measures - including
indication of when this power will be
mining production being adversely affected higher prices - are put in place, it is also
available. Clearly, power supplies originating
in Botswana. likely demand from the non-mining sector,
from or transiting through Zimbabwe are
including households, will continue to grow
Figure 8 shows Botswana’s sources of unreliable.
steadily; as noted above, this has been
electricity used in recent years. Around increasing at around 9% a year. BPC is also about to commence a major
80% of electricity is imported, with 70% expansion of the Morupule coal-fired power
from Eskom. Domestic supply (from BPC’s On the supply side, the most important
station. Morupule B will have a capacity
Morupule power station) accounts for pending development is the reduction in
of 600MW (compared to 120MW for the
around 20%. Morupule supply has been “firm supply” from Eskom under the new
existing plant), so when commissioned will
declining slowly, presumably reflecting the Eskom/BPC contract; this was 410MW in
meet almost all domestic requirements.
aging of the power station and the resulting 2007, and has been reduced to 350MW
Although it is the stated intention to generate
in 2008 and 2009, and will fall further to
maintenance needs. On the demand side, first power from Morupule B by 2010,
250MW in 2010 and 150MW in 2011.
mining accounts for around one-third of this appears optimistic, and a more likely
total consumption. Over the past decade, Figure 10 shows recent and forecast peak scenario is that Morupule B will only be
mining demand has been increasing at demand. Peak demand determines the level online in 2011 at the earliest. The much
around 5% a year, and non-mining demand of installed capacity (or firm import supply larger Mmamabula project, which will
at 9% a year. Peak demand (which is the commitments) needed. The chart assumes provide 2400MW, mostly for export, will
key determinant of the generation capacity that non-mining demand will continue to only come online in 2013.
Figure 8: Sources of Electricity Figure 9: Growth of Non-mining Electricity Consumption and GDP
Source: CSO, BPC, Econsult

6. 6 Economic Review
To meet the shortfall that is likely to result
in 2009 and 2010, BPC has tendered for Figure 10: Electricity Demand and Supply Projections
up to 240MW of short-term generating
capacity. This is a common response to
supply deficits, and was used extensively in
East Africa (Kenya, Uganda and Tanzania)
in 2006 in response to shortfalls in hydro
power generation due to drought; such
“emergency capacity” can be put in place
fairly quickly, and is typically diesel powered.
The solution adopted in Botswana is likely
to be either diesel-powered generation, or
possibly gas-fired generation using coal-
bed methane.
One way or another it is likely that the
required power will be made available and Source: Econsult
that Botswana will escape severe shortages
in 2009 and 2010. The problem, however,
will be the cost. Indicative costs of new Table 1: Approximate Cost of Electricity from Different Sources (New Capacity)
generation capacity from different power Source Cost (US cents per kWh) Cost (thebe per kWh)
sources are shown in Table 1. Large-scale hydro 2-4 12 – 25
As the table shows, the cost of emergency Large-scale coal 6–8 40 - 50
capacity from small-scale gas or diesel Small-scale diesel 25 – 35 160 - 230
plants is many times higher than that of
hydro or coal-fired power, which have been
the main sources of power in the region up generation. These subsidies could be very settlements. At a larger scale, however, there
to now. Current tariff levels in Botswana expensive: depending on the exact amount is little experience internationally of power
vary between 40 – 46 thebe/kwh (approx. of emergency power required, and the price stations based on solar energy to provide
6 – 7 US c) for domestic and small business of gas or diesel, the subsidies could amount electricity to the grid, although there are a
consumers, with lower tariffs for large to P3 billion a year – equivalent to some
scale business and mining users. Clearly, few experimental plants in Europe, the USA
10% of government spending and 3% or
current tariff levels are nowhere near and Australia producing up to 20MW. With
more of GDP.
enough to cover the cost of emergency current technology, capital costs are high
power generation, and are unlikely to While steep price increases will no doubt and solar is still relatively expensive when
cover the costs of new coal-fired power be unpopular, the experiences of other compared to coal or hydro power.
generation. Although Botswana electricity countries indicates that when faced with a
choice, consumers prefer tariff increases to However, the economics of power generation
tariffs have not been as low as in South
Africa, they are still relatively low by world interruptions in supply. are changing in a direction that is likely to
– or even African – standards. Substantial In the discussion of potential sources favour solar energy: coal input costs are
tariff increases – in the region of 50% of power to meet rising needs, in both rising (following higher oil and gas prices);
or more, over and above inflation – are Botswana and elsewhere in the southern environmental factors weigh against coal
probably necessary to finance the true costs African region, little has been said about the with its high carbon dioxide emissions,
of Botswana’s new generating capacity. potential of solar power. Clearly Botswana and changes taking place in solar energy
BPC has just been granted a 10% - 14% has one of the main inputs – ample supplies technology are bringing down costs. The
tariff increase by government, but further of sunshine – and there have been some development of carbon-offset trading
tariff increases will be necessary over the small scale attempts to use solar as a means mechanisms under the Kyoto Protocol,
next 2-3 years to enable BPC to pay for of providing electricity and water heating in
where carbon credits can be sold, would
new capacity, to provide an incentive for off-grid areas. For rural electrification, where
independent power producers (IPPs), and provide additional revenue to solar power
grid infrastructure costs are high and power
to provide appropriate signals to consumers usage low, domestic solar installations producers. In the medium-to-long term,
to use power more efficiently. Even with using photovoltaic technology are already large-scale solar power may well prove an
such increases, subsidies will be necessary more cost-effective than the provision of attractive alternative (or complement) to
to cover the cost of emergency power grid power to smaller and more isolated coal-fired power generation in Botswana.
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