SONA: Economic Outlook

SHARE   |   Monday, 12 December 2016   |   By Ian Khama
SONA: Economic Outlook

While our ongoing economic diversification efforts have resulted in measurable progress, we continue to be largely dependent on mineral, more especially diamond, revenues. As such, the country remains at risk from volatility in global commodity prices. According to the International Monetary Fund’s (IMF) most recent World Economic Outlook report, modest global growth rates of 3.1% for 2016 and 3.4% for 2017 are expected. Recent experience, however, teaches us to treat such projections with caution. Despite initially optimistic projections, our domestic economy last year ended up with a negative growth of 0.3%, having been driven down by a 19.7% decline in mineral revenues linked to weaker global demand, aggravated by drought and the challenges we experienced in our water and energy sectors. We anticipate an overall domestic growth rate of 3.5% for this year and 4.1% in 2017.

In this respect, while the liquidation of the BCL Group of companies will continue to have economic and social implications, particularly in the area of employment, it is anticipated that it will have limited direct impact in terms of our exports, Government revenues and overall growth. Government shall, nonetheless, continue to closely monitor developments with respect to the BCL liquidation process with the view of updating our macro-economic projections as may be necessary. The negative effects of the liquidation of the BCL Group may reduce this figure, its medium to longterm impact on economic growth, exports and Government revenues should be manageable. Given the difficulties facing the mineral sector, domestic growth is expected to once more be driven by the non-mining sectors, more especially in Trade, Hotels and Restaurants (6.8%), Transport and Communication (6.1%) and Finance and Business Services (4.0%).


I am once more pleased to report that our inflation rate is forecast to remain within the Bank of Botswana’s 3-6 % objective range. In the current financial year the rate fell below our target, averaging 2.7% between April and September. In light of the positive domestic inflation outlook, the Bank of Botswana maintained an accommodative monetary policy stance, with the bank rate being reduced to 5.5%. During the coming year we anticipate that sluggish global economic activity with low commodity prices will continue to put downward pressure on domestic inflation.

Trade and Foreign Reserves
Trends in merchandise trade as supplied by Statistics Botswana indicate that total exports for 2015 were valued at P63.4 billion, against P76.2 billion in 2014. This represents a 16.8% decrease in exports, mostly due to a fall in the demand for rough diamonds. Total imports increased by 1%, recording P73.2 billion in 2015 from P72.4 billion during 2014. Consequently, the trade balance was in a deficit of P9.7 billion in 2015, resulting with a 2015 deficit of P57 million in the balance of payments, compared to a surplus of P11.4 billion in 2014. As at August 2016, foreign exchange reserves were valued at P83.1 billion, equivalent to 18 months of import cover. Of these reserves, the Government Investment Account amounted to P33.8 billion. The continued goal of our exchange rate policy is to support the competitiveness of local industries. It is, therefore, important that we maintain a stable rate of exchange for Pula against the basket of currencies of our major trading partners. However, volatility of the Rand had, as of August 2016, resulted in an annual 2.8% depreciation of the Pula against major currencies that make up the IMF Special Drawing Rights.


The overall fiscal balance for 2015/2016 financial year was a deficit of P6.63 billion, which is higher than the projected P4.20 billion. This was an unfortunate necessity, as deficits should be avoided given their potential to erode our foreign exchange reserves; as well as impact negatively on our international sovereign credit ratings, which are critical in driving economic growth and development. Government can therefore not sustain such unbalanced spending, which we will do as a last resort only under exceptional circumstances. Our prudent macro-economic management has continued to garner international praise for buttressing financial growth and stability. In April, Moody’s Investors Service affirmed Botswana’s “A2” sovereign credit rating. Moody’s analyzed Botswana’s credit profile as still stable in the context of the shock to the economy caused by low copper and nickel prices, as well as instability in the demand for diamonds. 29. In its October 2016 review, Standard and Poor’s (S&P) Rating Servicesalso reaffirmed its “A-2” sovereign credit rating for Botswana. As with Moody’s latest S&P update reflected the continued downside risks stemming from volatile commodity prices.

Let me commend the members of this House for extending the last session of this House in order to debate and approve NDP 11, the implementation of which will commence on the 1st of April 2017. The Plan is aligned to the UN Sustainable Development Goals as well as our new Vision 2036. Consistent with its theme of “Inclusive Growth for the Realisation of Sustainable Employment Creation and Poverty Eradication” it will, in particular, address the challenges of poverty, unemployment and income inequality. To ensure the optimal use of our natural heritage on a sustainable basis, Government, remains committed to the Gaborone Declaration for Sustainability in Africa. This commitment is being implemented through the global partnership programme on Wealth Accounting and Valuation of Ecosystem Services (WAVES). We have now developed natural capital accounts for water, minerals, energy and compiled macro-economic indicators of sustainable development. The regularly updated data from these accounts is being integrated into the National Economic Accounts to guide policy decision-making. The results from the water accounting exercise are thus already being used to address water use efficiency

Economic Diversification Drive (EDD)
Since its 2010 inception, the EDD Strategy has led to a significant increase in the value of Government procurement from local manufacturers and service providers; annually amounting to over P2.2 billion over the past three financial year. To date 1,896 enterprises have been registered under the EDD. Implementation of the EDD Medium to Long-Term Strategy to develop sustainable sectors for economic growth and diversification is progressing, with implementation of the textile, leather and dairy sub-sector strategies. Under the Leather Sub-Sector, the establishment of a Special Purpose Vehicle that will own, build, operate and maintain the Leather Industry Park is progressing. Eight companies responded to an Expression of Interest, which was published in June 2016 to identify potential investors. Once complete, the Leather Industry Park is expected to create direct employment of 6000 to 8000 jobs. Implementation of the Private Sector Development Programme, a joint initiative between Government and European Union (EU) to improve enterprise competitiveness, is being administered by Business Botswana. The Programme has enrolled 100 small and medium enterprises in manufacturing; ICT; agro-industry; hotel and tourism as well as the construction and public works sectors. The Programme is further enhancing the capacities of development institutions such as LEA, CEDA, BITC, HATAB and Community Based Organisations. Implementation of recommendations from the Beef Value Chain is being finalised, while six additional value chain studies for horticulture, piggery, goats, honey, morula and tourism have been

Investment and Trade

During the 2015/16 financial year the Botswana Investment and Trade Centre (BITC) registered P377 million of investment expansions resulting from their investor aftercare programme, which encourages companies to reinvest locally. FDI attracted through BITC in 2015 amounted to P1.493 billion compared to P1.489 billion the previous year, while domestic investment amounted to P1.253 billion compared to P238.4 million the previous year. In 2015, BITC further facilitated exports valued at P2.2 billion. As part of Government’s investment promotion strategy, BITC has been further attracting investment in areas of competitive advantage such as cargo and logistics, beef, coal and soda ash auto components, ICT and leather production. Moving forward, our potential as a centre for trade and investment has been enhanced by the recent signing of the EU – Southern African Development Community (SADC) Economic Partnership Agreement (EPA), which accords duty and quota-free market access for Botswana’s exports to the EU market. Under this Agreement, our infant industries can be protected against EU imports from established industries. The Agreement also provides for transitional safeguard measures for Botswana’s sensitive products.

To support industrial development, provision has been made for the application of export taxes on up to eight products from Botswana for a period not exceeding 12 years from entry into force of the Agreement. In addition to benefiting from sourcing inputs for production within the SADC and EU regions, Botswana industries have been also accorded the opportunity to source raw materials and intermediate inputs from African, Caribbean and Pacific (ACP) countries, as well as EU Overseas Countries and Territories. The Agreement further supports the objectives of the SADC Regional Indicative Strategic Development. Plan of poverty eradiction and specifically the industrial pillar, where Member States envisage transformation of the region through value addition. Government is considering the enactment of an Investment Facilitation Law, which will establish an investment code for Botswana and stipulate service standards and turnaround times for facilitating investors.

BDC recovery
I am pleased to report that the Botswana Development Corporation (BDC) has recorded profits for the two years up to June 2016. Since mid-2015, just over P400 million worth of new investments have been approved, with an additional P800 million expected to be approved for funding both new and expanding businesses during next few months.

Economic Development Initiatives
A Board for the Special Economic Zone Authority (SEZA) has been appointed and has already engaged a Technical Advisor for the rollout of the zones. Priority is now being given to the development of the mixed use Special Economic Zone at Selebi Phikwe. In addition, Selebi-Phikwe Economic Diversification Unit (SPEDU) has engaged with communities in the SPEDU Region to resuscitate and support development projects in such areas as piggery, fish farming through co-operatives and development trusts. SPEDU is also facilitating the establishment of a Regional Chamber of Commerce and the development of the strategy to incorporate the SMME’s into the mainstream economy in partnership with Business Botswana. SPEDU is further facilitating the allocation of land for the establishment of private sector businesses including a pharmaceutical and air separation plants and an Aloe Vera farm and plant. These businesses are expected to be fully operational before the end of the 2016/2017 financial year, while plans to facilitate dam tourism are also underway. From April 2015 to March 2016, 2,657 entrepreneurs were trained and mentored by LEA, of whom 2,033 were youth. As of March 2016, an additional 25,189 were also trained through the Entrepreneurship Awareness Workshops programme, which targets secondary school leavers, vocational education trainees, as well as prison inmates. Government is employing sector specific strategies to promote local industries. A statutory instrument to restrict importation of salt in small quantities has been introduced to promote market access for locally packaged salt. Since its commencement, two salt packaging companies have been established. Restrictions on the exportation of scrap metal are also in place to improve accessibility by local metal foundries.
The Gambling Authority has now taken over from the previous Casino Control Board and is in the process of tendering for new licences, which includes casinos, sports betting and the national lottery among others. As this industry diversifies, we expect that this issuance of new licences will create more enterprises involving Batswana as well as external investors.

The market demand for rough diamonds improved slightly in 2016, increasing the investors’ confidence in the diamonds supply. Carat sales and revenue for this year are forecast to be 65% and 27% respectively above 2015 as a result of improved global demand. While the BK 11 mine continues to be under care and maintenance, the Lerala Mine started production in April 2016 and has already made two sales. The Karowe mine has continued to perform well after unearthing the second largest diamond in history, the 1,111 carat Lesedi la Rona. Copper and Nickel prices, however, remained depressed in 2016. The downturn put BCL and Tati Nickel Mines under severe financial constraint, leading to our decision to place the BCL Group under provisional liquidation in October 2016. In taking this difficult step, Government was confronted by the fact that to stay afloat the BCL companies required an additional P2 billion over and above the P1 billion plus Government had guaranteed for a bridging loan advanced by Barclays’s Bank in April 2016. These additional funding requirements, on top of the Barclay’s loan that must be serviced by Government, had by any measure exceeded our financial capacity for further support; more so that based on medium term projections the mines would continue to incur losses.


To secure Selebi Phikwe’s future, Government is implementing a robust Economic Recovery Plan, coordinated by the Former Bank of Botswana Governor, Ms. Linah Mohohlo. The plan includes provision for the accelerated implementation of the SPEDU economic diversification framework coupled with further public and private investment. Our other copper mines also continue to struggle. Boseto Mine has been acquired by Khoemacau after undergoing liquidation in 2015.
The mine remains under care and maintenance and will hopefully reopen by end of 2017. Mowana Mine was also put under liquidation at the end of 2015 and is seeking new investors. Notwithstanding these challenges, we continue to view the mineral of new, including non-traditional, mining operations. In this regard, I am pleased to confirm that there are some positive developments in  the energy minerals sub-sector. For instance, A-Cap Resources was issued a mining licence for uranium near Serule, while African Energy intends to mine coal and generate power at Sese.

*This is part of the State of the Nation Address (SONA) delivered by President Ian Khama on Monday.