BOTSWANA BALANCES BUDGET ON HIGHER DIAMOND EXPORTS

UNCLAS SECTION 01 OF 03 GABORONE 000431

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TAGS: ECON EFIN ETRD ELAB BC

SUBJECT: BOTSWANA BALANCES BUDGET ON HIGHER DIAMOND EXPORTS

REFERENCE: 05 GABORONE 264


1. SUMMARY: The Government of Botswana expects to balance
its budget in 2006, thanks to growth in revenues from the
mining sector and a one-off payment from the old Southern
African Customs Union agreement. Although Minister of
Finance Gaolathe predicted 6 percent growth for the next two
to three years and easing inflation, the private sector and
politicians are not so confident. The large allocations to
education and social services demonstrate that Botswana
continues to have its fiscal priorities right even as it
struggles to avoid budget deficits. END SUMMARY

GOVERNMENT FORECASTS SLIGHTLY SLOWER GROWTH


2. Botswana's economy grew at 8.3 percent in real terms
during 2004/05, up from 3.4 percent in 2003/04. The
increase derived primarily from the mining sector, which
grew at 18.2 percent, versus only 0.2 percent the previous
year. This change reflects the fluctuating nature of
revenue flows from mining rather than significant additional
revenue from a new mining operation coming on stream. The
exchange rate adjustment also increased the Pula value of
Botswana's mineral exports. The non-mining sectors turned
in a less impressive performance, with growth slowing to 1.9
percent from 5.6 percent in 2003/04. Lisenda Lisenda, of the
Botswana Institute of Development Policy Analysis,
attributed this to a decline in manufacturing exports and a
dip in tourism resulting from the prior appreciation of the
pula.


3. Minister of Finance and Development Planning Baledzi
Gaolathe forecast growth of 6 percent over the next two to
three years. In order to reach that target, he said, the
GOB must further eliminate barriers to investment, increase
productivity and maintain a competitive exchange rate. With
the latter challenge presumably met through the institution
of a crawling band mechanism, government efforts will focus
on attracting investment and increasing productivity. In an
effort to chart a path toward economic diversification, the
President appointed an Economic Advisory Council that should
make recommendations by September.


4. According to Wayne Osterberg, CEO of Stockbrokers
Botswana Ltd., however, 6 percent might be optimistic. In a
March 23 conversation, Osterberg told Emboff that he was
surprised by Gaolathe's estimate given the "gloomy"
atmosphere in the private sector. This was consistent with
the Botswana Confederation of Commerce, Industry and
Manpower's (BOCCIM) description of the economy as "waning".
High interest rates (businesses borrow at 17 percent) and
rising prices are cutting into the historically large
margins that lack of competition has afforded Botswana
companies.

RECORD BALANCE OF PAYMENTS SURPLUS EXPECTED


5. Minister Gaolathe forecast a record surplus of P6.5
billion ($1.2 billion) in the current account for 2006,
driven by substantial export growth. The preliminary
estimates for the balance of payments show a surplus in 2005
of P5.2 billion ($0.95 billion),compared to a deficit of
P232 million ($42.2 million) in 2004. Exports of goods are
estimated at P22.7 billion ($4.12 billion) in 2005, a 31
percent increase from P17.3 billion ($3.15 billion) in 2004.
This 31 percent gain primarily reflects increased exports of
diamonds, copper/nickel, soda, ash and beef coupled with
increased world market prices and favorable exchange rate
movement. Imports increased 17 percent from P13.4 billion
($2.44 billion) in 2004 to P15.7 billion ($2.85 billion) in

2005. Net outflows in the financial account were P880
million ($160 million),associated primarily with pension
fund portfolio diversification. As of November 2005,
Botswana's foreign exchange reserves held at P34.7 billion
($6.2 billion),representing an increase over 2004 of $500
million. These reserves were estimated to represent 27
months of import cover, an increase from 22 months in 2004.

INFLATION UP, DESPITE PREDICTIONS


6. Botswana's inflation rate averaged 8.5 percent in 2005,
up from 7 percent in 2004. Gaolathe attributed this to
depreciation of the pula and rising prices in the energy and
telecommunications sectors. He expected inflation to slow
in 2006. (The Bank of Botswana's target range for inflation
is 4 - 7 percent.) The Government's Central Statistics
Office, however, reported that year-on-year inflation had
reached 16.6 percent in January and edged up to 17 percent

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in February. The institution of school fees in January
contributed significantly to this change -- education costs
increased 140 percent. Rate hikes by Botswana
Telecommunications Corporation of up to 100 percent for off
peak, domestic calls and 50 percent for peak-hour domestic
calls helped drive up transport and communication prices by
20 percent. Other areas of high inflation included energy
(26 percent),alcohol and tobacco (17 percent) and food (12
percent). To offset inflation, the budget proposed an 8
percent across-the-board raise for all public employees.

GOVERNMENT ANTICIPATES BALANCED BUDGET


7. Minister Gaolathe presented before Botswana's National
Assembly a total proposed budget of P23.22 billion ($4.2
billion),which would result in a budget surplus of P922.5
million ($168 million). Mineral revenues constitute P11.39
billion ($2.07 billion) or 47 percent of projected total
revenues of P24.14 billion ($4.38 billion). Customs and
excise receipts are expected to increase by 55 percent from
the previous year to P5.30 billion ($0.97 billion) due to a
one-off payment from the Southern Africa Customs Union
Revenue Pool. The Minister described this as "the major
source of revenue increase." Without this boost in customs
revenues, the budget would be P968 million ($176 million) in
the red.


8. After decades of balanced budgets, the mounting costs of
HIV/AIDS are testing the government's finances. Last year,
the Government expected to run its fourth consecutive
deficit budget but ended up with a surplus of P574 million
($104 million) (reftel). This resulted primarily from the
adjustment to the exchange rate mechanism and favorable
shifts in world prices for Botswana's mineral exports. The
struggle to balance the budget is likely to persist as the
number of Batswana enrolled in treatment programs rises.


9. In the proposed budget for 2006/07, Botswana continued
to allocate a preponderance of funds for social development.
The two ministries with the largest allocations were
Education, which accounted for 27 percent of the recurrent
budget, and Local Government, which includes various social
welfare programs, at 14 percent.

JOB GROWTH WEAK


10. Despite the strong growth numbers for 2004/05, Members
of Parliament have recently expressed concern about the
direction of the economy. During the previous session of
parliament in November-December 2005, several ruling party
members opined that the economy was in trouble and pleaded
with the President to devote more resources to that problem.
That apparent incongruity results from the fact that
Botswana's growth is driven by the capital-intensive mining
sector. The non-mining sectors, which are more able to
create jobs, slowed significantly. Accordingly, formal
sector job growth slowed from 3.1 percent last year to 2.8
percent this year, just ahead of the population growth rate
of 2.4 percent.


11. Minister Gaolathe also announced his intention to
present for discussion before the National Assembly a draft
National Policy on Incomes, Employment, Prices and Profits.
The draft would provide for minimum wages for domestic and
agricultural workers and would formalize the objective of
linking wage growth to productivity. Elaborating on the
latter point, Gaolathe emphasized "concerns about our
workers' unsatisfactory attitude toward work" and poor
customer service as barriers to investment.

WANTED: INVESTMENT


12. Minister Gaolathe underscored the importance of
attracting investment, including foreign direct investment,
to accelerate economic growth. He listed delays in land
acquisition, the shortage of serviced land and the high cost
of servicing unimproved plots as barriers to investment.
Botswana's International Financial Services Center provided
no encouragement for hopes that it had gained momentum in
attracting investors. During 2005, the IFSC had to de-list
seven companies for failure to start or continue operations
and approved only five new applications.

LOCALIZATION OF TOURISM SMES


13. In an apparent attempt to address the perception that
foreign firms dominate the tourism sector to the detriment
of Batswana, the government announced its intention to

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reserve several types of small and medium tourist operations
exclusively for citizens. During the ensuing debate,
Minister of Environment, Wildlife and Tourism Kitso Mokaila
accused tourism companies of mistreating their workers and
importing young and inexperienced managers, overlooking
better qualified Batswana. Mission will address this issue
and its possible ramifications for the important tourism
sector septel.

PRIVATE SECTOR RESPONDS POSITIVELY TO BUDGET


14. The Bostwana Confederation of Commerce, Industry and
Manpower issued a press release praising the proposed
budget. After a "turbulent" 2005, BOCCIM hoped the
increased government spending would "kick start [Botswana's]
waning business prospects." It welcomed the government's
decision to keep VAT at 10 percent and exempt some
additional basic food stuffs but decried the lack of a
timeline for the implementation of the privatization master
plan. Although Transparency International again ranked
Botswana Africa's least corrupt country in 2005, BOCCIM
asserted that corruption is on the increase and demanded
greater transparency in government procurement.

COMMENT


15. Despite the regressive introduction of school fees in
January of this year, the 2006/07 proposed budget
demonstrates the kind of fiscal responsibility that helped
Botswana become a middle-income country. While the
continued investment in education and social services should
pay-off in higher productivity in the long term, low
productivity, high interest rates, and rising prices pose
significant obstacles to growth and diversification in the
short term.
AROIAN